Imagine waking up one day, scrambling to see if bitcoin and the cryptocurrency market is in the green or the red (c'mon we all do this right?) – then start to scour through the daily news (crypto markets don't sleep or have 9-5 cut off times) and headlines as you wipe the sleep crust out of your eyes to see:
“SEC APPROVES FIRST-EVER BITCOIN ETF“
and likely spit out your coffee or tea or juice of sorts as for months, maybe years if you are a seasoned veteran in the space, we have saw countless “Bitcoin Exchange Traded Funds” related updates to no avail – but what happens when this *does* become an actuality and the SEC does approve a cryptocurrency-related ETF? Well, as mad as some might be for the ‘clickbait' headline – we wanted to take an in-depth dive into the world of ETFs and see what kind of domino effect this would have on the industry and space that has long awaited an approval of a Bitcoin ETF.
As most of you know, rumors of a bitcoin ETF are almost as old as bitcoin itself. Over the last two years, however, talk of a bitcoin ETF has become increasingly noisy. In fact, some analysts believe the world’s first ever bitcoin exchange traded fund (ETF) will be approved within weeks.
What will happen when the SEC approves the first ever bitcoin ETF? How will the community react? What will happen if the SEC rejects a bitcoin ETF and declares all cryptocurrencies to be unregistered, illegal securities? These are all good questions – and possible scenarios so let's take a look and warm up to the idea of an SEC approval which would be a huge landmark in the world of cryptocurrency regulations.
The SEC Could Approve the First Bitcoin ETF Before September 2018
First, let’s talk about timeline. There are reports that suggest the first bitcoin ETF will be approved as early as September 2018. The SEC has already delayed a decision on five crypto ETFs until September 2018. However, the ETF with the best chance of being approved, the CBOE/SolidX bitcoin ETF, was not one of the five crypto ETFs that got delayed.
Some believe this means the SolidX/CBOE bitcoin ETF decision will arrive soon – say, in August 2018.
Others believe that the SEC will continue delaying its decision. The SEC has 45 days from the date of publication in the Federal Register to make a decision. However, they can file a request to extend that window.
The SEC Could Reject the Bitcoin ETF Application
Let’s look at the first scenario. The SEC could certainly reject the bitcoin ETF proposed by CBOE and SolidX. In fact, this may be the most likely scenario, as the bitcoin ETF was already rejected last year.
In total, the SEC has rejected more than 15 bitcoin or crypto-related ETFs since 2013. If they approve a bitcoin ETF, it would be breaking a streak that has lasted several years.
The SEC hasn’t rejected low-quality bitcoin ETFs from no-name companies; they’ve rejected bitcoin ETFs from notable names like Gemini, CBOE, and SolidX.
Why Would the SEC Reject a Bitcoin ETF?
The SEC’s biggest problem with a bitcoin ETF is, broadly speaking, market regulation and manipulation within the crypto space. The SEC has a duty to protect American investors. If the SEC approves a bitcoin ETF, it makes it easier for ordinary American investors to get involved with bitcoin – which is still a risky, highly-volatile investment.
Some of the specific reasons why the SEC has rejected bitcoin ETFs in the past include:
Unregulated Markets: The problem of unregulated markets was brought up by the SEC when they rejected the bitcoin ETF proposed by the Winklevoss twins. Namely, the SEC felt that the BTC market was still in the early stages of development and the market was largely unregulated. The SEC isn’t in the business of approving high-risk investment vehicles in unregulated markets.
Lack of Transparency: The SEC also takes issue with the lack of transparency across the bitcoin space and crypto industry. Many of the industry’s largest companies are private companies. Some exchanges – even the world’s biggest exchanges – continue to be run by an anonymous team from an unknown location.
Price Manipulation: It’s no secret that price manipulation is rampant across the crypto community. A single actor can manipulate the price by buying or selling a large chunk of bitcoin at one point. In larger markets with higher-quality ETFs, better liquidity solves this issue, preventing any single actor from dominating the market. That’s not the case with bitcoin.
Exchange Security: Finally, the SEC has issue with the security of major cryptocurrency exchanges. Some of the world’s biggest crypto exchanges have faced security problems and hacks. If a bitcoin ETF were approved, then the firm providing the ETF would have to practice rock-solid security with customer funds.
A Bitcoin ETF Denial Could Cause a Market Crash
The first time a bitcoin ETF was denied, we saw a collapse of bitcoin from $1300 to $950 in a short period of time. That was before bitcoin was nearly as big as it was today.
Obviously, an ETF rejection would have negative consequences on the price of bitcoin in the short-term. However, after previous ETF rejections, we saw the price of bitcoin always bounce back.
The real concern is that the SEC hits us with two huge news stories: the SEC denies the CBOE bitcoin ETF and declares bitcoin to be an unlicensed security. In that case, the price of bitcoin would almost certainly plummet.
More attention is being paid to this latest bitcoin ETF application than ever before, which indicates we could see bigger market swings when this ETF is approved or denied.
The SEC Approves the First Bitcoin ETF: What Would Happen Next?
All right, we got the bad news out of the way. Now, let’s talk about the optimistic position. You wake up and see a headline like:
“SEC Approves World’s First Bitcoin ETF”
What happens in the seconds, minutes, and hours after reading that headline? The short-term hours after a bitcoin ETF approval would be one of the most dramatic moments in crypto history.
First, we can obviously expect the short-term price of bitcoin to skyrocket.
We might even see the price of bitcoin rise or fall in the hours before the SEC’s decision as insiders take or exit positions. In other cases, the SEC might announce a press conference regarding the bitcoin ETF, and participants stake their bets on whether a bitcoin ETF will be approved or denied in the leadup to the announcement.
What about long-term price movements? Over a longer period of time, the price of bitcoin might show no signs of slowing down. A bitcoin ETF would pave the way for institutional investors – like hedge funds – to enter the crypto space. Right now, billions of dollars of institutional capital is waiting on the sidelines for any signal from the SEC. The approval of a bitcoin ETF could signal that the SEC believes bitcoin is a legitimate asset, and that could cause institutional money to flood into the space.
Over a longer period of time, we would expect the price of bitcoin to become more stable. One of the reasons the price of bitcoin has been so volatile over time is because of a lack of liquidity. As more institutional investors enter the space, it brings more liquidity, more bitcoin holders, and more stable prices.
Conclusion: Will a Bitcoin ETF Be Approved Before the End of 2018?
The big question is whether or not a bitcoin ETF will be approved before the end of 2018. The SEC has deferred a decision on 5 ETFs until September 2018, but the CBOE/SolidX bitcoin ETF was not among those 5. That means we could see an SEC decision on the CBOE bitcoin ETF in August 2018 or even before the end of July.
In any case, these are exciting times for the crypto space. Within weeks to months, you could be seeing a headline saying something like, “SEC Approves World’s First Ever Bitcoin ETF.”
With that being said, we hope you got a small glimpse into what a cryptocurrency exchange traded fund approval would mean for the industry. Take a look at some other important dates for those interested and waiting on the edge of their seats for the SEC's approval of the world's first ever bitcoin crypto ETF!