What’s Going On With Bitcoin ETFs?

Bitcoin approaching worst decline ever. What does that mean for bitcoin ETF prospects?

What goes up, must come down; the laws of physics work that way in markets as well.

After an explosive run that sent bitcoin prices up 14-fold in 2017, the digital currency is coming down nearly as fast in 2018. Bitcoin recently hit a low of $3,500, down a whopping 82% from its all-time high of more than $19,500 last year.

Large price swings are nothing new for the notoriously volatile cryptocurrency, but the latest drawdown is among the biggest in bitcoin’s decade-long existence. It’s on par, for example, with the 2014 bust, which sent prices down 86%, from $1,137 to $160.

The current decline is even approaching the 2011 plunge—regarded as the largest ever—when prices dropped 93%, from almost $30 to $2.

From Boom To Bust …

Opposing Views

It would be easy to pin the 2018 crash in bitcoin prices as simply the bursting of a bubble; and, according to crypto skeptics, that explanation is the correct one.

“It was a huge bubble, and then you ran out of buyers,” explained Gary Shilling, economist and market commentator.

“There is no legitimate use of the thing; the thought that bitcoin would replace currencies and take over the world is just ridiculous,” he added. “It has none of the characteristics of a currency—it’s not a good store of value, medium of exchange, or standard of account.”

Shilling, who is short bitcoin futures, doesn’t have a downside target, but expects prices to continue cratering.

Pause In Long-Term Uptrend

Meanwhile, taking the completely opposite view of bitcoin are people like Lou Kerner, partner at CryptoOracle, a blockchain-focused venture capital firm. Bitcoin evangelists like him argue that this year’s correction is simply a pause in the long-term uptrend for bitcoin prices, just like the 2011 and 2014 sell-offs.

Sure, prices may have gotten ahead of themselves last year, precipitating this year’s furious pullback, but previous crashes in bitcoin prices didn’t mark the end of the digital currency, and neither will this one. Eventually, prices will regain their footing and climb to new highs, they say.

"Crypto has been so weak, because [for] most of it, there's no underlying value outside of confidence," Kerner told CNBC. But bitcoin is a different animal, according to Kerner, who believes its total market value—currently around $75 billion—will eventually surpass gold’s $8 trillion market value.

Bitcoin is “the greatest store of value ever created," he said. "It should surpass gold over time. It won't happen overnight."

Bitcoin ETF Remains Elusive

For ETF investors, all the drama in the bitcoin market may not mean that much. They’ve watched the ascent of the cryptocurrencies from the sidelines, and subsequently are watching its descent from the sidelines as well.

There is still no bitcoin ETF available for U.S. investors, of course. The Securities and Exchange Commission dashed those hopes when it rejected nine bitcoin exchange-traded products from coming to market this summer, citing concerns about fraud and manipulation in the cryptocurrency market.

Though two other potential bitcoin ETF offerings, from VanEck/SolidX and Bitwise, are still awaiting an SEC verdict, investors aren’t that confident the SEC will change its tune anytime soon.

In fact, on Tuesday, SEC Chairman Jay Clayton doubled down on the idea that the bitcoin market wasn’t safe for investors.

Rules and surveillance to prevent manipulative techniques do not exist on all of the exchange venues where digital currencies trade, making him wary of greenlighting a bitcoin ETF, he said at the “CoinDesk Consensus: Invest” conference.

The issue of custody also remains a sticking point for the chairman. He said that any asset that underlies an ETF should have good custody. 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.

“Those two issues are important to me to get comfort on before we would allow an ETF with a digital currency underlying it to go forward,” Clayton explained.

Matter Of Time

Given the SEC’s continued concerns, most industry experts don’t think the launch of a bitcoin ETF is something imminent. But longer term, most believe one will come to market.

“The SEC’s rejections of the Winklevoss ETP and the nine futures-based ETPs over the summer demonstrated that the SEC still has fundamental concerns about the state of the bitcoin market (and the bitcoin futures market),” said Jeremy Senderowicz, partner at law firm Dechert, “especially with respect to retail investors, and that those concerns must be addressed to the SEC’s satisfaction.”

“We still remain optimistic that a bitcoin ETF will be approved eventually, but it is difficult to predict when that might happen,” he added.

Email Sumit Roy at [email protected] or follow him on Twitter sumitroy2