In an industry shocker, the Securities and Exchange Commission (SEC) denied the Winklevoss Twins' request to launch a Bitcoin ETF. This surely comes as a blow to the twins, most famous for their claim to having originated the idea for Facebook, Inc. (FB) and their ensuing lawsuit against fellow Harvard alum Mark Zuckerberg. The SEC denial comes nearly four years after Tyler and Cameron Winklevoss filed for regulatory approval, back in summer 2013. 

The Winklevoss ETF was one of three would-be Bitcoin ETFs that were awaiting SEC approval; this decision does not affect any of the other applications, nor future ones (yet).

So why would you care about a Bitcoin ETF anyway?

One can buy the most popular cryptocurrency, the bitcoin, at any designated bitcoin exchange. But what if one wants to buy and hold bitcoins as a long-term investment like a stock? For those who are excited about the better future valuations of bitcoin, but are less tech-savvy or worry about bitcoin thefts from their digital wallets, the recently announced bitcoin exchange-traded fund (ETF) is a way to go. (For more, see: A Look At The Most Popular Bitcoin Exchanges.) 

Bitcoin ETFs will give individual investors an opportunity to invest over the long-term in bitcoins, without the need to buy the bitcoins directly. It also eliminates the hassles of managing digital wallets. Short-term traders can bet their money on short-term price moves of bitcoin ETF units and attempt to benefit from trading profits.

How A Bitcoin ETF Works

It would follow the standard process of any ETF. (For more, see: An Inside Look At ETF Construction.) 

In any ETF, unit prices closely mirror the price of the underlying. For example, the price of one share of the popular gold-based SPDR Gold Shares ETF (GLD) closely reflects price of one-tenth of an ounce of physical gold. 

Advantages Of The Bitcoin ETF

  • Many investors interested in taking positions in the cryptocurrency are still skeptical about bitcoin, given that it is not traded on a standard exchange. There are also doubts about its regulation. Bitcoin ETFs will allow standard trading of bitcoin on known exchanges.
  • The ownership and responsibility to securely hold the underlying bitcoins will lie with the entity offering the ETF, and not the bitcoin ETF investor.
  • Bitcoin ETF trading would allow shorting of bitcoins for traders who may have a bearish view.
  • High price swings have been observed in bitcoin valuation (above $1000), which may keep actual bitcoins out of reach of common investors. Bitcoin ETFs allow fractional investments that can make investing in bitcoins affordable to common investors.

Risk Factors Of Bitcoin ETFs

A Bitcoin ETF, like all ETFs, is solely concentrated on a single underlying asset, the bitcoin. Most of the risk factors pertain to the characteristics of the underlying cryptocurrency.

  • Bitcoin valuation is highly speculative in nature, very volatile and currently unregulated by any central authority. There is no authority to approach in case of problems with Bitcoins. This risk will eventually be borne by Bitcoin ETF investors. (For more, see: The Risks Of Buying Bitcoin.)
  • ETFs would be exposed to the general market risk and liquidity risk. (For more, see: Bitcoin: Liquidity Of Bitcoins.)
  • With no designated clearinghouse or central depository for custody of Bitcoins, Bitcoins are prone to digital theft and loss even from the ETF's custodian.
  • Bitcoin transactions are irrevocable, which means that it will be impossible to recover Bitcoins for any incorrectly executed transactions (including theft). This, too, would affect ETF investors.

The Bottom Line

A quick history of popular ETFs indicates that investments in that underlying asset actually improved once the ETF was launched. Introduction of tradable instruments, enabling them to be within the reach of common investor, has usually resulted in making the underlying asset popular. Bitcoin ETFs are expected to provide a convenient and cost effective mode to common individuals to hold bitcoin stakes with small amount of money.