Tag Archives: etf

Why Bitcoin Didn’t Need an ETF to Begin With

Why Bitcoin Didn't Need an ETF to Begin With

The Bitcoin community doesn’t seem to be bothered by the US Security Exchange Commission’s decision to disapprove the Winklevoss twins’ Bitcoin ETF COIN like many analysts expected. The market’s stability after the denial of the COIN ETF led to discussions on why Bitcoin didn’t need an ETF to begin with.

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Why SEC disapproved the ETF and why Bitcoin didn’t need it

Bitcoin is one of the only currencies or networks in existence which facilitates payments between two users with the absence of a mediator or a network administrator. Within Bitcoin, regulations are non-existent and manipulation-free transactions can be made, regardless of the amount or the size of the transaction.

While Bitcoin wasn’t necessarily designed to replace fiat money, it was introduced in 2009 to serve as an alternative to the global financial structure and ecosystem. Satoshi Nakamoto, the creator of Bitcoin, wanted to present a cash-like settlement network in which users aren’t required to undergo impractical and inefficient settlement processes in order to send and receive money from one another.

Over time, Bitcoin as a decentralized technology evolved, with the work of the Bitcoin Core development team as well as Bitcoin’s global and open source development team of contributors. The Bitcoin network’s hash power began to secure the network from external attacks and welcome tens of millions of new users into the network.

As Bitcoin and security expert Andreas Antonopoulos notes, the truly decentralized, transparent and secure financial network of Bitcoin is beginning to replace the financial industry and provide the general public with a low-fee and faster financial network.

Before considering the fact that hundreds of millions of dollars and potentially billions of dollars could have been poured into Bitcoin as a result of the approval of the COIN ETF, it is important to ponder the purpose of Bitcoin as a financial network. Its real purpose within the global financial frame is to allow people to make peer-to-peer payments amongst each other, not to gather large investments within a highly and tightly regulated market.

Antonopoulos stated:

“If you measure Bitcoin's success by the approval of the incumbent and obsolete industry it replaces, you're doing it wrong.”

SEC’s disapproval is confirmation that Bitcoin is a decentralized network

Two main arguments presented by the SEC in their disapproval of the COIN ETF were that the SEC can’t protect investors from losses made while trading Bitcoin and that the Bitcoin network can’t be surveilled as easily as others.

Since the Bitcoin network completely eliminates the possibility of recovering transactions or refunding payments, it forces users to be more responsible. On PayPal for instance, a centralized financial network, users can ask network moderators if they mistakenly sent incorrect transactions or processed payments to the wrong receiver. Within the Bitcoin network, no such administrative team exists and users are solely responsible for their money and transactions.

If the SEC needs to guarantee investors and traders with an insurance policy, which basically means that when Bitcoins are lost or stolen or mistraded, the SEC should be responsible for protecting investors from any losses, it is highly unlikely that a Bitcoin ETF will never be approved by the SEC.

The official document of the SEC read:

"As discussed further below, the Commission is disapproving this proposed rule change because it does not find the proposal to be consistent with Section 6(b)(5) of the Exchange Act, which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest."

The SEC nor any other government organizations shouldn’t be responsible for protecting investors from making independent financial decisions. Also, it is almost impractical to introduce a highly regulated market to Bitcoin if Bitcoin was designed from the start to replace regulated markets and inefficient financial systems.

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Winklevoss Twins Await Imminent SEC Decision on Bitcoin ETF

Winklevoss Twins Await Imminent SEC Decision on Bitcoin ETF

  • They’re one of three groups vying to gain regulatory approval
  • A bitcoin ETF could attract $300 million in assets in a week

Tyler and Cameron Winklevoss will know within days whether they’ve won approval to begin offering their bitcoin-based exchange traded fund, with the digital currency’s record rally hanging in the balance.

Officials from the U.S. Securities and Exchange Commission met with the twins on Feb. 14 to discuss their proposal for an ETF based on the digital currency, according to a short notice of the meeting published on Feb. 22. A decision is due by March 11. The 35-year-old twins want to trade the security on the Bats BZX Exchange Inc.

An approved ETF would make bitcoin investing simple for small traders and institutions, while potentially boosting the digital currency just as it’s hitting new highs almost daily. Some $300 million could pour into a bitcoin ETF in its first week, Spencer Bogart, head of research at venture-capital investor Blockchain Capital, said in an interview.

“I’d be very surprised if it did anything but double from whatever levels it is at beforehand,” Bogart said.

Bitcoin rose as high as $1,263.49 on Thursday, an intraday record, passing the price of an ounce of gold. It has gained 28 percent this year, as investors worried about global uncertainties and speculated on a more relaxed regulatory environment for the currency under President Trump. Hopes for the ETF have been a factor as well.

The Winklevoss Bitcoin Trust is one of three such vehicles seeking regulatory approval — and the advantages that come with being first. The others are Bitcoin Investment Trust, a creation of Barry Silbert, who had previously built a market for selling shares in private companies, and SolidX Bitcoin Trust.

Digital Asset Services, the sponsor of the Winklevoss ETF, declined to comment. Silbert and Ivan Brightly, chief operating officer of SolidX, also wouldn’t comment. The Winklevoss twins may be best known for accusing Facebook founder Mark Zuckerberg of stealing their idea for a social-media network, a case they ultimately settled.

Long-Term Edge?

SEC approval could give enormous power and riches to the winner for years to come. Just look at gold: SPDR Gold Shares ETF, started in 2004, has more than four times higher the market value of iShares Gold Trust ETF, started in 2005.

“This is the first-to-market race,” Chris Burniske, an analyst at Ark Investment Management LLC, said in an interview.

Trading bitcoin now is no easy thing. Investors have to open bitcoin wallet accounts, then purchase bitcoins via online exchanges. Or they can invest in Bitcoin Investment Trust, which trades over the counter, often at a hefty premium to the cryptocurrency. A last possibility is Ark, which operates an ETF with 5 percent exposure to blockchain — the database technology underlying bitcoin — and peer-to-peer computing.

With a publicly traded ETF, small investors could just call their brokers or buy shares online.

Approval is by no means certain. On BitMEX, a contract betting on approval of the Winklevoss Bitcoin Trust spiked to an all-time high of 70 percent on Feb. 28, before crashing to 53 percent on March 1. Neena Mishra, director of ETF Research at Zacks Investment Research, pegs the chances at 40 percent.

Regulatory Question

The biggest unknown is whether the regulators will conclude that bitcoin, a digital currency created on and managed by computers, lends itself to being a part of an ETF at all. Whether it’s secure enough, for example. Exchange Mt. Gox had many of its bitcoins stolen several years ago. Last summer, a project running on a blockchain technology similar to bitcoin’s got hacked and lost millions of dollars of investors’ funds.

Bitcoin has similarities to currencies, as well as commodities like gold — since there’s a limited number, it could be considered a scarce resource. What ultimately matters is how the SEC sees it.

“Bitcoin is not a stock, it’s not a bond, it’s not a hard asset like precious metal, it’s not a commodity future,” Ben Johnson, director of global ETF and passive strategies research at Morningstar Inc., said in an interview. “It’s a technology that’s very much in its infancy, and it’s not something that in my mind lends itself to being packaged as an ETF.”

An SEC rejection of the Winklevoss proposal could help one of the other bitcoin ETFs seeking regulatory approval.

“If the Winklevoss (ETF) gets rejected, they’ll get a brief explanation, which will help the other guys figure out how to get theirs through,” said Adam Wyatt, chief operating officer at BullBear Analytics, a researcher focused on bitcoin and other digital currencies. “If it’s approved, all the other guys copy that and do whatever needs to be done to get approved.”

Bitcoin Investment Trust, which filed in January to list on the NYSE Arca, already trades over the counter. Bank of New York Mellon is the trust’s transfer agent. And SolidX has a big differentiator: It promises to insure its bitcoins from loss — something that could boost its chances of approval, Zacks’ Mishra said.

The Winklevoss’s ETF, which first filed with the SEC in July of 2013, has amended its S-1 filing multiple times over the years to address regulators’ concerns. It’s represented by the law firm of Ropes & Gray. The twins have also secured State Street Bank & Trust Co. as the administrator of the trust. They already operate the Gemini cryptocurrency exchange, catering to institutional and retail investors.

“All that adds up,” Eric Balchunas, an ETF analyst at Bloomberg Intelligence, said in an interview. “If they are going approve one, it’s going to be Winklevoss first. And they kind of deserve it.”

by
Olga Kharif

March 2, 2017, 3:00 AM MST
 

Why joining the Coin Club makes sense.

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As Bitcoin ETF Nears, Analysts Warn of Trading Frenzy

As Bitcoin ETF Nears, Analysts Warn of Trading Frenzy

Some predict a speculative rush if SEC approves a new fund in March

If the Securities and Exchange Commission approves a bitcoin exchange-traded fund next month, it might set off a speculative rush into bitcoin.

An easily accessed ETF that tracks the value of bitcoin could cause money to flood into the fledgling bitcoin market, analysts say. Indeed, what some see as a chance for average investors to participate in one of the great financial innovations of recent years could set off a trading frenzy in an already wild market.

“My concern is that the launch of an ETF could lead to irrational exuberance if the price of bitcoin appreciates dramatically,” says Christopher Burniske, blockchain-products lead at money manager and research firm ARK Investment Management. ARK invests in Bitcoin Investment Trust, an ETF-like fund that already trades over the counter but currently is only available to wealthy investors

After a nearly four-year wait, the SEC faces a deadline of March 11 to decide on a rule change that would allow the Winklevoss Bitcoin Trust ETF to trade on the Bats Global Market exchange.

Two other funds have filed similar applications that would offer ordinary investors broader access to bitcoin investing as well: Bitcoin Investment Trust, run by tech entrepreneur Barry Silbert, and SolidX Bitcoin Trust, run by SolidX Partners, are waiting for the SEC to rule on their applications to be listed on the New York Stock Exchange.

There’s no guarantee that any of these applications will succeed. But most bitcoin observers say that a bitcoin ETF is an inevitability eventually.

If Bitcoin Investment Trust obtains SEC approval, it would likely mark Mr. Silbert as a new style of Wall Street wunderkind. Similarly, if the Winklevoss twins, Tyler and Cameron, succeed with their ETF, they would see vindication after they were elbowed out of social-networking phenomenon Facebook.

Further, the Winklevosses stand to gain from any price increase caused by the ETF as they are among the largest individual holders of bitcoin—alongside Mr. Silbert’s fund.

The Winklevosses declined to comment, through a representative; Mr. Silbert said, in an email, that his lawyers had put him on “total lockdown” with the press since filing for his fund’s NYSE listing.

How bitcoin works

The novel nature of bitcoin—essentially a chain of numbers linked to another number on a public ledger stored in the internet cloud—intrigues investors but has given the SEC pause.

Andrew Odlyzko, a mathematician at the University of Minnesota, compares bitcoin to the Pacific island of Yap, where long ago the people carved giant stone currency and ferried it across the ocean in canoes. On one voyage, according to an anthropologist’s work, a boulder fell off the boat. The community decided to recognize the value of the stone at the bottom of the sea, making it a virtual currency.

“Everybody knew it was there; nobody could see it; nobody could touch it…but it was there,” Mr. Odlyzko says.

Once a bitcoin is created in a computer “mining” process, the community recognizes ownership of the invisible abstraction through two numbers produced in that process. One is the public key, which is like the owner’s PayPal address. Anyone can send bitcoin to this address. The other is the private key, a number that is mathematically linked to the public key but is revealed only to the owner of the bitcoin.

Bitcoin has proved useful as a low-cost way of moving money around the world. But its price is volatile. Last year alone, bitcoin closed in a daily trading range between $358 and $993, according to data provider CoinDesk.

SEC’s task

Since the Winklevosses applied for approval of their ETF in 2013, the SEC has teased out the many, often bizarre risks of a bitcoin ETF. Among the issues: Could robots hijack more than half of the mining capacity and bring the whole system down? Could the bitcoin universe split in two as a rival cryptocurrency did? Could the fund be hacked?

(Closely held SolidX, based in New York City, and the smaller entrant in the race, distinguishes itself from the other two by promising to insure its bitcoin.)

Spencer Bogart, an analyst who follows bitcoin for boutique brokerage Needham & Co., says the Winklevosses have addressed security concerns—planning, for example, to keep private keys locked inside offline computers, which would themselves be locked away in secure locations. Multiple individuals in multiple locations would have to grant access simultaneously to a bad actor wanting to see the keys, he says, for a theft to occur—an event he considers unlikely.

Still, Mr. Bogart figures the SEC could refuse approval on more pedestrian grounds: a perceived conflict of interest because the Winklevosses have kept so many important fund functions in-house.

‘It’s just really difficult to grab that amount of bitcoin quickly.’

—Bitcoin analyst Spencer Bogart on the $300 million he says would flood into the ETF in the first week

“I don’t believe there’s any ETF that trades in the U.S. where a single entity is the sponsor of the ETF, the provider of reference price for the underlying asset and the custodians of underlying asset, and that is what the Winklevosses are proposing,” says Mr. Bogart, adding that the Winklevosses likely used proprietary indexes and security for reasons of design rather than personal gain.

In a November letter to the SEC, Kyle Murray, a lawyer for Bats, argued that the disclosure of the Winklevosses’ multiple roles and the involvement of independent auditors and administrators mitigated any potential conflicts.

The small size of the bitcoin market, however, could still be an impediment to orderly fund trading. Across all U.S. exchanges tracked by data provider CoinDesk, the average daily volume of bitcoin traded is about $30 million. Much more trading occurs in China, but those exchanges wouldn’t be used by a U.S. fund, Mr. Bogart says, because they function in an opaque manner.

Mr. Bogart estimates that at least $300 million would come into any approved ETF in the first week, as a convenient door to bitcoin opens up to investors. Institutional investors like pension funds haven’t been able to partake in bitcoin because many of their charters require that portfolio securities are registered with authorities.

Mr. Burniske says it’s impossible to buy $2 million of bitcoin on any given day on U.S. exchanges without moving the market.

Yet, for every share of the ETF sold, an “authorized participant”—the fund’s market maker—will have to buy an equivalent amount of bitcoin.

“The market will feel the effect of authorized participants going out there and looking to source [$300 million,] 10 times more than the daily volume that goes through any of the exchanges,” says Bobby Cho, who trades bitcoin in “institutional sizes” for proprietary trading firm Cumberland Mining, a bitcoin-focused unit of Chicago-based proprietary trading firm DRW.

“It’s just really difficult to grab that amount of bitcoin quickly,” says Mr. Bogart.

If the Winklevoss fund isn’t approved, the closest thing to an ETF will be Bitcoin Investment Trust, which uses a private-trust structure and is managed by Grayscale Investments LLC, a unit of Digital Currency Group Inc. Only accredited investors can buy the shares on the primary private market, where they are priced in line with bitcoin. The investors must keep holdings for a lockup period of a year. Then they can sell on a secondary market, the over-the-counter OTCQX, where they currently sell at a 15% premium to the value of the underlying bitcoin, a margin that has been even wider in the past.

Strong demand and perhaps a lack of sophistication are causing OTC traders to overpay for the shares, Mr. Bogart and others say. The private trust had $162 million in assets under management as of Dec. 31. This size makes its actions influential in bitcoin markets.