Update March 10th 2017 – The SEC has rejected the Bitcoin ETF suggested by the Winklevoss twins.
According to a publicly distributed notice detailing the decision, the SEC said:
“As discussed further below, the Commission is disapproving this proposed rule change because it does not find the proposal to be consistent with Section 6(b)(5) of the Exchange Act, which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest.”
Recently there has been a lot of talk about the Bitcoin ETF that was set up by Tyler and Cameron Winklevoss. In this short post I want to give you a general overview about what’s all the fuss about, and let’s start with the basics.
What is an ETF?
ETF stands for Exchange-Traded Fund. It’s basically an investment vehicle that tracks the performance of a specific asset. In plain words, it’s a piece of paper you invest in that tells you “I’ll be worth whatever X is worth” – X being a specific asset such as oil, gold, bonds, stocks or currency.
It’s a simple way of investing in an asset without owning the asset itself. Since a lot of people who trade don’t really care about the actual asset but only about its profit and loss, ETFs simplify the investment process. So if I want to invest in Gold for example because I think the price of gold is about to explode, I don’t have to buy physical gold, I can just buy a gold ETF.
What is the Bitcoin ETF?
As you probably figured out by now, the Bitcoin ETF is a type of ETF that will mimic Bitcoin’s price – it is set to be traded on the Bats Exchange. This means that anyone who trades on the Bats will be able to invest in Bitcoin (including large institutional investors). It will also eliminate the need for storing and securing your Bitcoins since you don’t own the currency itself.
At the moment the SEC (Securities and Exchange Commission) is debating on whether to approve or decline the ETF. The ETF proposed by the Winklevoss brothers is not the only ETF waiting to be approved by the SEC. SolidX also proposed to set up an ETF and is waiting until March 30th for the SEC’s approval to be listed on the NYSE. Grayscale filed to list their ETF also. However, the Bitcoin ETF by the twins is probably the first in line as they originally filed their request in 2013.
The SEC is said to supply it’s response on March 10th 2017. However,if the SEC doesn’t issue a ruling one way or another, the proposed fund would be approved by default. Given that no ETF has been brought to market in this way, this is considered an exceedingly unlikely outcome.
The advantages of a Bitcoin ETF
Once there is a SEC regulated ETF on the market this opens up the opportunity for many investors to jump in and invest in Bitcoin without actually holding the currency by making it more accessible. The SEC’s approval would be another major step towards regulation Bitcoin worldwide.
Also since this is an investment vehicle you will be able to short sell it if you think the market is going down. Furthermore, investing in an ETF will remove one of the major drawbacks currently holding people from investing in Bitcoin – the need to understand the currency and how to secure your coins.
The disadvantages of a Bitcoin ETF
The main disadvantage of the ETF lies with the fact that the investment trust of the Winklevoss twins which issues the ETF currently doesn’t have insurance for investors’ money in case their coins are lost or stolen. SolidX on the other hand does supply insurance (but will be approved/rejected on a later date).
Also there is a fee of around 2% attached to investing in the Bitcoin ETF. However, seeing how this is relatively low compared to the usual fees people face when buying Bitcoins I don’t think this will deter a lot of investors.
How will this affect Bitcoin’s price?
Wouldn’t we all want to know :)
Nobody can really say how this will affect Bitcoin in the long run, however the logical outcome would be that if the ETF is approved, more people will now be able to invest in Bitcoin and the price will gradually rise. Just for the sake of comparison, gold ETFs were introduced in the mid 2000s and after that the spot price for gold tripled within 5 years.
However, if the SEC rejects the ETF this may cause panic in the market and have a lot of people selling their coins bringing the price of Bitcoin down.
To conclude, it seems like this is going to be a very interesting week…
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