Bitcoin ETF Explained: Will a Crypto Exchange Traded Fund Approval Send BTC Price to the Moon?
Those who have been following crypto development and news throughout 2018 have undoubtedly run across the term “Bitcoin ETF”. This was one of the most popular topics to discuss throughout the year, and it hit the headlines multiple time in recent months.
Discussions have presented it as a solution to all crypto problems and even announced that BTC ETFs can bring Bitcoin's price back to its former glory. However, there are numerous misunderstandings regarding what Bitcoin ETF is, as well as why is it so important. Not to mention misinformation that started flowing through the community.
Because of this, we will now discuss the topic ourselves, and try to explain what Bitcoin ETF is, and how can it affect BTC price if it were to be approved by the US SEC.
A Simple Explanation Of ETF
In order to properly explain the importance and effects of an ETF, we should first explain what it is. ETF, or Exchange-Traded Fund, is a fund that mirrors the price of various underlying assets, such as oil, or gold. In addition, ETF can also track assets like stocks. ETF shares can be traded on regular stock exchanges, where they are no different from traditional stocks.
However, ETF has one very important advantage, and that is the convenience and simplicity of the process. Trading an ETF is much easier than trading gold or oil itself, and the same is true for Bitcoin itself.
As for their origins, ETFs are usually created by companies that deal in asset management. These companies buy the underlying assets themselves and keep them under custody. In the meanwhile, they create ETFs, that are then approved by the SEC. Once they get an approval, their shares are bought within stock exchanges.
One important thing to note here is that ETF shares represent the fund's percentage. However, they do not represent ownership of the original underlying assets. In other words, those who buy gold ETF do not actually buy gold. Once again, this also includes assets such as cryptocurrencies.
When it comes to Bitcoin ETF, it is an investment tool that will constantly track the current price of Bitcoin, as ETFs usually do with other assets. That way, investors can still gain the necessary exposure to BTC, without having to actually trade in cryptocurrency directly. Instead of trading BTC, stock exchanges would only accept BTC shares.
This is important because Bitcoin and other cryptocurrencies are still not accepted by regular stock exchanges. However, Bitcoin stocks would have that luxury, if BTC ETF gains the SEC approval.
Trading Bitcoin ETFs would also mean that a lot more of institutional money would flow into the crypto world. Institutional investors are still hesitant to approach crypto trading to this day, due to high volatility rates, regulatory uncertainty, as well as new processes that they would have to master regarding storing the coins and alike.
Without possessing the real coins, institutions would not be exposed to risks such as losing them in a hacking attack. Instead, they would only have their shares, which is a much safer alternative.
While a lot of entities have attempted to gain approval for Bitcoin ETFs, there are only two types of BTC ETFs that were proposed by these firms. The first one is physical-backed ETFs, while the second one is ETFs backed by futures.
Physical-Backed ETFs And Futures-Backed ETFs
Physical-backed ETFs are exactly what you think they are – ETFs backed by actual BTC coins. This type of ETF would require companies to actually buy real Bitcoin coins, store them in their wallets, and create ETFs for them. Whenever there is a price swing regarding ETFs, the change in value would reflect on actual coins.
Futures-backed ETFs, on the other hand, work in a different way. The company issuing this type of ETFs doesn't have to buy Bitcoin. Instead, they would buy Bitcoin futures contracts. Simply put, futures are financial instruments that one can use for betting on certain asset's future price. All such contracts have an expiration date, although it is not the same for all of them. Some can use weekly timeframe, while others can include a quarterly timeframe.
Futures contracts trading is usually followed by higher risks, but investors still choose to do this due to higher rewards if they guess the price correctly.
Struggle For Getting Bitcoin ETF Approvals
We have already mentioned that Bitcoin ETFs became one of the most popular issues of 2018. Even so, they have yet to be approved, as no attempt to gain the approval so far has been successful.
There have been numerous applicants that attempted to gain such approvals from the SEC, with the most popular ones being the Winklevoss twins. The brothers attempted to achieve this on many occasions thus far, with their first proposal going as far back as mid-2013. However, the US SEC was never satisfied with their proposals, and experts believe that their attempts simply came too early, with the financial industry not being ready for them.
Apart from the twins, other entities attempted to achieve the same in the last several years. Over time, the number of proposals grew to be so big, that the SEC had to reject as many as nine of them in August 2018 alone. Some of the most notable applicants include Direxion, ProShares, GraniteShares, and the CBOE (Chicago Board Options Exchange).
The US SEC Requirements
Most experts agree that the best way to gain the ETF approval is to choose physical-backed ETF, instead of those that rely on futures contracts. However, companies that attempted to gain the SEC approval believe it to be the opposite. In fact, around 85% of applications feature futures-backed ETFs.
The reason for this decision is the custody question, which is so frequently discussed. In order to meet the expected demand on stock exchanges, companies would have to buy large amounts of Bitcoin. However, doing so can easily mean their downfall, which is what happened for a lot of big players in the past.
Bitcoin futures, on the other hand, are already an established financial instrument that the SEC has approved earlier. With that in mind, it is not surprising that these companies believe that using futures contract is the safe way to go. However, it appears that the SEC has additional requirements, such as the reduction of fraud attempts and market manipulation.
Bitcoin ETF Predictions
Throughout 2018, a lot of people became interested in the ETF issue and attempted to give predictions regarding their arrival. Arturs Ivanovs, the founder of FIC Network, stated that ETF would open up the market to more retail investors. Additionally, Ivanovs believes that volume from institutions would help the market reduce price manipulations. However, Ivanovs also believes that ETFs will likely not arrive prior to 2020.
Others, such as Csaba Csabai, the CEO of Income Locker, believe that there are other issues that need to be taken care of first. According to him, technological development needs to go further, and adoption rate needs to increase.
Spencer Bogart, the active vice president of equity research at Beedham & Co, stated that the odds of ETFs being approved now are less than 25%. A lot of other experts believe that Bitcoin ETFs will never arrive at all. This is likely because they consider cryptocurrencies to be a bubble, and that they are simply too dangerous for this kind of approval. While it is true that fraud and price manipulation are still large issues in the crypto world, numerous others believe that Bitcoin and other digital currencies will eventually resolve their issues and stabilize.
How Will ETFs Influence BTC Value?
Bitcoin price would likely skyrocket as soon as ETFs gain an official approval. This is due to expectations that people will rush to buy BTC. If physical-backed ETFs are the type that gets approval, the price would go up even more, since a lot more BTC coins would get purchased.
As for the futures-backed ETF, the impact on the price of Bitcoin would likely be smaller, since futures contracts would be the asset that is bought, instead of actual coins. Some people believe that the BTC value might not be affected at all, at least when it comes to ETFs themselves. Still, there can be no certainty until ETFs are actually approved, which means that all of these predictions are educated guesses, at best.