A Complete Guide to BITCOIN ETFs: What You Need to Know in 2019

Many analysts believe that approving a Bitcoin ETF (quoted fund) could lead to a huge spike, the biggest in history. This is possible, but others also think that it could improve the price in the short term, with a big loss in the long term. What is sure is that the repeated refusal to accept one has led to a market collapse.

The paths that the SEC can take regarding the creation of a fund quoted in cryptocurrencies are: to approve it, to refuse it or to delay the decision (by up to 90 days). In total, there have already been more than 10 different attempts, which this government institution has rejected.

That’s why everyone is looking forward for approval, since it could trigger an upward rally as we’ve never seen before. Because an approval by the SEC would imply that the government of the United States would accept Bitcoin as an investment tool.

We cannot know what the SEC’s result will be regarding this subject. A few months ago, they rejected one of the best proposals, the one created by the Winklevoss twins and their exchange of Gemini cryptocurrencies. If we rely on that ruling, it is unlikely that the SEC will change its mind and allow its creation.

Even so, optimistic people within the cryptocurrency community have said that something like it could happen shortly, based on what happened at the end of 2017 with the approval of Bitcoin futures.

In September of that year, the price of a BTC was close to $3,500. But by the end of it, it had far exceeded $10,000. When CME futures were officially launched on December 1st, the price reached $20,000. All this shows us the incredible influence that news like this has on the market.

We saw the opposite when on repeated occasions the various instances of ETF project presentations were rejected, leading the price to show the distaste of the market. For example, in August 2018, the SEC delayed its decision, leading to a $33 billion elimination off the market capitalization as a result.

This is a bit of ETF history, but now it’s time to see what they are and how they work, so we can understand their impact.

What is an ETF?

An ETF is a listed investment fund. It’s a financial product that follows an index’s performance, such as the S&P500, a commodity, such as gold or oil, or a set of assets. People can invest in them as if they were stocks, with a price that fluctuates as investors buy and sell their stake in an ETF.

The advantages presented by this type of products are quite obvious, we can acquire an investment in an asset without having to buy them directly. We don’t need to have an oil barrel in our homes to make money with it. You only need an ETF to be able to have liquidity simply.

In the case of the Bitcoin ETF, the advantages are quite similar. It allows any investor to become exposed to this new sector without all the inconvenience of wallets and the other cryptocurrency-related security issues. The ETF is responsible for all of this.

It should be noted that the ETF shall keep the bitcoins in its possession. Since when buying shares of the ETF, the investor only owns a portion of these.

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How do crypto ETFs work?

There are three types of cryptocurrency ETFs:

  • Bitcoin ETF: This is the most valuable cryptocurrency and the most popular, so if this type of financial products is approved, they’re most likely to be Bitcoin.
  • Altcoins ETF: In the future, or even before the Bitcoin, we could see the launch of an altcoins ETF. For example one of Ethereum (ETH) or Cardano (ADA).
  • A set of cryptocurrencies: Some of the ETFs submitted to the SEC consist of a set of cryptocurrencies. Instead of having an exclusive Bitcoin or Ethereum, one could buy a set of them.

One, in particular, sought to buy and sell a share of the fund to investors who wanted to have the 10 crypts with the highest capitalization in their investment portfolio, which was balanced once a month to offset the changes in the market price.

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The First Bitcoin ETF proposal

The SEC has rejected 15 proposals so far, out of which one of the last was done a few months ago. However, the first attempt to create an ETF dates back to 2013, when the Winklevoss brothers decided to launch what was called Bitcoin Trust. This wasn’t exactly an ETF, but it was similar enough to one, which is why it was rejected.

Over the next five years, the SEC has rejected a host of other proposals. This makes us wonder, why are people so optimistic about one being accepted? What makes them think that the SEC will approve one?

An expert’s response on the subject may help us better understand this:

Most commentators believe that the latest ETF request will be approved due to the ETF’s structure. Average retail investors simply don’t have almost $200k to invest in Bitcoin. This means that the SEC’s main concern to protect retail investors will be satisfied.

Analysts and the CBOE believe that the last ETF meets all of the SEC’s requirements. Also, the market has matured significantly in the last five years, eliminating the regulatory entity’s concern regarding liquidity and market manipulation.

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Can the ETF increase the price of Bitcoin?

Everyone assumes that if one of these funds is approved, the price of Bitcoin will increase considerably. Of course, if the SEC approves a Bitcoin ETF, it’s as if it was giving the entire industry an acceptance stamp.

But the most interesting thing about this is the possibility that institutional investors, those who have large amounts of money, will become interested in investing in cryptocurrencies. Because right now, they don’t have a simple and reliable way to do it.

An ETF offers this group of people an uncomplicated way to dive fully into the crypto world. Being able to participate in the ups and downs of this market without having to own bitcoins, while their investment is completely insured.

Right now, institutional investors aren’t legally allowed to possess cryptocurrencies, and they must follow regulations if they want to continue operating. They can only buy authorized and regulated investment products.

With an ETF, things change, attracting a large amount of money that would be poured into the market causing it to rise in a very short time.

If for example an ETF got $1 billion from its investors, then it would have to buy that same amount in the market. This kind of negotiation can’t be carried out instantaneously, but it can help maintain upward pressure.

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Comparison between Bitcoin and gold

An argument used by members of the community is the evidence shown by gold, and its relevance to launching a quoted fund. When the first gold ETF was launched, its price increased enormously.

Therefore, the same result could be expected with Bitcoin. These two may seem very different to the naked eye, but they have great similarities:

  • Both are scarce: There can only be 21 million Bitcoin. Currently, about 80% of them are in circulation, those that have been mined. We must consider that 4 million are estimated to have been lost permanently.
    Gold, on the other hand, is also scarce. Estimates suggest that the total supply of it would only fill 3.27 Olympic pools.
  • They are globally recognized: Gold has been a refuge of value for thousands of years. And although Bitcoin doesn’t have such an extensive history, it is highly recognized within the world of cryptocurrencies.
  • They increase in value during crises: Gold is a safe haven because investors usually buy it when the economy is in trouble. Bitcoin has shown similar properties, because it isn’t linked to any government.
  • They can operate without a global banking system: One can buy gold without having to involve a bank. The same goes for bitcoins, transferring them to another person doesn’t require a financial institution. The only restriction is the need for electricity and the internet, something over which gold holds an advantage.
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What happened when the first gold ETF was launched?

The first quoted gold fund was launched in 2003. A few months later, this precious metal enjoyed the longest upward trend in its history, at least for which information is available. This went from $331 per ounce at the beginning of 2000, to its maximum of $1,900 in 2011. If you had bought gold when the ETF was launched and sold at its maximum, you would have obtained a 478% return.

gold-ETF-chart

Another curious detail is that gold futures, like those of Bitcoin, were launched before the quoted fund. These emerged in 1974. We hope we won’t also have to wait 29 years to see one for the main cryptocurrency. If so, as it appeared at the end of 2017, we’d have to wait until the year 2049.

Another coincidence is that, after the launch of gold futures, the price increased considerably and then dropped. This situation is quite similar to the current one, where Bitcoin futures managed to reach their maximum price in December and then plummeted.

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Advantages of Bitcoin concerning gold

The total capitalization of Bitcoin is about $70 billion, while that of gold is $7 trillion. This is 100 times less, which implies that it still has a long way to go before it catches up to the precious metal.

The advantage of gold is that it has a few thousand years on its back. Bitcoin barely turned 10 by January 2019. Of course, if it continues with this trajectory, it could catch up to gold within a few years.

The reason that leads us to think that something like this could happen lies in the many advantages that Bitcoin has over gold:

  • It can’t be faked: Bitcoin cannot be falsified or replicated. On the other hand, gold bars could have another metal inside of them that makes them look solid, while only being worth a fraction.
  • Portable: Bitcoin is more portable. You can carry $100 million in BTC on your mobile phone. Even just with memorizing a phrase. If you tried that with gold, things wouldn’t be so simple. Memorizing 20 words is enough to take your bitcoins around the world without needing anything else.
  • It’s accepted by merchants: One can use Bitcoin to buy products and services. If we went to a supermarket with an ounce of gold they’d just stare at us. It’s hard to exchange it for other goods, unless it’s fiat money. On the other hand, Bitcoin has a vast network that accepts it.
  • Convenient and safe: Using bitcoin is convenient and safe. You don’t need a deposit box. You don’t need an armored truck to transport your bitcoins.
  • Risk of being confiscated: The creator of Bitcoin, Satoshi Nakamoto, and other enthusiastic cryptocurrency personalities have claimed that 1933 is the reason why it’s so valuable. In that year, the United States government made it illegal for private citizens to own gold. Overnight, the government confiscated all the gold, which can’t be done with Bitcoin.
  • It’s divisible: Splitting a gold bar in the middle isn’t easy. With Bitcoin, one can divide them into smaller units called satoshis, simplifying their use.
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Conclusion

In short, a Bitcoin ETF could bring a positive scenario, where we’d see a huge increase in its price. A mere announcement will make it rise, and it’s unlikely it’ll stop in the short term.

The question is, when will this finally happen? Since the SEC has done everything it can to prevent it. Perhaps we will see a change in 2020.

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