Rehashed - #20 The Road to the Bitcoin ETF
The ETF Revolution
We saw a short-lived rally in the markets over the past couple of weeks on continued speculation around the approval of a bitcoin ETF. The approval of such an investment vehicle will be a big deal because it makes the asset extremely accessible for the institutional and retail investor.
ETFs (Exchange-Traded Funds) are a relatively new investment vehicle that are rapidly becoming the investment instrument of choice for investors around the world. Specifically, an ETF is a type of fund that owns the underlying assets (which can range from baskets of equities, precious metals and infrastructure to private equity and hopefully bitcoin and other crypto-assets), and divides ownership of those assets into shares. ETFs are an important part of the capital markets ecosystem, currently accounting for nearly one-half of all trading in US stocks.
Unlike other types of funds (like mutual funds, closed-end funds, etc.), the U.S. federal securities laws did not originally account for ETFs. As a result, there is a more rigorous review process; ETFs have to obtain an individualized exemptive order from the SEC (Securities and Exchange Commission) before going to market.
The Main Players in the Bitcoin ETF Race
The prestige and first mover advantage that is likely to be attained by the first bitcoin ETF provider has turned the whole process into a bit of an arms race. The number of applicants has increased tenfold, from just a couple petitions submitted to the SEC last year, to around 14 applications at the start of this year.
The Winklevoss twins, who own a considerable amount of bitcoin, along with Gemini exchange, have been involved in the bitcoin ETF process since the beginning. Their initial application for the Winklevoss Bitcoin Trust, which was proposed in 2013, was denied in March of 2017, with the SEC reasoning that the Bitcoin markets were too unregulated. Fast forward to July of this year, and their petition was once again rejected on further lack of market regulation and liquidity concerns.
The punters now have their sights set on the investment firm Direxion, who are petitioning for a bitcoin futures-backed ETF. Direxion have just had their decision postponed until September 21, 2018, which will be a date to watch. VanEck, a well respected investment manager, have teamed up with SolidX and are also vying for first approval. Accounting for SEC extensions, we should have a final decision on the Van Eck ETF by March 4, 2019.
Many are expecting sizable price appreciation of Bitcoin from such an event. After all, when the first gold ETF went live in 2004, the gold price rallied by 350%. As an ETF must own the underlying asset, it would require the purchase of actual bitcoins in order to back investments in the ETF. Considering basic supply and demand principles, the large chunk of supply taken out of the open market is likely to create significant upward price pressure.
As the crypto space continues to evolve, there are many developments that are leading to a more mature and robust ecosystem. Such developments, such as establishment of CBOE and CME futures markets, support the notion that a Bitcoin ETF approval is ever-more likely. However, the markets still have long way to go to truly solidify crypto as a new asset class. The market must receive more regulatory oversight and develop robust financial tools such as hedging instruments to help further legitimize the space. As inevitable as it may be, the timing of the first Bitcoin ETF is likely to still be a minimum of 12-18 months away.
In the News
Intercontinental Exchange (ICE) announced a global platform and ecosystem for digital assets. ICE will offer a physically settled and federally regulated Bitcoin futures market launching in November 2018. Their newly formed company, Bakkt, is additionally working with Boston Consulting Group, Microsoft and Starbucks to create an integrated platform that will enable consumers and institutions to buy, sell, store and spend digital assets on a global network.
A (USD) $460M million long bitcoin futures position on OKEx was liquidated but not filled. Under the exchange’s social loss clawback system, OKEx bitcoin futures traders will be responsible for covering (USD) $9M in losses. Such incidents highlight how the crypto-markets still have a long way to evolve.
President Bill Clinton has been booked to speak at Ripple’s Swell conference in October. Twitter was quick to poke fun at the engagement.
Bermuda, Gibraltar, and Malta have all passed crypto-friendly laws in an arms race to become the world capital of cryptocurrency technologies.
Forbes ran a piece on CoinFund, an investment firm at the heart of the cryptocurrency community.
Augur, the new blockchain-based prediction market platform, may have Napster-like potential.
August 15 - The Future of Blockchain, Digital Assets & Interoperability, Auckland
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About the author:
Capital markets to crypto convert. From Christchurch → Boston → New York, Freddie became intrigued by the potential of the digital asset economy after plucking a book on Bitcoin off a New York library bookshelf in 2016. Her parents are thrilled that she is chasing magic money on the internet.
Disclaimer: The above references an opinion and is for informational purposes only. The opinions expressed by the author do not represent the opinion of BitPrime.