Bitcoin ETF: what is it, impact on the market, prospects

Nadezhda Zakharova 02.11.2018

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Everyone involved in cryptocurrencies has definitely heard the news circulated in the press regarding the fact that BTC is entering the world market as a stock exchange asset.

Behind such pretentious headlines in media articles and thematic portals lies much more modest information.

However, the coming changes in attitudes towards cryptocurrencies will cause a transformation of the entire industry and the need to rethink the attitude of states towards it.

What is an ETF?

Literally translated from English, the phrase “Exchange Traded Funds” sounds like “Exchange Traded Fund”.

Moreover, the word “fund” does not mean a certain amount of money set aside for specific purposes, but an organization or company.

Securities issued by such a fund are traded on trading platforms on the same terms as ordinary shares.

Regarding Bitcoin, the process of trading its derivatives on trading platforms will not require direct purchase through a broker.

The issue of guaranteeing transactions will be dealt with by the guarantor company, which will bring the BTC fund to the market.

In traditional circulation, an ETF represents securities that are a share of the ownership of the fund and all its assets or securities.

The holder receives a percentage of profit corresponding to the share based on the results of the reporting period.

The convenience of working with such a tool is that purchasing a package of just one fund allows you to diversify risks by the fact that the fund itself owns and manages the entire portfolio.

Perhaps the benefits are not obvious over short periods, but private medium- and long-term investors choose ETFs as their main instrument.

Negative opinions

An ardent opponent of the introduction of Bitcoin ETFs is Simon Dixon, CEO of a large investment platform for blockchain products BnkToTheFuture. In his opinion, traditional cryptocurrency regulation will add counterparty risk, which virtual coins initially lack. This will reduce the financial security of single traders.

The founder of the hedge fund Pantera Capital, Dan Morehead, considers it inappropriate to place high hopes on a Bitcoin ETF. The man calls on market participants to pay attention to the launch of a high-quality platform for trading cryptocurrency, based on the use of cloud developments from Microsoft and other industry giants. This stimulates the formation of an open system with regulation for blockchain projects.

Dan is confident that the SEC will be cautious in making a decision on the Bitcoin ETF issue, so the process will not be completed until the summer-autumn of 2020. His proposal will increase the capitalization of the virtual coin market and provoke an increase in cryptocurrency rates.

One of the founders of Ethereum, Vitalik Buterin, also believes that too much attention has been focused on ETFs for BTC.

The ETH author argues for the need to focus on creating retail solutions aimed at attracting more investors and users. Buterin argues that the Bitcoin ETF will trigger a “price pump”, but not the growth of the cryptocurrency market. The creation of conditions and the development of tools for micro-investments in virtual assets contributes to the rapid spread of digital coins.

Global processes in the crypto industry are already slightly dependent on the volume of mining. You need to keep an eye on stock trading, which has a great influence on market development. Despite the investment slump, 1 Bitcoin costs almost $3,300, remaining the most popular virtual currency. It is logical that the first ETFs will be created for BTC.

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What will happen to Bitcoin?

Due to the fact that enormous costs are spent on creating the instrument and bringing it to stock market standards, at first the BTC ETF will be the lot of large players.

At the time of writing, information has been confirmed that three applicants have submitted applications to list Bitcoin ETFs:

SolidX initiated the procedure for creating an ETF on BTC back in 2020. The situation then was not as tense as it is today, so the process was delayed;
VanEуck in 2020 applied to participate in the implementation of an ETF for digital currency, but also did not receive a positive response;
Cboe (Chicago Board Options Exchange) has applied to list VanEyck's ETF called “XBTC.”

As we can see, submitting an application implies at least the preliminary consent of the relevant responsible persons to create a new asset.

It is known that the cost of one share of the Bitcoin fund will be equal to 25 BTC. You will get an idea of who can afford to invest in this fund when you convert the cost into your currency.

An additional barrier to investment by private investors is that only accredited investors, such as hedge funds, can become investors.

Impact on the digital currency market

A positive response from the SEC will lead to significant changes in the crypto industry. With the arrival of large investment “whales” on the market, the total capitalization of virtual coins will rapidly increase. This will affect Bitcoin quotes and the rates of other cryptocurrencies.

If a precedent arises for the creation of a bitcoin ETF, similar investment products for altcoins will begin to actively appear. According to preliminary information, access to the new product will be open to American companies - there is no more information about the citizenship of potential investors.

The introduction of a new product will make it easier to purchase large quantities of Bitcoins. Currently, buying several million dollars worth of BTC requires hundreds of transactions. Index funds will allow you to carry out actions in one operation.

Experts suggest that the introduction of ETFs will attract investors with a total investment portfolio of more than 400 billion USD, which exceeds the capitalization of Bitcoin (12/16/2018) by 8 times.

Expected release date of the asset

According to the rules of the Securities Commission (SEC), the decision is made within 45 days.

So, the result should have been announced on September 10, 2018.

As you can see, it was not published, therefore, the SEC decided to use additional time (according to the regulations another 45 days) to make a decision.

This moved its publication date to September 24th.

Nothing was announced on this day either, therefore internal protocols came into force or emergency work scenarios were introduced. At least this is the conclusion that foreign experts covering the activities of the exchange came to.

Our own analysis of the situation shows that the delay can be caused by two situations:

The uniqueness of the situation. This is where US and international law comes into play, where there are no clear criteria for evaluating digital assets on a cost and legal scale. That is, responsible persons simply do not know which articles to refer to when assessing the performance of a future asset and how to insure against possible exchange rate fluctuations, which, as we see from history, can be impressive;
The second possible reason for the delay is preparing the ground for investment by the inner circle of those who are aware of events and are ready to invest in a new asset in the process of launching it on the market and receive the largest systemic profit. While the SEC is delaying its decision, potential investors are purchasing the asset so as not to cause price spikes and a new round of panic buying at any price. As soon as this is done, the decision will approve the launch of the instrument, a rush will form in the market for both BTC and the BTC ETF, which will allow the sale of only part of the volume of invested assets to recoup the entire campaign and continue to generate profits in the future.

The indication that the decision will be positive is based not only on the suspicious delay in making a decision, but also on a number of factors that have been important in securities decisions in the past.

Let's consider them:

The market capitalization of BTC exceeds $100 billion. This figure is head and shoulders above all “competitors”;
Safety. In the past, the most reliable storage of BTC was hardware wallets; today there are solutions that allow you to securely store Bitcoin and be able to invest it;
Coinbase custodial and Swiss stock exchange are the biggest names in the BTC leasing industry for clients;
Full regulation. The SEC has in the past provided clarity on the issue of digital currencies entering traditional markets. It was announced that BTC and ETH will not be considered securities and/or equivalent assets. The BTC ETF has become an alternative solution that bypasses previously established restrictions;
In the past, Bitcoin futures have been traded quite actively, in fact, the procedure has been tested.

What is the prospect for ordinary traders, holders and investors?

Despite the fact that all actions seem aimed at bringing BTC into the range of familiar controlled assets, there are benefits for those who do not have the opportunity and/or desire to invest in ETFs:

PROS:

Increasing market capitalization, which means its expansion and deepening;
Increasing the reliability of BTC as real infrastructure develops around it;
Reduced market volatility due to the presence of large players;
A long-term bullish trend for BTC and ETFs, in which the new fund will play the role of a serious catalyst.

CONS:

Bringing the BTC market to an institutional format contradicts the idea of Satoshi Nakamoto and the principles of a decentralized payment system;
Large capital with extensive experience in stock exchange manipulation is able to very quickly concentrate a large volume of assets in their hands, forcing holders to sell them cheaply;
The closure of a number of crypto exchanges under pressure from the authorities or due to strong competition from the stock market.

Calculation for ETF approval

The emergence of a Bitcoin ETF is a matter of time. Growing interest in the investment product will lead to a positive result. Decisions on bitcoin ETFs have not yet been finalized. Market participants had expected approval or denial in September 2018, but the SEC pushed back the deadline. The Commission's final verdict regarding the bitcoin ETF will be adopted on February 27, 2020. A new tool for purchasing digital assets should attract large investors to the industry (pension and insurance funds, banking organizations, etc.).

Frequent postponements of SEC decisions have a negative impact on the exchange rate of Bitcoin and other digital currencies. The coin lost almost 10% of its value in a short period of time. The government body is in no hurry to make a final verdict.

There have been attempts to introduce ETFs for Bitcoin for several years. The initiative was first adopted by the notorious Winklevoss twin brothers (Cameron and Tyler Winklevoss), who accused Mark Zuckerberg of stealing the Facebook idea. Previous applications received negative responses from the SEC.

This time, market participants hope for a positive decision for a number of reasons:

The total capitalization of cryptocurrencies exceeds 100 billion USD, and Bitcoins - more than 57 billion USD (12/16/2018).
The need to create a product that allows you to buy Bitcoins and invest them.
Legal regulation of digital assets.
An ETF for BTC protects against the risks that arise when storing Bitcoins. There is no need to purchase cryptocurrency through a Bitcoin wallet.
Bitcoin futures are being successfully sold, which increases the popularity of the cryptocurrency.

In the wake of the global legalization of blockchain products, the loyalty of financial and government regulators to virtual assets is increasing.