Bitcoin prices are heating up again after a recent pull-back, but experts caution that although it may feel inevitable, an ETF backed by a digital-currency may not materialize as quickly as enthusiasts might hope.
“The SEC appears to have a very high bar to clear, tied to market manipulation and custody audit,” Todd Rosenbluth, head of ETF and mutual fund research at CFRA Research said on Friday.
Whispers of a Bitcoin ETF comes amid a ramp up in institutional interest in the value of virtual assets. The encompassing value of digital currencies hit a record at $1 trillion earlier this month as Bitcoin prices popped to an all-time high at $41,958.
Theories surrounding the prospects for an investment fund that would be more accessible to individual investors also comes as the Street’s chief disciplinarian, the SEC, will be headed by a bonafide bitcoin expert: Gary Gensler, a former head of the Commodity Futures Trading Commission and a professor of cryptocurrencies at MIT.
On Monday, President-elect Biden called for Gensler to serve as SEC chairman. With his noted crypto-savviness, Gensler would pair well with Hester Peirce, an SEC commissioner who has become a vocal crusader for digital assets and is referred to as “crypto mom” by Bitcoin hodlers.
Despite that, assurance that Gensler and Peirce might expedite a long-awaited Bitcoin fund with an ETF wrapper may be a bit premature, at least in the near term. “As the infrastructure around [Bitcoin] grows, we expect an ETF to come to market eventually, but it is unclear when and we are skeptical it will be in 2021.” Rosenbluth said.
A Bitcoin ETF has been a crowning glory for crypto investors since 2013, with the objective of offering individual investors easier access to Bitcoin at a low cost and in ETF-form. To be sure, an ETF sponsored by Van Eck Securities & SolidX Management offers qualified investors, mostly hedge funds and deep-pocketed investors, access to a bitcoin-backed trust, but that offering failed to meet hopes for a fund that delivered cryptos to the masses.
Rosenbluth ballparks that about seven firms over the years have tried and failed to get authorization for a digital-currency ETF — including Gemini, founded in 2014 by Tyler and Cameron Winklevoss.
It’s no secret that a lot has changed for Bitcoin over the years, with a wave of institutional investor interest in the sector stepping up to stimulate a fresh rally in coins and renewed optimism for products that offer a wider selection of investors access. Even so, nagging questions about infrastructure in a market that didn’t exist until 2009 have given regulators reason to slow play a crypto ETF.
Amy Lynch, a former SEC examiner and president and founder at consultant FrontLine Compliance, mentioned that the question of how to value Bitcoin and other cryptos may be the biggest roadblock for regulators. It trades “purely on speculation as opposed to a real value denominator,” Lynch said.
“In order to price a security,” if Bitcoin and other assets are deemed as such, “in a methodical way it has to be pegged to something priced in a repeatable standardized way,” Lynch said. The FrontLine consultant said that the inability to price cryptos makes them more vulnerable to manipulation and harder to regulate.
“It is not a question of if, it is a question of when,” said Michael Sonnenshein, managing director at Grayscale, one of the largest managers of cryptocurrencies via the Grayscale Bitcoin Trust [$GBTC] and similar Ethereum-focused investment vehicles [$ETHE].
Sonnenshein said that the market infrastructure has evolved significantly from three years ago when there was a retail-fueled fervor that was capped by an epic collapse in bitcoin’s price in early 2018. Lynch said that she doesn’t doubt that an ETF will happen but warns that the SEC may have larger priorities at hand.
“I agree that it isn’t a question of if but when, but it will take time and it’s not going to happen in early days of his role in the SEC,” Lynch said. In the long run, even if a Bitcoin ETF does come to pass it could pose an issue, at least in the early days, for the market as investors scurry out of investments like Grayscale and into new low-costs alternatives.
An analyst at JPMorgan said “a cascade of GBTC outflows and a collapse of its premium would likely have negative near-term implications for Bitcoin given the flow and signaling importance of GBTC”. Meanwhile, investors will have to turn to Grayscale, and other bitcoin-adjacent assets like mining stocks Marathon Patent Group [$MARA], Riot Blockchain [$RIOT] and others, which have their own inherent risks of volatility.