cryptocurrency, bitcoin, ethereum, crypto
Bitcoin futures are here (…they’re just not evenly distributed).
The SEC's approval of Bitcoin futures markets is a significant step on the road to the creation of a new asset class. It will likely open the door for more Bitcoin derivatives and other crypto futures, further institutionalizing Bitcoin’s legitimacy and stimulating adoption.
Which means all eyes are now on ETFs.
So first, what's an ETF?
An Exchange Traded Fund (ETF) is a basket of assets; you invest in the basket, not the assets.
Say you want to invest in gold but don’t actually want to go through the hassle of buying gold yourself. Well, you could buy an interest (stock) in a gold ETF, which would buy and hold the gold for you. You own an interest in the basket, but the ETF owns the actual goods in the basket.
ETFs are not insignificant; currently, ETFs make up about a quarter of all US stock trading volume.
How an ETF Is Born
There have been, and currently are, several bids to create Bitcoin ETFs. But what does it take?
ETFs qualify as “investment companies” under the Investment Company Act of 1940 (the “Company Act”). Generally, an investment company means any company that is primarily in the business of investing, reinvesting or trading securities. The Company Act requires that investment companies register with the SEC or fit into an exemption or exclusion.
Each ETF typically has a unique strategy (for example: Does it only hold Bitcoin? An index of crypto? Only “currency” crypto?), which means each ETF must be approved on a case-by-case basis by the SEC.
It’s not an easy process, either. It can cost several millions of dollars and take months or even years to get approval.
So Where Does That Leave Bitcoin?
The Winklevoss twins applied for a Bitcoin ETF but the SEC rejected it in early 2017. Interestingly, the implied crux of the SEC’s rejection was concern over cryptocurrency markets being unregulated (because, y’know, a regulating a market like subprime mortgages definitely protects consumers, especially when directly regulated by government-backed entities like Fannie Mae and Freddie Mac).
The SEC also rejected SolidX’s bid for a Bitcoin ETF in early 2017.
ARK Innovation currently has an ETF that invests some but not all of its assets in Bitcoin. However, it’s an ETF focused broadly on innovative investments, not purely cryptocurrency.
Other countries, like Sweden, have approved Bitcoin ETFs. And the size of, and interest in, those ETFs is staggering. Sweden’s Bitcoin ETF is bigger than 80% of US ETFs, showing there is significant interest in crypto ETFs.
Bitcoin ETFs Today
Right now there are several pending applications with the SEC for Bitcoin ETFs. Specifically, REX and VanEck have applications pending. So 2018 could be a big year.
Why Do ETFs Matter?
The creation of a Bitcoin ETF would further open up the crypto market to retail investors, much like the BTC futures markets are now doing. More investing opportunities in an asset will have significant secondary effects; it may lead to a more efficient market, wider adoption, and more social approval.
Similar to the arguments about why a futures market may help or hurt Bitcoin, it’s possible the creation of ETFs may cause a “cash drain” if investors switch from owning actual Bitcoins to owning interests in Bitcoin ETFs. That cash drain would devalue BTC.
But the approval of ETFs will give further legitimacy to crypto (from the SEC, of all sources). And that approval will encourage everyday investors to put more money into crypto, which could offset any cash drain.
All in all, we’re watching the creation of a new asset class; ETFs are the next logical step.