If you have been following the cryptocurrency news in the past couple of months, you have probably noticed the buzz about something called a ‘bitcoin ETF’. Just yesterday, almost all major crypto news sites were flooded with headlines claiming that the US Securities and Exchange Commission (SEC) has, again, postponed the approval of the first bitcoin ETFs. But what is this ETF that seems to excite the crypto community as a whole – and why is it so important? And would it really impact the cryptocurrency market as much as a lot of people believe it would?
Let’s dive into the world of ETFs. By the end, we might even understand what the SEC’s beef is with them and how likely it is that they’ll get over it.
Exchange-traded funds: what is a bitcoin ETF?
Before we jump into bitcoin ETFs, let’s step back for a second. After all, how could we understand how a bitcoin ETF works if we’re not even sure what a traditional ETF is?
An exchange-traded fund (there you have the full name finally, we know you’ve been waiting for it) is basically an investment fund traded on the stock exchange. It works just like normal shares and stocks do. You can buy and sell them on the market using the current share prices of the asset. But the difference is that the ETF is not just a simple company that divides the ownership into shares held by shareholders. It represents a basket of securities the fund owns that tracks an underlying index.
To put it briefly: it’s an investment vehicle that tracks the price movements of a given asset allowing the investors to take advantage of the price changes without actually having to own the assets.
In case of cryptocurrency ETFs, an ETF could mean a basket of different cryptocurrencies or just bitcoin itself. Just like traditional ETFs, it would also track the price movements of these digital coins.
Okay, that sounds interesting. But why would we opt for buying ETF shares when we can simply own the bitcoin itself?
The advantages of bitcoin ETFs
Well, the first advantage of the ETF is that exactly. You do not have to own and hold the actual coins yourself. Even though cryptocurrency storage is getting more and more secure, buying and storing your own cryptocurrency is still not without its risks and difficulties. Yes, wallets are becoming safer and more secure. But do you know which wallet is unhackable? A wallet that does not exist. And if you don’t need to store you own crypto, you don’t have to own a wallet.
It’s also important to point out that an ETF does not require a minimum investment that we would normally have when buying actual bitcoin or other cryptocurrencies on an exchange. Of course, having a minimum amount set by exchanges makes sense from their point of view. It would be very costly to process tiny amounts of transactions. Naturally, they have to have a limit to avoid that. But if you just want to dip your toes into the crypto world, a minimum investment can be a bit discouraging.
All in all, ETFs can be a great way for investors to diversify their portfolio while also mitigating risks from investments. They can easily track multiple tokens as well. This would be a bit harder if they were the actual owners of those coins. You might actually need more wallets to store the various types of cryptocurrencies.
An inflow of new investors
ETFs could be also very beneficial not only for the traders who’d like to buy them, but also for the crypto market as a whole. It would mean that a lot of new investors would join the bitcoin market. And with them, comes a huge inflow of new money into the sector. ETFs make it easier for traders to invest in the cryptocurrency world. It could also be attractive for those who are familiar with the traditional financial world but are afraid of bitcoin because they lack the expertise in crypto. As ETFs are not specific to bitcoin and cryptocurrencies, people who already have experience with these funds are more likely to get started with these instead of trading actual digital tokens.
But if it’s such a wonderful investment opportunity, then why don’t we actually have bitcoin ETFs? It might come as a shock if you’re not fully up-to-date on the crypto news. But as of now, the SEC has yet to approve of a bitcoin ETF.
So what is the SEC’s problem with these bitcoin ETFs and can we expect a change of heart sooner or later?
SEC still doesn’t trust bitcoin
The main problem is that, as in the US, ETFs are considered to be securities, the SEC has authority over them in all matters. This means that all ETFs have to be approved by the organization – including the bitcoin ETFs. But historically, these ETF applications haven’t been a favorite of theirs, to say the least, as all of them ended up rejected.
And the reason for their decision? In case of the Winklevoss twins’ ETF, the Winklevoss Bitcoin Trust, the SEC claimed that the possibility of fraud and market manipulation is still too high in the bitcoin market. This seems to be their biggest problem. As bitcoin is largely unregulated, they don’t trust that bitcoin ETFs could provide the needed security for the investors.
But in early 2019, it seemed that the SEC’s hard ‘no’ on the ETF issue is faltering as it looked like that two bitcoin ETFs, Bitwise’s ETF and the VanEck/Solid X bitcoin trust would be getting the green light from the Commission. Unfortunately, that decision was then postponed. And then postponed again. The latest news is that the Commission is still trying to collect as much information and expert opinion on the topic as it’s possible before making the final decision.
Overall, the community is being hopeful about the possibility of the ETFs. The question now remains ‘when the first ETF will be approved’ instead of ‘whether it will ever happen’. Now, we’ll just have to wait to see how the story plays out.
At least, now everyone here knows what an ETF is and how it works. So when the day of approval comes, we’ll be prepared.