When Will The US Get A Bitcoin ETF?

Holding bitcoin has been an enriching experience for thousands of investors, but not everyone has had easy access to the digital currency.

While almost any U.S. investor can go out and open a Coinbase account to trade bitcoin, not everyone is comfortable doing so. For various reasons, others may be restricted to buying and selling securities in their traditional brokerage account.

That’s where a bitcoin ETF would come in handy. Unfortunately, no bitcoin ETF exists in the U.S. Could that change?

An 8-Year Saga
It’s been eight years since Cameron and Tyler Winklevoss submitted the first filing for a bitcoin ETF, the Winklevoss Bitcoin Trust. But the proposed fund was twice rejected by the Securities and Exchange Commission amid concerns about the risky nature of the nascent cryptocurrency market.

The ETF, which would have traded under the ticker symbol “COIN” (now claimed by crypto platform Coinbase) wasn’t alone. The SEC has rejected more than a dozen other proposed bitcoin ETFs over the past several years, each time citing issues with inadequate investor protections in the bitcoin market.

The rejected ETFs came in all shapes and sizes, from “physical” bitcoin funds that would directly own the cryptocurrency to futures-based products that would hold derivative contracts on the Chicago Mercantile Exchange; from long-only funds to leveraged and inverse products—nothing passed muster with the SEC.

Clayton Era
There was perhaps no lower point in the journey to get a U.S.-listed bitcoin ETF approved than in the summer of 2018. That’s when in a single day in August, the commission rejected a whopping nine proposed bitcoin ETFs.

“Rules and surveillance to prevent manipulative techniques do not exist on all of the exchange venues where digital currencies trade,” former SEC Chairman Jay Clayton, who headed the regulator between 2017 and 2020, explained in 2018.

The issue of custody also was a sticking point for the chairman, who said that the risk in an ETF should only be the risk of the value of the underlying asset, and shouldn’t include the risk of theft or disappearance of said asset.

Clayton’s SEC also took issue with the then-nascent state of bitcoin futures markets.

“While CME and CBOE are regulated markets for bitcoin derivatives, there is no basis in the record for the Commission to conclude that these markets are of significant size. Additionally, because bitcoin futures have been trading on CME and CBOE only since December 2017, the Commission has no basis on which to predict how these markets may grow or develop over time, or whether or when they may reach significant size,” the SEC wrote in one of its orders rejecting a futures-based bitcoin ETF in 2018.

The Time Is Right
Naturally, filings for new bitcoin ETFs were few and far between in the aftermath of the SEC’s decisive rejection of multiple bitcoin funds in 2018. But the dream of a U.S.-listed bitcoin ETF never died. After two quiet years, filings for bitcoin ETFs ramped up significantly this year, and expectations for a successful launch have arguably never been higher.

There are a few reasons for this. First, the cryptocurrency ecosystem has matured significantly in the past few years. As of this writing, bitcoin has a market capitalization of more than $850 billion; bitcoin futures have traded on the CME for over three years; and many reputable platforms, like PayPal and Fidelity, offer bitcoin trading and/or custody services.

Second, there have been a number of successful bitcoin ETF launches around the world—including Canada—suggesting that regulators may be coming around to the idea that cryptocurrencies are an investable asset class.

Third—and perhaps most importantly as it relates to a U.S.-listed bitcoin ETF—Gary Gensler, the new SEC chairman, directly hinted that an approval may be possible.

Gensler’s Speech
Expectations that the SEC may finally give the green light to a bitcoin ETF moved sharply higher in August after Gensler expressed an openness to considering one in a speech he gave to the Aspen Security Forum.

“I anticipate that there will be filings with regard to exchange-traded funds under the Investment Company Act [’40 Act],” Gensler said in his remarks. “When combined with the other federal securities laws, the ’40 Act provides significant investor protections.”

He added: “Given these important protections, I look forward to the staff’s review of such filings, particularly if those are limited to these CME-traded bitcoin futures.”

The reaction to Gensler’s comments was immediate. In the two weeks following his speech, filings for half a dozen futures-based bitcoin ETFs entered the pipeline.

The race was on.

Expectations Rising
If 2018 marked the low point for expectations of a U.S.-listed bitcoin ETFs, perhaps Gensler’s speech marks the high point—or at least the highest point since right before the regulator rejected the Winklevoss Bitcoin Trust the first time in 2017.

Lending support to the idea that the SEC may finally give the nod to a bitcoin ETF are the three U.S. bitcoin mutual funds that were approved this summer. Each of those funds invests in bitcoin futures, reinforcing the idea that a futures-based ETF would likely be the first type of bitcoin exchange-traded fund to launch.

Not everyone is happy about that. Handling futures introduces the potential for tracking error as a fund must roll from one futures contract to the next. Some market participants say that’s an unnecessary cost to investors, because the SEC could just approve a “physical” bitcoin ETF that would own bitcoin directly.

While that may be true, there are no indications that the SEC is ready to approve that type of bitcoin ETF in the near future (though the 11 “physical” bitcoin ETFs still in the pipeline suggest that issuers haven’t given up hope on the SEC eventually coming around).

If a bitcoin futures-based ETF is able to launch and trade without issues, perhaps the SEC will take the next step and approve a fund that directly owns bitcoin.  

Sure Thing?
After eight years of little progress, nothing is certain when it comes to a U.S.-listed bitcoin ETF, but analysts say that if the SEC finally comes around to approving one, it could make the move as soon as this fall. Whether the commission approves one particular ETF or multiple at the same time is an open question (most people believe that the fairest outcome would be the latter).

Once approved, the first bitcoin ETF is likely to be a hit with investors—though probably not as big a hit as a “physical” bitcoin ETF would have been.

There has been a widely held belief among people in the U.S. ETF industry that a bitcoin ETF is as close to a “sure thing” as you can get. The expectation was that the first bitcoin ETF to launch would be a home run, having the potential to gather $1 billion of assets or more in just a day or two (the SPDR Gold Trust (GLD) currently holds the record for fastest ETF to that mark: three days) and tens of billions of dollars more in the weeks and months that follow.

But that thesis was predicated on a “physical” bitcoin ETF. It remains to be seen how much demand there is for a futures-based product.

After eight years and counting, investors will take what they can get, even though the approval of the first U.S.-listed bitcoin ETF may not be the end of this ongoing saga.