ETF stands for Exchange Traded Fund. They were created in the 90’s to combine the best parts of Index Funds and Stocks. Like an Index Fund they track an underlying asset or assets but can be traded on stock exchanges. They are generally considered to be low-risk investment vehicles and in the United States are regulated by the SEC. Currently there are Futures based Bitcoin ETFs, but the market is still waiting for a US Spot Bitcoin ETF.
History of Bitcoin ETFs
During Bitcoin’s history there have been many attempts to register a spot Bitcoin ETF with the SEC, none of which have been successful. Although the reasons why have had slight variations, the key points are: the immaturity of Bitcoin as an asset, the volatility, and the lack of demand for an ETF from institutions.
For many years the only way institutions could gain exposure to Bitcoin was through the use of the Greyscale Bitcoin Trust (GBTC). Doing so came with lock-up periods and often a significant premium on the price of Bitcoin (as high as 82%), which is less than ideal for an asset with Bitcoin’s volatility. However, since the 23rd of February 2021 GBTC has been trading with a negative premium. This is partially due to multiple Bitcoin ETFs being launched in Canada, on the Toronto Stock Exchange. These have been launched by Evolve Funds Group (EBIT), Purpose Investment (BTCC) and CI Global Asset Management (BTCX), with Purpose Investment’s BTCC having $1 billion in AUM less than a month after launch. On the 19th of March 2021, Brazil became the second country to launch a Bitcoin ETF, QR Capital’s QBTC11.
Who’s trying to launch one?
Multiple funds and companies keep trying to launch Bitcoin ETFs and the SEC keeps either delaying or denying them. The best way to keep up to date with decisions is with our Macro Events calendar.
Why might now be different?
There are a few factors that have changed, hinting the SEC might finally be ready for a Bitcoin Spot ETF. With Bitcoin reaching a market capitalisation of over $1 trillion, the maturity argument is weakening. Furthermore, payments giants Mastercard, VISA and PayPal and Wall Street behemoths like JP Morgan, Goldman Sachs and Morgan Stanley are all either offering or looking at ways to offer Bitcoin exposure to their clients, many of whom would like that exposure through an ETF for the increased tax efficiencies that it provides. VanEck’s research found that Bitcoin was less volatile than 34% of the companies listed on the S&P 500 in 2020, demonstrating the volatility argument surrounding Bitcoin no longer stands.
Clearly the climate supporting a potential Bitcoin ETF is as positive as it has ever been. However, the greatest optimism comes Biden’s pick for the Chair of the SEC. Gary Gensler is very much pro Bitcoin: he has taught blockchain technology at MIT as well as testified on digital currencies policy and regulation before Congress. Gensler already has a friend in the SEC, Commissioner Hester Peirce (Crypto Mom), who on the 15th of March 2021 spoke at the British Blockchain Association on the subject of the SEC approving a Bitcoin ETF and hopes 2021 will be a ‘turning point’ for crypto regulation in the US. She was at least partially correct, as we saw multiple futures based Bitcoin ETF launched in the US.
Why might it be good for Bitcoin?
Although there already are some Bitcoin ETFs, the SEC is the gatekeeper for the largest markets in the world – the US. It would be the strongest sign of approval that Crypto has become a proper asset class. This could potentially open the flood gates to billions of dollars pouring into Bitcoin, as it provides a simple method of exposure to the asset, that is integrated with current markets, without the requirement for self-custody, understanding private keys or gas fees. ETFs are also useful for tax efficiency and can be used in savings accounts, increasing the number of long-term HODLers and the use case of Bitcoin as digital gold.
Why might it be bad for Bitcoin?
In the Bitcoin whitepaper Satoshi wrote that Bitcoin was to be an alternative to the financial system, not something to become part of it. The more Bitcoin that is held by large financial organisations, the less decentralised it becomes. Beyond just the ideals that Bitcoin was built on, this could cause potential problems for any future hard forks or Bitcoin improvement proposals (BIP) as financial institutes would vote to their benefit rather than the networks. Furthermore, a significant effect could be generated from Crypto markets being open for trading 24/7, yet the traditional markets that ETFs trade on only being open for a few hours, five days a week. As ETFs can be a basket of assets, Bitcoin could find itself grouped with other assets causing an increase in correlation to traditional markets, as significant buying or selling of the ETF would cause price action across the underlying assets.
For Bitcoin to become truly accepted (and to moon), it needs the inflow of capital that would come with a spot Bitcoin ETF. This will create new phenomena in the Crypto markets that will take time to identify and understand but will ultimately sure up Bitcoins position as a unique asset class.
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Disclaimer: Nothing within this article should be misconstrued as financial advice. The financial techniques described herein are for educational purposes only. Any financial positions you take on the market are at your own risk and own reward. If you need financial advice or further advice in general, it is recommended that you identify a relevantly qualified individual in your Jurisdiction who can advise you accordingly.