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BATS Rule Change.
ETF means exchange traded fund. Such a fund would be an traded on major exchanges and would be backed up by actual bitcoins. A client would buy shares of the ETF and the ETF’s management would be obliged to buy the equivalent amount of bitcoin from the BTCUSD market. That is the same way as it’s done with precious metal ETFs like the SPDR Gold Trust.
The ETF has to be approved by SEC (Securities and Exchange Commission). The challenge here is that the SEC has never dealt with ETF based on non-physical products - bitcoins are fully virtual so a bitcoin ETF looks rather unusual. The second and more substantial issue is however whether or not the BTC market is mature enough to be traded this way and to open its doors to institutional investors. People usually named the fact that the majority of BTCUSD volume before the PBOC intervention came from China’s zero-fee exchanges and was probably fake, and that the market is very small and prone to manipulation.
The proposed ETFs
- COIN ETF (Winklevoss brothers) - deadline 11 March 2017
The Winklevii first proposed the ETF in 2012 and have been trying ever since. The COIN ETF is seeking the approval of the SEC and already has passed several “soft deadlines” for decision. On those occasions the SEC didn’t make any statement which so far meant we keep waiting till the next soft deadline.
However, the SEC has a hard deadline to decide whether to approve or reject a bitcoin ETF on Bats once and for all by the 11th of March 2017. - Read about it here.
- The COIN would be listed on Bats - well available from the US.
- Here is the SEC’s PDF talking about this.
- Shares of COIN are expected to be available for trading on all national security exchanges.
- The COIN’s specifications are still being amended according to changes on the market, see below.
The twins first started by creating an index - the Winkdex.com and chose the name of the ticker - COIN. The Winkdex is a volume-weighted average of BTCUSD trades from top three exchanges (top in terms of volume - which means the exchanges change):
Winklevoss IndexSM (also known as WinkDexSM) provides a blended price for bitcoins. WinkDex is calculated by blending the trading prices in U.S. dollars for the top three (by volume) qualified Bitcoin Exchanges during the previous two hour period using a volume-weighted exponential moving average.
They filed the documents via Digital Asset Services, LLC: it was a preliminary registration statement (also called an S-1) for COIN with the U.S. Securities and Exchange Commission (SEC). So far the SEC hasn’t made any statement other than call for public comments earlier in 2016.
There is another proposal (“rulechange”) to have the COIN ETF listed on Bats exchange: rule change with the SEC (called a 19b-4). The rule change proposal has currently open the public comment section. You will see familiar names like the notorious buttcoiner /u/jstolfi or a Circle representative.
So the sequence should be first approving the rulechange which will make it possible to list a BTC ETF on Bats at all, which makes it more likely for COIN to get listed but this decision is not focused exclusively on COIN. Although this is just how the formal procedure has to go. ATM the March 11 deadline is from the practical point of view really just about COIN.
Some reading on COIN
- Forbes, 7 Feb 2017 - an article with one BTC ETF skeptic and one BTC ETF optimist, by Laura Shin of the Unchained podcast.
She starts out with introducing the Winklevoss twins and states the fact that the SEC has run out of time to say yea or nay to COIN and has to make their decision by 11th of March 2017. According to Reddit’s House of Commons it seems though that the SEC doesn’t really have to say no, they apparently either say nothing which will be a passing grade, or quietly recommend the twins to withdraw their application, make some changes and submit it later.
Anyway, the opinions are quite valuable to anyone who has no idea what it might be like to work at SEC:
Spencer Bogart, vice-president of equity research at Needham & Company: “I think we need to take into heavy consideration the general conservativeness of the SEC,” he says. “If you think of this just from a game theory aspect, if I work at the SEC and I approve this ETF and a lot of money flows into it and something goes wrong, there’s a very good chance I could lose my job over that. If I do approve and it goes extremely well, it’s very unlikely someone comes around to pat me on the back or give me a promotion.”
Daniel Masters, director of Global Advisors: “Many of [Bitcoin’s] risks have been ameliorated, counteracted and addressed by things like the [New York Department of Financial Services] regulatory regime [aka the Bitlicense, which is regulation specifically designed for cryptocurrency firms], by the anti-money laundering provisions that pretty much every decent [cryptocurrency] exchange has in place, which in some cases rise to the level of opening a banking account in terms of identification.” He also notes that sophisticated protocols and new hardware modules used for so-called cold storage, the process by which bitcoins are secured offline so as to protect them from theft and hacking, should also address security concerns. “There are enough serious people — banks, regulators, technology companies — all sorts of different players now in the space doing sensible things,” Masters says.
Both of them agree on one important thing - that there are less liquid markets than BTCUSD which have an ETF and it is no problem at all.
There is another bitcoin ETF proposed by a blockchain investment company SolidX. It addresses some issues that people brought up regarding the Winklevii ETF. That is: the COIN ETF is pretty much a family business.
- The underlying bitcoins for COIN would be bought at the Winklevii owned Gemini exchange.
- They plan to use the Gemini Auction.
- There is no insurance but they use cold storage.
- XBTC ETF (SolidX) - deadline 30 March 2017
The SolidX ETF is insured up to $125M and uses several BTCUSD exchanges for the index. The bitcoins will be stored and insured via Xapo. The fund would track an index provided by TradeBlock - the XBX. The XBTC would be listed on NYSE - well available in the US and in EU, this is one of the biggest exchanges in the world.
SolidX Files S-1 Registration Statement for SolidX Bitcoin Trust ETF. (New York - July 12, 2016) - SolidX Partners Inc., an innovative blockchain technology company, today announced that it has filed a registration statement on Form S-1 with the Securities and Exchange Commission relating to the proposed launch of the SolidX Bitcoin Trust, which will seek to provide shareholders with exposure to the daily change in the U.S. dollar price of bitcoin, before expenses and liabilities of the Trust, as measured by the TradeBlock XBX Index. The Trust will not be actively managed, and will list on the New York Stock Exchange under the ticker symbol “XBTC.” An electronic version of the registration statement can be accessed through the SEC’s website at www.sec.gov.
- The ETF was proposed in July 2016 - you can read the S-1 registration statement here
- The proposal is being actively edited - last change was released 6th Feb 2017, see this discussion
What is already out there
There already is a Bitcoin Investment Trust (GBTC) which is however trading at a premium above the market value. The reason is that most people cannot buy its shares directly - to do that one has to be an accredited investor.
An accredited investor, in the context of a natural person, includes anyone who either earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR, has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).
The GBTC was created by Barry Shillbert’s company Grayscale.
- Stockholm ETN
Exchange-traded notes (ETNs) are similar to exchange-traded funds (ETFs) in that they trade daily on stock exchanges and track the performance of an underlying index (less fees).
There are some differences though: ETNs are structured as unsecured debt. Investors are effectively lending money to the provider in exchange for the commitment to provide a return tied to an index. There is also a difference in the taxability - read more on Investopedia.
The Stockholm ETN is currently the closest thing to a bitcoin ETF one has in Europe.
Why is the bitcoin ETF so attractive
There seems to be quite some interest to buy bitcoin as an investment but institutional traders are afraid of the security of bitcoin exchanges. With the ETF they could trade bitcoin on safer, regulated platforms.
Bitcoin ETF in the news
July 2013 - NYT: Winklevoss Twins Plan First Fund for Bitcoins
Cameron and Tyler Winklevoss […] filed a proposal with securities regulators on Monday that would allow any investor to trade bitcoins, just as if they were stocks. The plan involves an exchange-traded fund, which usually tracks a basket of stocks or a commodity, but in this case would hold only bitcoins. […] Their proposal has the advantage of coming from the desk of Kathleen Moriarty, a lawyer at Katten Muchin, who played a leading role in the creation of the first exchange-traded fund and popular gold- and silver-backed E.T.F.’s.
But even if the Winklevosses’ proposal fails, some industry experts said that it marks a significant signpost in the push to give virtual currencies at least a veneer of respectability. “Digital currencies are not going away,” said Carol Van Cleef, the head of law firm Patton Boggs’s emerging-payments practice. “And as bitcoin rises in popularity, you’re going to see traditional financial products and services being adapted to it.”
July 2016 - Bloomberg: Brace Yourself for the Winklevoss Bitcoin ETF
“It would legitimize bitcoin and put a lot more scrutiny on it.”
December 2016 - FT: Winklevoss twins see bitcoin as ‘better than gold’
With the launch of Gemini in 2015, [the Winklevoss twins] unveiled one of the first regulated and licensed digital currency exchanges in the developed world. […] Their next project is the Winklevoss Bitcoin Trust, an exchange traded fund (ETF), which would publicly trade on the better alternative trading system (Bats) exchange, a global operator of exchanges and services for financial markets. It has been under review by regulators for almost four years, but it took a promising step forward in mid-October when State Street, a bank, agreed to serve as fund administrator.
“We think the positive effect that a bitcoin ETF would have on the price of bitcoin is vastly underappreciated, and that the probability of approval is drastically overestimated within the industry,” Bogart wrote. “Overall, this is a low probability event with a very significant upside,” Bogart said of the ETF. “Ultimately, while it appears there is significant pent-up demand from the investment public for such a vehicle, bitcoin itself certainly doesn’t need an ETF and will continue on regardless of the SEC’s decision.”
January 2017 - MarketWatch: Path to Bitcoin ETF still uncertain but may be easier under Trump
Last week, President Trump said “we can try to cut regulations by 75%—maybe more,” although he didn’t give specifics. On Monday, he signed an executive order that is meant to severely cut the number of federal regulations, requiring two regulations to be eliminated for every new one created. Jay Clayton, the Wall Street lawyer picked by Trump to be the next chairman of the SEC, has also suggested he wants to ease regulation. But analysts cautioned that while approval was more likely given the anti-regulatory bent of the new administration, the bitcoin issue remained very much up in the air. “Trump will ease the way, but that doesn’t mean it’s suddenly a sure thing,” said Phil Bak, the former head of ETF listings at the New York Stock Exchange. Bak noted that the cryptocurrency remained a volatile and complex technology, and that there was currently no easy way to short bitcoin—that is, to bet on a decline in prices.
February 2017 - MoneyMorning: The First Bitcoin ETF Could Win Approval in March Despite Long Odds
The first Bitcoin ETF has a chance to win approval from the Securities and Exchange Commission (SEC) as soon as March 11 – just five weeks away. A Bitcoin ETF (exchange-traded fund) would be a huge deal. Needham & Co. analyst Spencer Bogart estimated last month that the first Bitcoin ETF would attract $300 million in its first week of trading. In his Jan. 10 note, Bogart said a Bitcoin ETF would “drive the price of Bitcoin up significantly,” although he didn’t give a price target. In a previous report, Bogart forecast the increasing adoption of the digital currency would push the Bitcoin price to $17,473 by 2025.
This report however links to an article on MoneyMorning from Sep 2016 that states that the ETF approval is actually quite likely and will drive the BTC price up.
Why do analysts think the BTC price should go up after the ETF approval
The reason for that is the way the bitcoin ETFs are modeled. Since the exchange traded funds hold the bitcoins it means that as the ETF will be traded bitcoins will be bought out of the BTCUSD market. That is the same way the SPDR Gold Trust and the iShares Silver Trust work.
One added bonus is that the money that would flow into the ETF (and by extension into bitcoin) would be fresh capital coming from people who would like to invest in bitcoin but have been worried about the technical and security issues.
Here is a comment about the commodity markets and how their ETFs might relate to the bitcoin ETF:
“Retail and equity investors, who wouldn’t or couldn’t go direct to the commodity markets, were prepared to invest in these vehicles. That in turn sucked physical commodity, used to back the ETFs, out of the markets in question, leading to price appreciation,” wrote Daniel Masters, director of the UK-based Global Advisors Bitcoin Investment hedge fund, in a blog post last month. Masters also served for six years as the global head of energy trading for JPMorgan Chase & Co. (NYSE: JPM). “It has to be emphasized that the capital that flowed in was not doing so in some repackaging exercise, but was fresh, previously unseen capital,” Masters said.
Other mentions about the ETFs
February 2017 - Meb Faber’s Podcast on investing was hosting John Bollinger who started talking about bitcoin trading at the 46th minute of the episode. He mentioned that bitcoin will probably going to get en ETF soon which will improve the liquidity.
February 2017 - Redditor’s optinion