The Chicago Board Options Exchange (CBOE) launched Bitcoin-based futures back in December 2017, but it has still yet to launch a Bitcoin ETF. There is a lot of hype around the Securities and Exchange Commission (SEC) approving the first one by the end of this month, but for the time being this is just mere speculation.
The US is lagging behind when it comes to crypto ETFs, as Europe has had a Bitcoin ETF since May 2015 and an Ethereum ETF since October 2017. However, many people are confused as to what the purpose of a Bitcoin ETF is and why it could potentially be a good thing.
What is an ETF?
An ETF is an exchange-traded fund that is sold on an exchange and will either track the price of a specific index – such as the Dow Jones – or invest in a variety of different stocks and bonds. The difference between an ETF and a regular fund is that funds are not always traded on exchanges, and you often need to go through a brokerage in order to invest in them. It’s for this reason ETFs have much lower fees. There are ETFs for just about everything – ranging from orange juice to oil.
The Crypto Equation
Europe, in general, is much more accepting of cryptocurrency and blockchain technology than the US. This could be part of the reason that crypto ETFs have been available on certain exchanges for so long already. Just last week, Malta approved three bills to help create the first blockchain island, another clear sign that European nations – and related governments – are more open towards accepting this new technology. There is still a certain degree of fear and mistrust in the US, but this is starting to dissipate and we can see this with crypto miners being given special electricity rates in upstate New York.
Why Create a Bitcoin ETF?
There is a lot of institutional money being sloshed around on investment exchanges, so if there was a Bitcoin ETF some of this money could potentially flow into Bitcoin. Rather than traders backing a particularly bad winter in Europe – wiping out their orange orchards and pushing the price of orange juice up – these traders can put money into Bitcoin and other crypto using ETFs. Investment firms are bound by a set of very strict rules, and have to invest client’s funds on stock exchanges rather than in crypto exchanges. This new influx of money into Bitcoin could push the price of crypto up, but it can also work the other way too.
An ETF is More Secure, but Also More Expensive
A lot of traditional investors that have spent their entire lives investing in stocks and bonds are – quite frankly – scared by the lack of regulation in the crypto sphere. People appear set in their ways, have their favorite platforms, and stay “loyal” to specific investment strategies. There is a good chance they won’t go out of their way to deviate from these behavioral patterns. By creating a Bitcoin ETF and listing it with a large exchange in the US – such as CBOE – the door is then opened to this new wave of investors. Due to the fact it is listed on a traditional exchange, trading platforms – such as TD Ameritrade, Fidelity, and E*TRADE – can then pick these up and offer them to their clients. It is far safer and easier to trade on a regulated exchange that has been operating for more than ten years, rather than on a Wild West-esque crypto exchange.
For the privilege of having the extra security and someone else handling the purchasing and sale of Bitcoins, there is a rather large fee involved. The markup on the price of Bitcoin on European shores can range between 30% and a staggering 90%. While some investors would be happy to pay this markup for the extra security and relative ease of trading, investors might actually be better off in the short term just buying Bitcoin themselves on a crypto exchange.
Why Not Just Use European ETFs?
Investors could simply just use the available European ETFs to invest in Bitcoin, however there might be some possible tax implications for US investors due to FATCA. Many European exchanges only have a license to offer their products to European investors, which could also be another hurdle. European ETFs might present a short-term solution, but there are downsides to investing in them.
When Will the US Get its Own Bitcoin ETF?
The Winklevoss twins have been trying to register a Bitcoin ETF for some years. Recently, the twins moved one step closer to making this dream a reality as they were awarded a patent for a platform to administer a crypto ETF. This combined with the increasing pressure from institutional investors is pushing the SEC to speed up the process. We could possibly see the first US domiciled Bitcoin ETF by the end of July, but September should be considered a more realistic launch date.
Through the introduction of a Bitcoin ETF, the influx of money into the Bitcoin market could help trigger the next bull run. ETFs are positive in the sense that they simplify the process of investing in Bitcoin, but this ease comes at a price. It must also be noted that in an ETF, investors don’t actually own the Bitcoin and therefore can’t spend it on goods or services – the fund holds the Bitcoin.