Will Bitcoin ETFs Become A Reality?

bitcoin-495995_960_720Are we about to see Bitcoin Exchange Traded Funds or ETFs become a reality?

The US Security and Exchange Commission SEC is expected to give its ruling shortly on whether to approve or reject Exchange-Traded Funds (ETFs) for the Bitcoin sector.

Will Bitcoin ETFs Become A Reality?

Bitcoin ETFs would purchase and hold Bitcoins and provide an alternative method for people to effectively invest and trade in Bitcoin without having to deal directly with Bitcoin exchanges.

This would enable investors to avoid the technical issues involved in dealing directly with Bitcoin, such handling Bitcoin addresses and managing private keys, wallets, and the issues of hot and cold storage.

The SEC decision will have an influence on the short term price development of Bitcoin as well.

If SEC approval is given, then it’s expected that the Bitcoin price will shoot upwards. If the answer is no, then Bitcoin will suffer at least a temporary slump in price.

The last weeks in the run up to the decision have seen the Bitcoin price moving sharply upwards. Partly this is due to general financial market optimism – the FTSE, Wall Street S & P 500 and other stock markets have seen appreciation recently as well. But it’s also due to investors and traders taking up market positions in anticipation of the awaited SEC decision.

The last week however has seen a fall from the all time high peak of over $1200 in the Bitcoin price. The price has now gone into a reversal, so far of under 5% or so – which is nothing especially unusual for Bitcoin, being a highly volatile asset class, but a clear reversal nonetheless.

This price reversal I feel is possibly down to two things. Firstly having tested the all time high peaks around $1275 with no subsequent breakthrough there’s a certain amount of profit -taking. Secondly, some investors and traders are reconsidering their positions at the last moment before the SEC announcement and jitters are appearing as a result.

So what’s going to happen with the proposed Bitcoin ETF? No one knows for sure – except that is for the SEC.

But if we examine at this issue from a more long-term and neutral perspective, how does Bitcoin look to non-Bitcoin and non-digital currency enthusiasts right now?

We’ve had the Mount Gox debacle with millions of dollars in investors funds disappearing. Whether stolen, hacked, mislaid, whatever. The end result is a lot of bad publicity for Bitcoin.

There was also the busting and closure of the notorious “Silk Road” website which traded illicit items using Bitcoin. Another black mark for Bitcoin’s PR.

Then we have continual rumors and actual instances of break-ins, hacks and other problems affecting the currency.

Plus the fact that the very nature of Bitcoin means it is essentially unregulated. Anonymous, beyond the reach of regulators. It’s out there in the cloud, where no one can touch it. You enter at your own risk.

Another aspect of Bitcoin to bear in mind is that most of the trading volume – currently now around 98% – is accounted for by exchanges in China. Three main exchanges to be precise – OKCoin, BTCC, and Huobi.

We in the West, with our Bitcoin exchanges at Kraken, Bitfinex, Coinbase, Bitstamp and the rest are playing tiddlywinks compared to the volume of Bitcoin now being traded on just three exchanges in China. Most of the Bitcoin mining is also now done by organizations operating in China.

Back in January the Chinese financial regulators ordered the Chinese exchanges to block withdrawals of Bitcoin back into Chinese Yuan for one month. This led to a sudden sharp fall in the Bitcon price world-wide, as well as obvious liquidity problems for the affected investors. So what the Chinese regulatory authorities vis-a-vis Bitcoin has consequences for Bitcoin world-wide.

I’m a fan of digital currency and peer-to-peer digital payment systems and banking. But at the moment the present landscape leaves much to be desired.

Will the SEC give it’s blessing to an asset class that resides in this kind of environment – and an asset class which is now under such strong Chinese influence to boot as well?

The SEC see themselves as sitting on the cautious, secure and respectable side of finance and investment. For them, caution is the primary watchword. They act as the wise father or grandfather, watching over and protecting the kids from themselves.

Interesting is that BitMEX, the Bitcoin CFD and futures exchange puts the odds on SEC approval of the Winklevoss COIN ETF application at around one third (fluctuating).

I tend to think on balance that the SEC won’t give the go-ahead for Bitcoin ETFs just yet.

I feel the infrastructure of the digital currency world is not yet mature and solid enough for a Bitcoin ETF. Bitcoin right now is Wild West frontier terrority.

Frontier territory can be exciting. It offers opportunities. But it’s also extremely volatile and dangerous and that means it’s not for everyone and probably not for the average investor. And I think this is what will sway the decision of the SEC.

But I could be wrong. And whatever the SEC decides this month, Bitcoin ETFs are coming, no doubt about it.

For the record, I liquidated 80% of my own Bitcoin last week when the Bitcoin price downturn started. We’ll see what happens over the coming weeks.

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Disclosure: The author holds investments in Bitcoin and other financial assets at the time of writing this article.



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