Industry participants have floated several proposals for Bitcoin exchange-traded funds (ETFs), but thus far, none of them have received approval from the U.S. Securities and Exchange Commission (SEC). If the government agency finally gives one of these proposed funds a green light, it could have significant implications for not only Bitcoin adoption but also for the digital currency's market.
If the SEC approves a Bitcoin ETF, that would mean that any person with a retirement account, including Roth IRAs and 401(k)s, would be able to purchase the cryptocurrency. Further, anyone with an investment account at a brokerage would be able to buy it.
For some, buying Bitcoin through one of these accounts might prove far easier than following the steps involved in purchasing it and then moving it to a wallet. By allowing individuals to use these accounts to buy Bitcoin, the SEC might greatly increase its use.
Potentially Reduced Risks
By giving investors the ability to buy Bitcoin through brokerage or retirement accounts, the SEC could potentially reduce the risks faced by those interested in obtaining the digital currency.
Buying Bitcoin generally requires an investor to go to an exchange, purchase the digital currency, and then potentially move it to a wallet. If the SEC approved these ETFs, investors could obtain Bitcoin simply by buying shares.
Further, by allowing investors to purchase Bitcoin through retirement and investment accounts, the SEC could potentially offer them another layer of protection. Funds held in the accounts of brokerages that are members of the Securities Investor Protection Corporation (SIPC) are protected up to a certain amount.
It is important to keep in mind that the SIPC only protects the funds in the event that a brokerage fails. In other words, the SIPC does not protect investors against potential declines in the value of their funds.
If an investor uses the funds in their retirement or investment account to buy an ETF, for example, and the ETF loses value, the SIPC would not cover that.
By providing proposed Bitcoin ETFs with a green light, regulators may then provide the digital currency with substantial inflows. Demand has been building for such a fund, according to analyst Spencer Bogart.
"It appears there is significant pent-up demand from the investment public for such a vehicle," he told CNBC. Because of this, approving this ETF could trigger a significant influx of investor funds.
Another potential benefit of approving a Bitcoin ETF is that the digital currency could enjoy significant price gains. Some market observers have even predicted that Bitcoin prices could reach US$35,000 if one of these funds gets approved. At this price point, the digital currency would be worth close to twice as much as its US$20,000 all-time time reached in December 2017.
Michael Strutton, CEO of research firm IronWood, provided even higher estimates. He said that if a Bitcoin ETF obtains approval, its price could climb to "at least US$26,000 and below US$44,000."
While some Bitcoin enthusiasts focus on the digital currency's price, others take a different approach. At the time of this writing (August 2018), the SEC has rejected several proposals that would allow financial institutions to offer Bitcoin ETFs.
The first such proposal, floated in 2013, was brought forth by Tyler and Cameron Winklevoss. Back then, several market observers cast doubts on its chances of receiving approval, with Index Universe ETF specialist Ugo Egbunike telling The New York Times: "There are so many ways it could go wrong."
The SEC eventually went on to reject the Winklevoss ETF in March 2017, emphasizing that the Bitcoin markets are largely unregulated, which makes them vulnerable to manipulation. The SEC's decision caused quick and significant declines in the price of Bitcoin.
The Winklevoss ETF was only the first to receive this treatment from the regulator. In August 2018, the SEC rejected nine separate proposals. The government agency once again cited the threat of market manipulation, claiming that the proposals had not done enough to illustrate how the exchanges offering the funds would prevent this manipulation from taking place.
If digital currency regulation evolves to the point where those proposing Bitcoin ETFs can meet the standard that the SEC is requiring, the resulting approval could easily be seen as a major sign of legitimacy for the digital currency.
While the SEC has thus far rejected several proposals for Bitcoin ETFs, granting approval would likely have a significant impact. For starters, approving one of these funds could bolster adoption by opening up Bitcoin investments to anyone with a retirement or brokerage account.
Enabling the purchase of ETFs through these accounts could potentially lower risk for investors by allowing them to obtain Bitcoin in a nontraditional way. By lessening risk and increasing adoption, approving a Bitcoin ETF could potentially provoke significant inflows for the digital currency, thereby pushing its price higher.
In addition to bringing about these positive market-related developments, approving a Bitcoin ETF would help provide the digital currency with greater legitimacy.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…