Investors Wait For Bitcoin ETF Approval

What is an Exchange Traded Fund (ETF)?

An Exchange Traded Fund (ETF) is a fund, or a collection of assets — whether they be stocks, bonds, commodities, or even, potentially, cryptocurrencies — that you can purchase a share of, rather than the actual assets themselves.  This structure gives investors a way to easily gain exposure to many assets and asset classes without buying the asset(s) directly. 

Take, for example, the Standard and Poor’s 500 (S&P) ETF. Instead of buying all 500 stocks that make up the index, you only buy shares of the ETF, which either gain or lose value based on the collective price movements of all 500 stocks. As you might imagine, it’s much easier, and cheaper, to buy one share of this ETF rather than an equivalent amount of each of the 500 stocks. For ETFs that are actively managed, professional money managers buy and sell assets into and out of an ETF in order to maximize its specific financial goals (which can vary greatly) saving you the tax liability of continuously buying and selling securities within your own portfolio.

Why a Bitcoin ETF?

A Bitcoin ETF would allow investors to get exposure to the price movement of bitcoin without buying their own bitcoin. A Bitcoin ETF would make owning bitcoin accessible to more investors for two main reasons:

1. Some investors are uncomfortable using exchanges that bitcoin is sold on. They also may not want the responsibility of storing and protecting their bitcoin, which can be lost or hacked.

2. Some investors cannot purchase assets like bitcoin because of legal restrictions surrounding portfolio composition. These funds and companies might nonetheless want exposure to the asset, even if they cannot purchase the asset.

A Bitcoin ETF gives these investors exposure, but mitigates these concerns.

Notable Bitcoin ETF Applications

Multiple organizations have applied to be the administrator of a Bitcoin ETF, but none have been approved (as of Q4 2020). They include:

• Winklevoss Bitcoin Trust: This application was rejected by the Securities and Exchange Commission (SEC) in 2017 and 2018. 

• VanEck Solid X Bitcoin Trust: This was thought to have a good chance of approval due to its connection to the Chicago Board Options Exchange (CBOE). Instead, the application was withdrawn shortly before receiving a final decision.

• WisdomTree Trust: Submitted in June 2020, the application states that this ETF will hold a maximum of 5% bitcoin. If nothing else, this is a test of whether the SEC is banning all Bitcoin ETFs or just bitcoin-heavy ETFs.

The primary reasons these applications have been rejected were related to concerns about bitcoin trading markets and whether they allow for fraud or can be easily manipulated. As the overall cryptocurrency market gets larger and more geographically dispersed, these concerns may dissipate over time.