In this article, I will explain the basics of an ETF and Bitcoin ETFs.
What is ETF?
The idea was born in 1989. An exchange-traded fund (ETF), is a type of investment fund that tracks the price of an underlying asset, such as gold, oil, an index or a basket of stocks. It is a public security that trades like a stock and serves a proxy for a group.
ETFs are classified by the U.S. Securities and Exchange Commission (SEC) as securities, and they track the movements of a given investment (gold, oil etc.). Furthermore, investors do not need to buy the gold or oil directly.
Basically for an investor that only focus on gains or loses, ETF provides a simple buying alternative.
What is Bitcoin ETF?
Bitcoin ETFs are the fund where the underlying asset is Bitcoin. Bitcoin ETFs will provide an opportunity to buy BTC, directly from the stock market, without actually owning it. In other words, investors can buy and sell ETFs during the trading hours.
Types of ETFs
There are two kinds of Bitcoin ETFs.
ETFs that Purchase Bitcoin Derivatives
The first type is generally ETFs that do not hold Bitcoin. In case of buying physical BTC, what they do is trading Bitcoin futures, options, swaps, money market instruments.
ETFs that Physically Hold Bitcoin
In my opinion, this type is way better than the first type which I explained above.
These are ETFs that buy and sell BTC physically.
VanEck and SolidX are examples of this type.
History of the SEC’s Reviews of Bitcoin ETF Proposals
Back in March 2017, the SEC rejected the application for a Bitcoin ETF put forward by the Winklevoss twins. The reason behind the rejection was, ” Bitcoin market was still too manipulable, volatile and resistant to surveillance”.
After that SEC denied a similar proposal submitted by NYSE Arca, which wanted to list the SolidX Bitcoin Trust ETF.
Aside from these two ETFs, an ETF from Barry Silbert’s Grayscale Investments was rejected in January 2017.
In July 2018, the Winklevoss Bitcoin Trust proposed for listing by the Bats BZX Exchange for a second time and again it was rejected.
In 2018, SEC rejected nine Bitcoin ETF applications such as Direxion, ProShares and GraniteShares.
The reason behind SEC rejections was market manipulation.
In 2019, it is more likely for Bitcoin ETFs to be accepted as three days ago SEC released it’s first Token Guidance.
Pros – Cons
- It lowers the barriers to entry. With a Bitcoin ETF, it will be easy to buy BTC. For now, a lot of people do not know the procedures to buy BTC. As a result, a Bitcoin ETF will increase the adaption.
- A Bitcoin ETF will bring new money to the market. Especially with the regulations, institutional investors may enter the market.
- With regulated brokers, investor’s confidence will increase which means more adaption.
- ETFs have much lower fees when compared with other funds.
- An ETF will raise the investor confidence because of the regulations. More confidence means more adaption.
- ·The market for trading ETFs can be closed while cryptocurrency exchanges are open. As a result, there may be significant price changes and investors will not be able to buy or sell with ETF.
- Actively managed funds charge higher fees than their passive counterparts.
- More manipulation can happen with an ETF.
- Short selling with leverage may drop the price.
- With an ETF, there is a huge risk about forgetting the philosophy of Bitcoin.
In my opinion, we may see a Bitcoin ETF in 2019. SEC Token Guidance is a big new for the market showing that they are working on it.
Moreover, a ETF can really boost the price because of the instutitional money.
As I explained before, Bakkt will also affect the price in a good way.
If we see the launch of Bakkt and Bitcoin ETFs in 2019, that will not be a suprise for me.
We can easily see an ATH at the end of 2019.