HodlBot Founder Predicts First SEC-Approved Bitcoin ETF to be Physically Backed
HodlBot Founder Predicts the First Bitcoin ETF the SEC Will Approve Will be Physically Backed
Several applications for a Bitcoin (BTC) exchange-traded-fund (ETF) have been sent to the US Securities and Exchange Commission (SEC) for review and approval but SEC has denied many of these proposals including those from Winklevoss twins, Proshares, Direxion, and GraniteShares.
The SEC cited liquidity and valuation issues associated with crypto ETF proposals as reason for the denials. However, observers appear optimistic that the first Bitcoin ETF approved by the SEC will hit the market in 2019.
Anthony Xie, Founder of HodlBot says he is quite positive that any Bitcoin ETF based on Bitcoin futures will be rejected, adding that the first Bitcoin ETF the SEC will approve will be physically backed.
According to him the reasons are not far-fetched. ETFs that physically hold bitcoin have the advantage of low transaction cost compared to the high fees exchanges charge to trade between fiat and Bitcoin. Also, they track the performance of bitcoin and offer a huge liquid market.
However, Anthony said ETFs that physically hold bitcoin are not without risks and concerns, chief being counterparty risk, high expense ratio, and can have markets closed for ETF but open for bitcoin.
On the other hand, ETFs that purchase bitcoin derivatives doesn’t have to worry about the security risks of holding Bitcoin since it does not take custody of any Bitcoin. However, Anthony says this type of ETF is less likely to get approved because it has active management risk and cost, margin call risk, rollover risk, leverage trading risk and approximates the performance of bitcoin.
The biggest worry surrounding ETFs that hold Bitcoin is custody risk. But Anthony said he believes that mitigating custody risk is easier than mitigating the risks of improperly tracking Bitcoin by trading derivatives.
Legitimate custodian services are popping up i.e. Coinbase Commerce, Xapo, itBit, Bitgo. In the future, it’s very likely that large financial institutions will also jump into the game. Securely storing BTC is difficult, but not impossible.
On the other hand, the risks associated with trading Bitcoin futures are not so easy to mitigate. The investors need to place a great amount of trust in the active manager to approximate the performance of Bitcoin using derivatives. It will be less transparent, cost more, and a small price change can have a big impact on performance because of leveraged trading.