The U.S. Securities and Exchange Commission is seeking comments on yet another application for a proposed exchange-traded fund (ETF) that would track the price of Bitcoin.
An exchange-traded fund is a marketable security that allows investors to bet on the performance of an underlying asset (or assets) without requiring the investors to maintain custody of the underlying asset(s). ETFs are traded like stocks, which allows investors to speculate on the price of gold or oil without having to enter into complex derivative contracts or hold the actual assets.
ETFs can, in theory, track the price of anything from physical commodities to foreign currency exchange rates to stocks and bonds. ETFs are technically investment companies which must seek approval from the SEC prior to selling shares to the public. ETFs are not mutual funds, although they have the similar characteristic of exposing their investors to pools of underlying assets. Shares in mutual funds can only be purchased or redeemed at the end of each trading day, while ETFs trade throughout the day at changing prices, just like stocks.
There has been a great deal of interest in creating an ETF that tracks the price of Bitcoin. Such an instrument would remove one of the largest impediments preventing capital from entering the crypto-space—custody. Institutional investors have cited the inability to find a qualified custodian as one of the largest hurdles preventing them from accessing the crypto-space. If those investors could speculate on Bitcoin through an ETF on a trusted platform, that would eliminate a massive barrier to entry.
This is not the first proposal for a Bitcoin ETF that the SEC has seen. In March of last year, the SEC denied the Winklevoss twins’ application for a Bitcoin ETF, citing the inherently unregulated nature of Bitcoin markets.
This latest proposal comes from Cboe Global Markets, which has requested permission to list and trade SolidX Bitcoin Shares, an ETF initially proposed by asset manager Van Eck Associates and blockchain startup SolidX Management. This marks the third attempt of Van Eck to launch an ETF based on Bitcoin. In September of last year, the asset manager withdrew an application for an ETF tethered directly to Bitcoin, and in January, Van Eck shelved an application for an ETF that tracked Bitcoin futures.
Unlike most ETFs which are geared towards retail investors, this Bitcoin ETF is designed for institutional investors, as is its proposed share price. One share in this ETF would equal the value of 25 BTC—which is roughly $165,000 at the moment. SolidX CEO Daniel H. Gallancy said in a phone interview with CNBC that the high price tag reflects the fund’s focus on institutional rather than retail investors.
There is currently a financial instrument trading on the over-the-counter markets that tracks the price of Bitcoin—the Grayscale Bitcoin Investment Trust (GBTC)—which investors can use to expose themselves to the price fluctuations of Bitcoin without having to acquire and store the virtual currency itself. This product, however, is not an exchange-traded fund, nor is it regulated or approved by the SEC. The price of GBTC has in fact failed to track the price of Bitcoin accurately, and trades at a massive premium compared to the underlying BTC.
For any Bitcoin ETF to be approved by the SEC, it would have to demonstrate that it could track the price of Bitcoin with a much higher degree of accuracy than GBTC.
The SEC recently proposed a plan to make it easier to bring ETFs to market by creating a streamlined application process for so-called “plain vanilla ETFs”—funds that do not employ complex leveraging techniques. Perhaps this is an encouraging sign for SolidX Bitcoin Shares. However, the SEC may decide that an EFT tracking Bitcoin is an exotic financial instrument that therefore requires more scrutiny than this streamlined process allows for.
Arthur Hayes, the CEO and co-founder of BitMEX, a peer-to-peer crypto trading platform that offers leveraged contracts, made the bold prediction on CNBC’s Fast Money that Bitcoin is one positive regulatory decision (such as the approval of an ETF) away from breaking through twenty thousand and reaching as high as fifty thousand by the end of 2018.