ETFs are financial instruments that enable investors to access markets without buying the underlying asset, thus minimizing certain risks.
These so-called ETFs These funds are regulated by the U.S. Securities and Exchange Commission (SEC), as securities and they mirror the movements of a particular piece of investment — such as a commodity like gold or specific company stocks — without requiring direct purchase by the investor.
ETFs offer a way to reduce risk while keeping exposure to vibrant markets, proving essential for conservative investors.
For those new to cryptocurrency, ETFs are a perfect fit. The crypto market is known for its volatility, and the initial steps to enter it can be daunting. One needs to open an account on potentially unregulated platforms, or alternatively, secure their own crypto wallet, which can be cumbersome.
A Bitcoin-based ETFs could potentially simplify these complexities, by providing investors with Bitcoin exposure in a more familiar and regulated framework. Yet, Bitcoin ETFs face several regulatory barriers. We'll explore how these funds could operate, their demand, and the regulatory challenges they must navigate. The essential point about ETFs is their nature as passive investment tools. Despite being traded in public markets, there aren’t any management fees to track.
Bitcoin ETF Basics
Each ETF is tied to a market index and its performance is aligned with that index. In the case of a Bitcoin ETF, the index might be a mix of various cryptocurrencies or simply linked to Bitcoin's price.
The significant distinction between holding a Bitcoin ETF and owning Bitcoin
is that it removes the need to focus on holding Bitcoin alone — because the ETF provides a buffer by linking finances to the index instead of the digital currency itself. security or storage of that Bitcoin No concerns about exchange hacks or wallet breaches — just investment within the market
Another reason ETFs appeal to everyday investors is their absence of minimum investment thresholds. following the price of Bitcoin .
Read: Bitcoin for Dummies
Bitcoin can be divided many times, almost infinitely. , but when trading on exchanges, minimum purchase amounts often exist to cover transaction fees. ETFs eliminate the need for these minimums, focusing solely on price speculation. ETFs might be structured to provide dividends to investors. Mimicking such a process with actual Bitcoins would entail paying someone to manage the wallet and sell portions of holdings periodically to distribute profits. With ETFs, this is hassle-free because no Bitcoin transactions occur.
Crucially, the dividend mechanism falls under the U.S. ‘like-kind’ tax provisions, minimizing tax impacts. Cryptocurrencies, on the other hand, face both short- and long-term capital gains taxes in the U.S., with high rates — up to 40% in some scenarios.
The argument for Bitcoin ETFs centers around offering a safer investment pathway into Bitcoin without diving into the unpredictable terrains of direct Bitcoin trading. ETFs serve as legacy tools to manage risk and streamline investment processes, inherently bound to U.S. regulations, thus awarding them credibility over direct Bitcoin market ventures.
However, since their inception, Bitcoin ETFs have courted controversy.
The pivotal authority in Bitcoin ETF discussions is the SEC. As securities under the Howey Test, ETFs fall under SEC jurisdiction.
ETF Challenges
The Howey Test, from a 1946 Supreme Court citrus grove case, determines if an instrument is a security based on three questions: finance investment, common enterprise involvement, and profit expectations from others' efforts.
Throughout 2018, the SEC blocked various ETF attempts to hit the market,
Read: What is the Howey Test?
Bitcoin ETF Approval?
such as its August 22 decision denying two Bitcoin ETFs access to the NYSE’s Arca platform. This, along with prior filings dating back to December 2017, paints the picture of the SEC’s firm stance on Bitcoin financials.
The SEC clarified that its decision wasn’t a critique of Bitcoin per se, but specifically on the formation of Bitcoin ETFs. It was viewed as sidestepping, providing space to not label Bitcoin directly as security or non-security.
Instead, the focus was on the risk of fraud and manipulation in the Bitcoin sphere.
Yet, a silver lining in this stands: the SEC revisited its August rejection for further consideration. The refusal was largely due to an undeveloped Bitcoin futures market. As it matures, Bitcoin ETFs might still see approval.
A decade after the 2008 groundbreaking Bitcoin paper, morphing from an obscure tech novelty to mainstream finance, the market isn't ripe. SEC rulings appeared to suppress its growth by declaring it ill-prepared against fraud and manipulation, which their stricter financial measures could solve.
Bitcoin Progress
Bitcoin has come a long way since Satoshi Nakamoto’s Nonetheless, some experts see Bitcoin ETFs as future staples in digital asset investment strategies.
Still, Bitcoin’s Mainstream and Wall Street acceptance is growing California-based 'Reality Shares' venture files a partial Bitcoin ETF application.
Bitcoin ETF News
- Quick Reaction: U.S. SEC urges Reality Shares to retract its ETF submission.
- Glimmer of Hope? An SEC Commissioner suggests potential approval of a Bitcoin ETF in the future.
- Tom Lee from Fundstrat: Bitcoin doesn’t need an ETF to skyrocket by 2019's end.
- Blockonomi’s Editor-in-Chief and Kooc Media founder — a UK-based digital media outlet. Advocate for open-source software, blockchain technology, and an unrestricted internet.
References
- https://www.fool.com/investing/2018/09/14/why-are-there-still-no-bitcoin-etfs.aspx
- https://www.cryptocompare.com/coins/guides/what-is-a-bitcoin-etf/
- https://www.manhattanstreetcapital.com/faq/for-fundraisers/how-determine-if-token-security-howey-test
- https://money.usnews.com/investing/cryptocurrency/articles/2018-10-09/approval-of-bitcoin-etfs-by-sec-appears-murky
