The upcoming SEC decision regarding the Winklevoss twins' proposed Bitcoin ETF has had a tremendous influence on the recent Bitcoin price gains.
I'll give a quick and elementary explanation of what an ETF is and what it has to do with Bitcoin before discussing the pros and cons of a Bitcoin ETF. An ETF, or exchange trading fund, is simply a fund that contains a pool of assets that investors have the potential to invest in. Many current ETFs hold assets such as oil, which enables potential investors who want to invest directly into oil to invest in oil without having to purchase shares in an oil related company or hold the physical oil themselves. Let's say for example that a specific ETF "holds" 1,000 barrels of oil. Let's say the price of oil is $50 per barrel. In theory, this ETF holds $50,000 worth oil, and the individuals who buy shares of the ETF all "own" a specific portion of the total amount of oil based on their investment amount. In real life ETFs hold a much greater amount of assets than the example I described, but the idea is still the same. This allows individuals to invest in assets such as gold, silver, oil, ect. without having to buy or store the physical assets themselves. Bitcoin's need for legitimacy and institutional investment could be achieved through an ETF, but it will come at a cost.
1. A Bitcoin ETF would bring legitimacy and encourage more institutional investment to the Bitcoin market.
Positive Aspects
The positive aspects that a new influx of capital investment and interest from "traditional" institutions are something Bitcoin has been in need of for a long time. For many individuals who are experienced on the traditional stock market are instantly initially skeptical by the idea of bitcoin, due largely to the lack of options for investing in Bitcoin other than holding the physical Bitcoin. The risks associated with holding physical Bitcoins, such as losing passwords, theft, ect., are easily navigated by taking the necessary steps to secure your Bitcoins, but could still be seen as a more risky means of trading compared to simply buying shares of traditional stocks. A Bitcoin ETF may be what finally gives many individuals the security that they need to safely invest in bitcoin through traditional investment means. Although the Bitcoin market has its fair share of high volume traders and investors, the rapid investment from many investors and institutions that would likely follow the approval of a Bitcoin ETF would likely reach a whole new level.
Negative Aspects
The first and one of the biggest negative consequences that I estimate will occur shortly following the development of a Bitcoin ETF is the increase in regulation that cryptocurrencies as a whole will likely experience shortly after. One of the biggest advantages that I believe Bitcoin and other cryptocurrencies hold is the minimal barrier to entry into trading and investing into them.Whether you are a teenager with $100 worth of Bitcoin who wants to try their hand at cryptocurrency investing or you are a major player who trades $100,000's every day, in theory both individuals have the same opportunities to invest. Clearly the high volume traders are at a clear advantage, but they also have a clearly higher risk associated with their trading. Whenever major financial institutions enter the market they not only bring their massive amounts of capital, but also their connections and influence over financial legislation. People often forget just how big of an influence the major financial institutions have over politics, regulations, and laws within the US.
2.Bitcoin needs a formal and clear regulation structure in order for it to be originally adopted.
Positive
The current regulations surrounding Bitcoin and cryptocurrency in general are extremely confusing and in many cases are simple not clear. Having fair and transparent regulation surrounding cryptocurrencies will likely add a level of safety and security to entrepreneurs and innovators working within the blockchain space. The regulations are so confusing and difficult to follow currently, that many firms have had to exit the market due to the regulations and costs associated, and there have undoubtedly been numerous firms who have not entered the market in fear of regulations or inadequate means to follow the regulations. The question of whether Bitcoin is a currency is even different depending on which branch of the US government you are looking at. Businesses and people need to get the impression that Bitcoin is a safe and convenient way to exchange funds, without feeling skeptical or worried about governmental action against them for doing so. Once some big names get involved in purchasing and investing in Bitcoin, it is likely that the tide will begin to turn and many will begin to view Bitcoin in a less "sketchy" manner.
Negative
Although establishing fair and accurate regulations surrounding Bitcoin would help bring a new level of legitimacy to the market, can we truly expect these regulations to be formatted with the best interests of the people in mind? Whether we like to admit it or not, many of the financial regulations were specifically established to help benefit many of the big and centralized financial institutions rather than the people who fund these institutions. It is not unlikely that the formation of Bitcoin and cryptocurrency regulations would be geared towards the interests of the major financial institutions rather than for the good of society. Two excellent examples of the types of regulations that could be directly against what is best for the people, would include a "minimum purchase" requirement or extensive identity verification. The regulations would likely not directly set up a minimum purchase, but it is entirely feasible that the regulations could include fees on a per order basis. Imagine if every transaction came with a $10 "tax" on the individuals to pay for the verification and other processes. This type of "tax" or fee would have no impact on the high volume traders, but it would have a serious negative effect on individuals wishing to buy small or minimal amounts of Bitcoin.
A way to invest in bitcoin indirectly would give many potential investors additional confidence in Bitcoin.
Positive
I don't know about you, but when I have had conversations with individuals who are experienced in the realm of traditional investing it seems to take these individuals some time and research to overcome their initial skepticism. One of the common questions that have come up when talking to these individuals has been in reference to how else can they invest other than holding the physical Bitcoin. A Bitcoin ETF, if done fairly, could allow these more skeptical individuals to "get their feet wet" in Bitcoin investing and would lead to an increase in confidence in the Bitcoin market as a whole. The trading fees on traditional stock exchange service, such as E-Trade, are typically low and would maintain a relatively low barrier to entry for low volume individuals to invest in Bitcoin at a reasonable price. The additional confidence that Bitcoin received would likely carry over to many other cryptocurrencies and blockchain technology as a whole, which would clearly be a positive motivator for innovation and advancements in the crypto-space.
Negative
One of the greatest revelations that came along with Bitcoin and blockchain technology was the elimination of the need for trust of other parties. Instead of having to wonder if another person truly holds the Bitcoins that they claim to, an individual could simply do some digging and discover the amount that the individual's wallet contain. Even if we assume that most members of the financial system are honorably and practice integrity, we have seen a copious amount of instances that prove that many behave in the exact opposite manner. Not only does an investor in an ETF have to contribute to the costs required for the administrative aspects of the fund, but they also cannot ever be 100% sure that their money is being used honestly and correctly. I don't necessarily even mean that the individuals who control the ETF are going to be engaging a ponzi scheme or any type of malicious behavior like that, but even just using an extensive amount of customer's money for "business operations". The costs and fees associated with running these funds don't just come out of thin air, but rather they typically use a portion of the total capital invested. Even if the fund is of the absolute highest ethical and honesty standards, there is still inherently more risk compared to purchasing and holding the Bitcoins yourself. These funds do provide a very beneficial service that helps to bridge digital currencies with traditional finance, but is the service these funds provide worth the risks and costs associated with using them?
@cryptofreed, do you think the SEC will approve? Anyway thanks for this piece. I'll quote some parts in an article for Cointelegraph morrow.
I personally believe that no one can give more than an educated guess based upon the circumstances surrounding the approval. Most of the information I have read and looked at so far makes me lean slightly towards the idea of it getting denied, but honestly could go either way.
Great analysis.
I have been biting my nails in anticipation of the bitcoin ETF. can't decide whether to buy more or to wait for the initial pump, sell and buy lower. Bitcoin investing is sure exciting!