Needham: Probability of Approval for a Bitcoin ETF 'Very Low'

Needham & Company, an independent investment bank and asset management firm, released today a mini investors’ report on the prospect of a Bitcoin ETF in 2017. The company currently hands Barry Silbert’s Bitcoin Investment Trust (GBTC) with a ‘Hold’ rating. Report author, Spencer Bogart, detailed the upside potential of a bitcoin ETF being approved and discussed the probability of approval.

Also read: SEC Delays Decision on SolidX Bitcoin Trust

Needham specializes in advisory services and financings for growth companies. Since its inception, Needham has acted as lead or co-manager in over 785 public offerings. The firm has also been an agent on more than 115 private placements, and completed over 385 mergers and acquisitions. Together, these transactions total over $200 billion.

Profound Effect on Bitcoin’s Price

“We think the listing of a bitcoin ETF would have a profound effect on the price of bitcoin,” Needham’s report reads, adding that:

Conservatively, we estimate that a bitcoin ETF could attract $300 million in assets in its first week and the resulting effort to source the underlying bitcoin for the Trust would likely drive the price of bitcoin up significantly.

Citing the resemblance of an average daily trading volume of bitcoin to the average security in the S&P midcap 400, Needham believes it would be hard for the ETF to acquire $300 million worth of bitcoin without pushing up the price substantially.

If a bitcoin ETF is approved, this effect would also be amplified because “providers will be simultaneously pulling available liquidity from order books,” the report reads.

Overall, Needham believes that “the positive effect that a bitcoin ETF would have on the price of bitcoin is vastly underappreciated.”

Not only there would be an inflow of assets, but “favorable shifts in perception and regulatory risk would be at least as significant for driving price higher.” The approval by the SEC, and subsequently, a bitcoin mainstream investment vehicle “would add legitimacy to bitcoin in the eyes of investors” and expose bitcoin to a larger percentage of people.

Low Probability of Approval

While there is a tremendous upside potential for bitcoin, the probability of approval is “very low” and “drastically overestimated,” Needham wrote. While difficult to quantify, the firm estimates the probability to be “sub-25%.” The report cites the reason for not approving:

…the confluence of fear, uncertainty and doubt coupled with basic incentives at the SEC will make it very difficult to get approval.

However, there is also a possibility of the SEC doing nothing by the deadline. In this case, “the proposed rule change is automatically approved,” Needham explained, adding that this will improve the chance of a bitcoin ETF being approved. This is because “politically, it might be easier for the individuals responsible for making the decision to let the decision go to auto-approval,” meaning there is no reason to disapprove instead of sticking a stamp of approval on the listing.

Regardless of whether a bitcoin ETF is approved or not, the report concludes:

Ultimately, while it appears there is significant pent-up demand from the investment public for such a vehicle, bitcoin itself certainly doesn’t need an ETF and will continue on regardless of the SEC’s decision.

Do you think the SEC will approve any Bitcoin ETFs? Let us know in the comments section below.

Images courtesy of AP and Needham & Company

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