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Bitcoin ETF: Will SEC Concede By The End of 2019?

Massimo Di Giuda

During its relatively short popularity, Bitcoin managed to get its futures listed on Chicago exchanges, and now the turn of ETF has come.

13-08-2019 12:50:41  |   News
ETF (exchange-traded fund) is a fund whose shares are traded on the stock exchange and repeat the price dynamics of the underlying assets that are part of the fund's portfolio. The ETF on the S&P 500 consists of the same stocks as the index itself, and in the same proportion. This is much more convenient than buying 500 shares, some of which cost hundreds of dollars apiece.

Even if the funds are enough, it is almost impossible for an individual to collect such portfolios, especially in foreign markets. By issuing derivatives, the ETF issuer does all the work for the investor. This is one of the most popular ways of investing worldwide, you can invest in completely different economic sectors of many countries.

The reason why SEC approval is so long-awaited, is simple. As a rule, after the emergence of exchange-traded funds, the value of the underlying asset rises. This is logical, as more investors have the opportunity to buy ETFs in exchange for goods that were previously difficult to buy. Demand moves the fund’s price up, which immediately leads to the growth of the underlying asset. Of course, only if there is a demand for one or another ETF. In the Bitcoin case, applications were sent by well-known companies, so the increase in demand and prices is extremely likely. Below is a chart of gold, the first exchange-traded fund of which appeared in 2003. Since bitcoin is often compared with yellow metal, a similar dynamic is expected.


Gold price chart. Source: https://goldprice.org

Joel McLEOD, CEO at Stadivm:

«The approval of any of the 3 pending Bitcoin ETF applications currently being considered by the SEC would have an unprecedented upwards influence on the price of Bitcoin, and by proxy, the entire cryptocurrency market. The groups behind the Bitcoin ETF proposals, Bitwise, VanEck/SoldX and Wilshire Phoenix, are highly connected and respected within traditional finance. This truly is a tipping point between the infancy of crypto-asset investment, and its coming of age.»

SEC has already received many applications recently and earlier, but nevertheless still postpones the decision. There are many reasons, and each of them is a serious obstacle. For example, the question remains how to interpret Bitcoin: as a currency, asset or property. Lack of legal framework for AML law is also a sufficient reason for the refusal. The price of a cryptocurrency is easy to manipulate. For example, to move the price of oil, gold or world currencies at least a couple of percentage points, you need a thousand times more liquidity than it is necessary to bring down or raise the capitalization of Bitcoin. This is a natural reason for the limited amount of bitcoins and its relatively low capitalization.

The next reason to reject an application for ETF is the increase in trading volumes on cryptocurrency exchanges. This is the standard practice of the exchanges, which they use to avoid a fall in the ranking on aggregator sites and not to miss profit. For SEC, it really seems that the entire infrastructure is rather precarious for issuing a stock exchange fund on top of this fragile system. Therefore, the version of lobbying the interests of ETF opponents as the reason for the constant delays can be dismissed. As a regulator, SEC must find reasons for making a positive decision; a single abundance of the applications is not enough.

In the Bitcoin community, there is also no consensus on ETFs. The two most famous opponents are Andreas ANTONOPOULOS and Nick SZABO. Both say that Bitcoin ETFs will do more harm than good. One of the risks is the same — price manipulation. At the end of 2017, when Bitcoin almost reached $20,000, there were those who took loans for investment, which turned out to be a nightmare. The pumping of the market with money provoked an influx of investors who subsequently closed deals at a loss to repulse investments somehow, and thereby dropping the price even more. The same can happen after the adoption of the ETF.

30-08-2019 10:00:55  |   Investments
Yet the existence of an alternative is better than none. There should be no prohibitions for potential investors from those who are against the ETF, of course, if the SEC approves it. Therefore, despite the fears of many experts, the appearance of Bitcoin ETF will be the rational action that has been expected from the US regulator for 5 years. At the same time, we must remember that the idea of a derivative is infinitely far from the original idea of Bitcoin.

Not a single crypto anarchist will count on ETFs, futures and other derivatives; for them, investing in Bitcoin itself is the only option. It is not yet clear whether individuals will be able to make low-volume Bitcoin ETF transactions, or whether it will be available only to institutional investors with impressive capital. In the first case, investors who want to dilute their portfolio with cryptocurrencies will be able to buy ETFs and probably earn on the exchange rate difference as much as those who bought Bitcoin.

Image courtesy of: CNN

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