Will they, or won’t they?
The introduction of bitcoin ETFs saw another twist recently, when anonymous Commodity Futures Trading Commision (CFTC) officials told online publication Zerohedge that the approval of such funds by the SEC was “nearly certain”. A flurry of reports from mainstream and crypto-related publications prompted discussions regarding the possibility.
But the SEC stated yesterday that it was postponing decisions for specific ETFs. “The Commission finds it appropriate to designate a longer period within which to issue an order approving or disapproving the proposed rule change so that it has sufficient time to consider this proposed rule change,” the agency stated. The SEC added that it would reach a decision by September 21 for the Bitcoin ETFs proposed by Direxion Asset Management. The agency is still expected to rule on an application by the Chicago Board Options Exchange (CBOE) for a bitcoin ETF by August 10.
But that is not the end of the matter. A race is on between funds to become the first cryptocurrency ETF. San Francisco-based startup Bitwise Investments has become the latest fund manager to file for an ETF. The startup already has an index fund that tracks returns for the top 10 cryptocurrencies.
Matthew Hougan, Global Head of Research at Bitwise, listed several recent developments that played into the startup’s move.
Among these factors are stability in crypto markets after last year’s volatile price swings and emerging clarity in regulation related to the status of prominent cryptocurrencies, such as bitcoin and ethereum. He also said that the 93% increase in futures volume and development of custody solutions as pluses in favor of bitcoin ETFs. The developments highlighted by Hougan are timely responses by the cryptocurrency industry in response to the SEC’s letter in January that listed 31 questions.
“We know today that investors want access to cryptoassets based on the massive increase in crypto-trading accounts,” said Hougan. “Our point of view is that the investing public will be better served by having access to SEC-regulated, public, open-ended investment vehicles that are transparent and professionally managed.”
How Will Bitcoin ETFs Affect Crypto Markets?
A key precipitating factor for introduction of bitcoin ETFs is the prospect of institutional capital entering the cryptocurrency space. “Better access means better price discovery and everything that gets us down that road, whether it’s the launch of futures of launch of an ETF, is a good thing,” said Hougan from Bitwise.
Joshua Gnaizda, founder at Crypto Fund Research, a research firm focused on the cryptocurrency industry, forecasts “increased institutional activity” in the cryptocurrency space. According to him, hedge funds have been hesitant to invest in cryptocurrencies due to problems with physical custody of bitcoin. Unlike gold, a commodity to which it is often compared, bitcoin cannot stored physically or shipped in containers to a recipient. Digital storage of cryptocurrency has proved to be problematic with numerous hacks plaguing its security.
The recent introduction of custody solutions by the likes of Coinbase and Ledger could change this equation. (See also: Coinbase Tries To Reel In Institutional Investors). It could also lead to a bump in bitcoin’s price. “Bitcoin ETFs will purchase Bitcoin on exchanges, thereby directly increasing demand for bitcoin as long as the fund has net inflows,” explains Gnaizda. “I would expect net inflows for the short to medium term at least since there will be little competition and there is much unmet institutional demand.”
An ETF approval could also pave the way for an options-based product for cryptocurrencies. Hougan points to historical precedent as proof. “When regulators launched the first commodity futures products, they successively approved both single commodity ETFs and commodity basket ETFs,” he wrote via email. “Investors wanted both options and both sets of funds were successful.” Gnaizda concurs: “As the ETF will trade on CBOE, it is likely we will see options based on this ETF which will provide an additional opportunity for large investors to hedge various risks,” he said.
An alternative perspective comes from Bloomberg Intelligence. The research firm forecasts bearish technical fundamentals for bitcoin as reason that its price will decline. “If a Bitcoin ETF is approved for U.S. trading soon, $8,000 is a likely initial key resistance level. Residing just below that handle are the 18- and 52-week averages. The 18-week acted as good support in the 2017 bull market and the 52-week is the more significant measure. Something substantial should be required to arrest recent bearish indications. The 18 has crossed below the 52 and last week was an outside-week-down (a higher high and a close below previous low). Absent a bullish catalyst, $4,600 is a next support,” the authors write.
Investing in cryptocurrencies and other Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns small amounts of bitcoin and litecoin.