What’s behind all the anticipation surrounding a Bitcoin ETF, and what would an approval mean for investors?
A Bitcoin ETF is an Exchange-traded fund. Bitcoin ETFs periodically reach the cryptocurrency news headlines as hopes remain high that the U.S. Securities and Exchange Commission will eventually reverse its long-standing habit of declining filing applications. Recent developments provide a glimmer of hope.
The idea of a Bitcoin ETF emerged amid the excitement of 2017 during BTC’s last significant bull run. ETFs were reasonably new but highly popular instruments enabling low-fee passive investment strategies in indices without taking custody of the underlying shares.
In the case of a Bitcoin ETF, BTC would be the only underlying asset. However, the idea was that a Bitcoin ETF would make BTC more accessible to professional investors and turn BTC into an asset that could be traded via traditional market infrastructure.
Crypto-native firms were quick to jump on the idea, and the Winklevoss twins were among the first to attempt a filing, which the SEC rejected in 2017. Over the years, regulated players, including Van Eck, have submitted various other filings without success.
So far, a U.S.-regulated Bitcoin ETF has proven to be an elusive goal.
Change always brings fresh opportunities, and a shift of leadership in the SEC has once again triggered rumors that a Bitcoin ETF may be approved. Incoming SEC Chairman Gary Gensler had sparked high hopes of a more pragmatic approach to cryptocurrency regulation, thanks to the fact that he had previously taught a course on blockchain at MIT.
The changes at the leadership level haven’t brought in any sweeping changes as yet. However, Gensler has made several pronouncements on his views regarding cryptocurrencies, calling for better consumer protections and suggesting that assets in DeFi’s “Wild West” could be classed as securities.
Despite these cautious-sounding statements, Gensler has provided fresh hope to those still aiming to bring a Bitcoin ETF to market. In early August, he suggested that exchange-traded products exposed to regulated BTC futures contracts could be approved under the Investment Company Act of 1940. Note that his words refer to products that track BTC futures, not physical BTC.
Gensler’s position appears to be that the futures markets are better regulated than the cryptocurrency spot markets, and a futures ETF would be an additional layer of regulatory security for investors.
As a result, asset managers including Van Eck and Valkyrie Investments have rushed to make filings for Bitcoin futures ETFs hoping that they’ll be the first to market. According to Bloomberg analysts, there are promising signs for a positive outcome, with a possible launch date as early as October this year.
After so many years of waiting for a Bitcoin ETF to be approved, the reaction to the most recent news has been somewhat mixed, and perhaps for good reasons. Since 2017, there’s been a collective expectation that a Bitcoin ETF would cause a jump in price. This idea is largely predicated on the assumption that the ETF will make Bitcoin more accessible to professional and institutional investors.
But there are doubts as to whether approval will cause waves in the markets at this point. Firstly, as reported by the FT, there’s some skepticism around the idea of whether or not a Bitcoin Futures ETF will necessarily appeal to investors. One analyst points out that in the traditional markets, ETFs linked to physical commodities tend to attract more investment than those linked to futures.
A Bitcoin Futures ETF could also underperform the markets for physical products due to the risk of contango in futures markets, where shorter-dated contracts sell for less than longer-dated ones.
However, a more prosaic reason that a Bitcoin ETF may not shake the markets may be that too much time has passed since the initial flurry of excitement around Bitcoin ETFs. Over the last year or so, institutional investors have begun to find their way into Bitcoin and cryptocurrencies, thanks to a proliferation of regulatory-compliant exchanges, custodians, prime brokers, and peripheral services.
At this point in the evolution of cryptocurrencies, there’s a thriving derivatives market, including U.S.-regulated futures and options on futures products from the CME. There are also products such as the Grayscale Bitcoin Trust, which provide other opportunities to gain exposure to Bitcoin.
So while any regulated Bitcoin ETF may be good news for the industry overall, there are still plenty of questions remaining over whether or not it would be the extreme positive price signal that many have anticipated over the years. However, there are still plenty of reasons to remain bullish on cryptocurrencies and innumerable opportunities for profitable trading and investing in the current markets.
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