Bitcoin ETF Decision Upcoming, Community Is Divided
With the next deadline for a decision on a bitcoin-based exchange traded fund (ETF) by the US Securities and Exchange Commission (SEC) looming around the corner, let’s take a closer look at what an ETF could mean for the bitcoin market and why the bitcoin community is divided.
First of all, it’s important to realize that not all ETFs are the same. Out of the 10 ETFs currently being reviewed by the SEC, only one will actually hold physical bitcoins in its reserves. That one is the much-talked about VanEck bitcoin ETF that was filed through the CBOE exchange earlier this year.
The other nine ETF proposals on the SECs table are not backed by bitcoin, but instead backed by futures contracts of bitcoin. In the US, bitcoin futures contracts are traded at two major futures exchanges in Chicago known as CBOE and CME.
What Is a Bitcoin Futures Contract?
Futures contracts were originally designed for farmers and other commodity producers to lock in prices of the commodities they wished to trade at a future date. When that date came, the holder and the issuer of the contract would settle it by having the commodity physically delivered to the person holding the contract.
Bitcoin futures, however, are structured in a way that has no link to the actual market for bitcoin. Instead of having bitcoins delivered to the person holding the contract when it expires, the contract is settled in cash, without any bitcoins ever changing hands. Despite this, some experts have claimed that bitcoin futures have caused greater volatility in the bitcoin market, in particular on the days the contracts expire.
Do Futures-Based ETFs Matter?
Although a futures-based ETF wouldn’t hold any bitcoins, it can still be argued that it is good for the bitcoin market because it spreads knowledge about bitcoin to new types of investors who may choose to buy physical bitcoins at some point in the future.
It would also legitimize the asset even more in the eyes of traditional Wall Street investors and financial institutions, and most likely lead to the creation of more bitcoin-based investment products in the future.
That said, most experts agree that an ETF backed by physical bitcoins would by far be the most impactful event for the price of bitcoin both in the short and long run.
Community Is Divided
Some members of the bitcoin community, including technologist and serial entrepreneur Andreas Antonopoulos, are against Wall Street money pouring into bitcoin in the form of an ETF.
“I think it's a terrible idea. <...> ETFs fundamentally violate the underlying principle of peer-to-peer money, where each user is operating not through custodian, but has a direct control of their money, because they have direct control of their keys. Your keys - your bitcoin, not your keys - not your bitcoin,” Antonopoulous warned adding that Bitcoin ETF will become an instrument to manipulate bitcoin prices, scaling and forking debates.
Nick Szabo, a famous computer scientist, legal scholar and cryptographer, also shares the same viewpoint, arguing that it “might cause more problems than it’s worth.”
I for one am not lobbying for an ETF or for Wall Street-managed money in general. It might cause more problems than it's worth. The recent sell-off by dumb money has or soon will deprecate many opinionated know-nothings in this space. We don't need new ones to take their place. https://t.co/s7OxZt9IrJ— Nick Szabo⚡️ (@NickSzabo4) August 12, 2018
Others, however, argue that a regulated investment product such as an ETF is the only way for bitcoin to truly catch on as a mainstream asset class globally, saying that “people do not want self-custody.”
Because most people do Not want to self custody. The only people in crypto now are power users, developers and traders. If you wan this to be a global thing, then they will want something that is easy and regulated. That’s facts.— Leon Gaban (@leongaban) August 13, 2018
The next deadline for the SEC to decide on a bitcoin ETF is Thursday August 23, when it is set to decide the fate of a proposal from ProShares, a well-established provider of ETFs in the US. ProShares’ proposal includes two ETFs, one that would let investors bet on the bitcoin price going up, and another that would offer short exposure, meaning investors can profit when the bitcoin price goes down.
Physical Futures Coming
With the link between the bitcoin futures market and the physical market being weak at best, a new start-up dubbed Bakkt is trying to change this by introducing 1-day physically delivered bitcoin futures contracts in November this year.
With our solution the buying and selling of bitcoin is fully collateralized or pre-funded.— Bakkt (@Bakkt) August 20, 2018
Our new daily bitcoin contract will not be traded on margin, use leverage or serve to create a paper claim on a real asset.
The new company, set up by heavyweight financial institution Intercontinental Exchange (ICE) has already received investments from crypto hedge fund Pantera Capital, and is working with major brands like Microsoft, BCG, and Starbucks on developing the platform, which Wall Street veteran Mike Novogratz referred to as “the most important news in crypto this year.”