A lot of people have been talking about ETFs and how they are going to save the cryptocurrency markets from the 2018 downturn. However, to find out where we are and where we are going with a cryptocurrency ETF, we must first understand what an ETF is.
What is a Cryptocurrency ETF?
ETF is short for “Exchange-Traded Fund.” By definition, an ETF is a basket of securities that you can buy or sell through a brokerage firm on a stock exchange. “ETFs are offered on virtually every conceivable asset class from traditional investments to…commodities or currencies.” The cryptocurrency ETF, itself, owns the underlying assets such as Bitcoin, and divides the ownership of the fund into shares. Therefore, the shareholders do not have direct claim to the underlying assets in the fund. However, shareholders have rights to dividends paid by the assets and can trade their interests like common stock. In the end, this gives investors ‘indirect ownership’ of the assets, such as Bitcoin in our case.
Why is a Cryptocurrency ETF Important?
An ETF allows investors to purchase cryptocurrencies, which are foreign to most ordinary people, in a way that is familiar to them. I use the analogy that a cryptocurrency ETF will allow shareholders to “dip their toes in the [crypto] water.” It gives them a feel for what it is like to own cryptocurrencies without having to dive head-first into learning about blockchain, private keys, storage, and other related topics.
The familiar structure of ETFs is the metaphorical key for institutional investors. This key unlocks the regulatory glass door to the crypto-frontier. It gives access to an asset class that they could previously see, but not touch. It opens the door to an injection of capital into the space, which is currently left on the sidelines.
Where Are We Regarding Cryptocurrency ETFs?
The current amount of ETFs that have been approved by the SEC – zero.
Skeptics claim the biggest factor holding up the approval for a crypto-ETF is the potential manipulation of the market. Due to cryptocurrency’s current volatility, the SEC believes that the market is susceptible to major investors manipulating the price.
In addition to price manipulation, another less talked about concern is that of quality custody of the underlying digital assets. “Very few crypto custodians meet the strict security requirements demanded by regulators and institutional investors.” This lack of quality custody prevents institutional investors from being able to dip their toes in the water.
Even with the lack of success, there are still a number of applications in the process of getting a crypto-ETF approved. The VanEck/SolidX Bitcoin ETF is the next proposal up for ruling by the SEC, due by September 30th. We should see plenty of price movement leading up to that date.
Where Are Cryptocurrency ETFs Going?
I believe the SEC is taking the cautious, albeit appropriate, approach towards the approval of a cryptocurrency ETF. The concerns of manipulation and quality custody of assets are well founded. However, crypto-enthusiasts and even financial experts believe that a crypto-ETF approval is imminent.
I believe in order for an cryptocurrency ETF to be approved, one of the two issues listed above (price manipulation or quality custody) need to be addressed. Rationally, the first one to be resolved is the custody issue. Just recently, we are hearing of positive momentum towards quality custody in the form of Bakkt. Bakkt is a proposed digital asset platform that allows digital assets to be bought, sold, stored and spent. Through the partnership of ICE (owners of the NYSE), Microsoft, Starbucks and others, Bakkt offers a federally regulated market for digital assets. The platform is planned to launch in November 2018.
With the launch of Bakkt and other custodial platforms, cryptocurrency ETFs look more likely to be approved. I would be very surprised if we don’t see a cryptocurrency ETF approved within the next 6-8 months. As a result, this clears the way for investors to dip their toes in the crypto-waters.