The Bitcoin price has been very responsive to announcements from an exchange-traded Bitcoin (ETF) fund. The expectations of such Bitcoin ETF are many crypto investors high — too high, as some people think. Nonetheless, many are eagerly awaiting the upcoming decisions of the US Securities and Exchange Commission on various proposals for a Bitcoin covered fund. Most recently, the SEC has postponed its decision on a joint venture by the Chicago Board Options Exchange (CBOE), the investment firm VanEck, and the block firm SolidX to September 30, The Commission could allow a further extension until 27 February 2019. Proponents of a Bitcoin ETF should therefore prophylactically adjust to a continuation of the hanging section.

What is an ETF?

Exchange Traded Funds (ETF) are investment funds that are bought or sold directly via the stock exchange. They track indices and have the same price history as the underlying index. Such an index may be, for example, the German stock index DAX. In this case, the fund management company would buy shares from all 30 DAX companies and thereby practically “rebuild” the DAX. Thus, the investor can benefit from the performance of the companies, without having to worry about the purchase or sale of individual shares.

Likewise, it is possible to create an ETF that, for example, reflects the price of oil. Consequently, a Bitcoin ETF would aim to replicate the bitcoin market. As stated in the ETF application by the CBOE:

“[…] The investment objective of the Trust is that the Shares reflect the performance of the bitcoin price less the Trust’s operating expenses.”

ETFs are usually managed passively. The CBOE emphasizes this also in its proposal:

“The trust is not actively managed. It does not engage in activities that seek to derive any benefit from bitcoin’s price changes or mitigate losses.“

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This provides investors with a compelling cost advantage over actively managed funds, ie those where a manager selects stocks individually. Commissions, if any, are low. The running costs are also significantly lower than for actively managed funds.

Another bonus of a Bitcoin ETF would be the fact that money invested there is a special fund and thus protected against any possible bankruptcy of the fund manager. Bitcoin and security — it’s not surprising that many Hodler closely associate the fate of the cryptocurrency with the US Securities and Exchange Commission’s position on Bitcoin ETFs.

The catalog of demands of the SEC

So far, however, none of the SEC’s proposals for Bitcoin ETFs have managed to completely dispel the concerns of the Securities and Exchange Commission. Recently, a second attempt of the Winklevoss brothers encountered rejection. In January, the SEC defined in a letter to Paul Stevens (Investment Company Institute) and Timothy W. Cameron (Securities Industry and Financial Markets Association) what conditions must be met for the approval of a Bitcoin ETF.

In the letter, the Commission identifies five key areas of concern for which none of the Bitcoin ETF proposals submitted so far has provided satisfactory solutions.

Valuation : ETFs must value their assets every business day to achieve a net asset value (VAT). Can this be achieved given the volatility of cryptocurrencies, fragmentation and the lack of regulation of the underlying markets? Liquidity : ETFs must have sufficient liquidity to repurchase daily. What measures would the funds take to ensure that they have sufficient liquidity to make redemptions? Safekeeping : The Funds must ensure the safekeeping of the assets. How would a fund fulfill the custody requirements? How would a fund ensure the existence, ownership and functionality of private keys? To what extent would cybersecurity threats affect the safekeeping of assets? Arbitrage : An ETF must have a market price that does not deviate significantly from its NAV. How would ETFs react given the fragmentation, volatility and trading volume of the cryptocurrency market? How would volatility-based trading on a derivatives market affect arbitrage? And how would the closure of a crypto exchange affect him? Manipulation : Cryptocurrency markets have much lower investor protection than securities markets, with greater opportunities for fraud and manipulation. Is the ETF suitable for a wide range of investors, including private investors? Would investors have enough information to understand the risks?

Expiring deadlines

The failure of Winklevoss’s ETF proposal has already been reported several times. ETF supporters are now placing their hopes in the outstanding ETF proposals. The main focus is on the proposal of the CBOE, SolidX and VanEck. The CBOE proposal, however, is the only one where the fund must also be “physically” covered by bitcoins. The smallest possible investment should amount to 25 bitcoin, according to the current bitcoin price about 140.350 Euros or 161.774 US dollars. The focus is clearly on institutional investors. This is quite a calculation: SolidX CEO Daniel Gallacy justified the relatively high entry threshold with currently still lingering concerns of the SEC, ETFs for private investors:

“Based on various comments, it appears that regulators are currently concerned about an ETF available to retail investors. We think that will change over time, but the current situation is a good starting point for a product that is aimed exclusively at institutional investors “, Gallacy opposite Bloomberg.

In addition to the CBOE ETF, the SEC will decide on the request of three other applicants. The verdict on ProShares’ ETF proposal is due on 23 August. Since this is not a physical ETF, ie the investments are not invested directly in bitcoin, it can be assumed that the SEC decision will have less impact on the bitcoin price. In addition, ETF proposals from GraniteShare and Direxion will also be available in September. By then it will become clear whether the crypto-enthusiasm of Commissioner Hester M. Pierce has already rubbed off on her colleagues.