Bitcoin ETF Still Unlikely... But Possible

Written by Jason Simpkins
Posted January 31, 2017 at 3:12PM

The concept of a bitcoin ETF draws a lot of interest.

Many people are curious about the crypto-currency and its investment prospects. However, they may also lack a complete understanding of its functionality, or the will to open up an e-wallet and buy bitcoins directly through an exchange.

A bitcoin ETF could address that market by making bitcoin more accessible to mainstream investors. It would also be a boon for those that already hold bitcoins, as its price would almost certainly skyrocket.

Enter the Winklevoss Bitcoin Trust, the eponymous bitcoin ETF of the Winklevoss twins, which is currently under review at the SEC.

The appetite for the fund is indisputable. Bitcoin itself has seen its value increase sixfold since its July 2013 application was filed. It doubled in 2016.

But there are hangups, one of which is liquidity.

You see, bitcoin is classified as a commodity, rather than a currency. And commodity ETFs are typically structured as grantor trusts. That means they have to hold the underlying commodity to cover a portion of their assets. But the bitcoin market is relatively thin. So if the fund saw heavy inflows, the resultant demand could lead to a huge spike in prices. That would prevent the fund from adding to its holdings.

Bitcoin analyst Spencer Bogart estimates a bitcoin ETF would lead to an influx of $300 million in new investor capital into the bitcoin in just the first few weeks. That could expand the total value of bitcoin in circulation to roughly $15 billion, from $13.8 billion currently.

But again, that’s just an estimate, which is a problem in and of itself.

There is no historical precedent for a digital currency ETF and there’s seldom been a time when a commodity has been offered in an ETF before being allocated as a mutual fund.

Worse still, registered investment advisers are currently unable to directly buy bitcoin for their clients.

Conversely, proponents point to the advantages of mainstream access and democratization of the marketplace.

Furthermore, bitcoin-believers see greater opportunity in a Trump presidency. Just this week, President Trump issued a new executive order that requires governmental agencies to cut two regulations for each new one they propose.

In any event, the SEC has until March 11 to rule on the Winklevoss bitcoin ETF. Again, it's unlikely but there's always reason for hope.


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