This week, the first US exchange-traded bitcoin fund is set to open trading. Is it a watershed moment for crypto?
If recent history is any guide, it could be a peak: Two other watershed moments for digital assets were followed by losses. When crypto exchange Coinbase went public in April and bitcoin futures first appeared on trading platform Cboe Global Markets in December 2017 (and on CME Group, the worlds largest financial derivatives exchange, a little after that). Those events were viewed as something that might legitimize crypto among normal people and institutional investors, and both turned out to be high-watermarks for bitcoin.
Why is bitcoin so much cheaper today than it was before?
Bitcoin prices are rising as a bitcoin ETF, run by ProShares under the ticker BITO, is set to open trading as early as Tuesday (Oct. 19). According to Coinbase and St. Louis Federal Reserve data, the virtual token has risen to about $61,829.00, its highest closing price since April. Several more bitcoin ETFs are expected to be launched in the US in coming weeks.
After wallowing away bitcoin ETFs for years, the Securities and Exchange Commission is now allowing the United States to catch up to Europe and Canada, where such funds are already available. The launch follows after SEC chairman Gary Gensler indicated in the summer that the agency was open to an ETF tied to CME Groups bitcoin futures, which allow traders to hedge or bet on bitcoin prices at a later date. The ETF was filed under the Investment Company Act of 1940, which Gensler claims provides investors with significant protection.
Why the SEC was wary of bitcoin ETFs?
Gensler may be open to an ETF that buys crypto futures, rather than actual bitcoin, because those derivatives are available on an exchange whose origins date back to the 19th century and are regulated by the Commodity Futures Trading Commission. It also avoids worries that the agency may have about the fund having to hold actual bitcoin. While digital assets have improved substantially in recent years, hacking of crypto exchanges isnt uncommon, and Gensler claims that the SEC will be looking for increased regulatory protections in custody (keeping a clients assets safe). Bitcoin futures, on the other hand, are derivatives linked to index prices. The funds dont store virtual assets directly.
The $7 trillion ETF industry has proved to be a huge success with investors and traders, providing borrowers and sellers with slick, easy ways to buy and sell assets. Its unclear how popular a long-awaited US ETF for bitcoin will be. American citizens can already immediately access bitcoin through apps offered by the likes of Coinbase, Square, and Robinhood. A futures ETF has additional expenses because the derivatives contracts expire, requiring the fund to buy new contracts to maintain its exposure (known as the roll). Bloombergs analysts, who predicted that the SEC will allow a bitcoin ETF to begin trading this month, contend the fund may be popular will traders. Short-term investors can use ETFs to diversify positions from their brokerage accounts, but longer-run investors may not be as interested in ETPs.
One of the things ETFs are known for is cutting costs and making it easier to trade and invest. Grayscale Bitcoin Trust, a crypto fund, charges 2% while ProShares bitcoin ETF expected to launch trading this week only charges 0.95 percent. As the SEC allows more of these funds to be established and as competition grows, financial institutions that have charged high fees for crypto products may be put under increased pressure.