Thursday, January 11, 2024

A Buzz Around Bitcoin ETFs

There has been a lot of attention surrounding cryptocurrencies going back to Bitcoin’s exponential rise in price between 2010 and 2021. Subsequently in 2022, cryptocurrencies received even more attention when FTX collapsed and the then Chief Executive was arrested for stealing from FTX customers. More recently, cryptocurrencies generated headlines when cryptocurrency fund manager Grayscale won a lawsuit against the Securities and Exchange Commission in favor of Grayscale for its’ proposed Bitcoin backed spot exchange-traded fund (a “spot Bitcoin ETF”). Additionally, twelve other aspiring enterprises have applied for and await a ruling from the SEC. Now, if you are like me, you are probably wondering: what is a spot Bitcoin ETF?, why is the SEC involved if Bitcoin is not considered a regulated security?, and why is this important to the investment sector?

Generally, an ETF is a fund, or bundles of assets, that trades on a securities exchange. Rather than investing in a specific stock, an investor is investing in a collection of assets. ETF’s have shares that are bought and sold like common stock on a securities exchange. The benefits of ETF’s include a lower risk of exposure and diversification of an investment portfolio. In the context of Bitcoin, an ETF allows access to Bitcoin’s price movement without owning any Bitcoin. In essence, an ETF’s gain or loss is based upon the price fluctuations in Bitcoin without there being any Bitcoin in the fund itself. Here, a spot price ETF tracks the current price (the spot price) for the immediate purchase or sale of an asset in the marketplace. Thus, a spot Bitcoin ETF tracks Bitcoin’s price if it were to be bought or sold at that specific time.

Under SEC rules, Bitcoin isn’t considered a security because it lacks the key attributes of a security, that its value is dependent upon, directors, officers, or employees of a company. While the SEC does not regulate Bitcoin, the SEC has previously approved Bitcoin ETF’s based on futures contracts, which are regulated under the Investment Company Act of 1940. In those instances, the Bitcoin ETF shares coincide with future contracts and the speculated price at a future date. In contrast, spot Bitcoin ETF’s will have shares issued and redeemed based on the present and actual price of Bitcoin. The SEC is concerned with this sort of Bitcoin backed ETF, and has previously rejected such proposals, due to the possibility of manipulation in the underlying market of Bitcoin without any regulatory investigation or oversight. Combine the recent newsworthiness of cryptocurrencies with the unique landscape for SEC involvement and you can start to see why this is gaining attention.

The last piece to this is the impact on investors of the SEC’s forthcoming decision on spot Bitcoin ETF’s. A major benefit is the potential access it will provide to the most valued cryptocurrency ($41,126.40). Currently, if you do not own any Bitcoin you would not be able to hold an investment based on the true and present value of Bitcoin. Instead, you would need to invest in a speculative security. Spot Bitcoin ETF’s could change all of that should the SEC determine adequate safeguards for protection of investors. It could also give rise to entrepreneurial opportunities for those wanting to get into the game.

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