In the next few weeks, the US Securities and Exchange Commission (SEC) will examine the latest application for a license to launch a Bitcoin ETF. A report which has been widely circulated in recent weeks predicts that the introduction of a Bitcoin ETF could lead to a 500% rally in the price of Bitcoin. So – what are the chances of the ETF being approved, and if it was, would it really lead to the price of Bitcoin rising as high as $42,000?
The latest application, which is being made by a joint venture by the CBOE, Van Eck Investments and SolidX, follows closely after the SEC rejected a similar application made by Tyler and Cameron Winklevoss. A four-person panel rejected the application, with three members rejecting the application and one dissenting.
A statement released by the SEC sited concerns about liquidity, and the potential for manipulation in the underlying Bitcoin market, as the main reasons the application was rejected. However, it’s worth pointing out that the ETF being proposed by Van Eck is slightly different from the one proposed by the Winklevoss brothers. The most important difference is that the Van Eck ETF will be targeted to institutional investors, rather than retail investors.
When the SEC makes decisions about granting licenses for ETFs, one of their primary concerns is investor protection, especially when it comes to retail investors. This is the reason certain products like hedge funds can only be marketed to accredited investors with a minimum net worth. The Van Eck fund would have a share price of $200,000, excluding all but the wealthiest retail investors.
Analysts are divided over whether or not the ETF will be approved. However, there are several other ETFs applying for licenses in the next six months, and most analysts believe at least one of them will receive a license. It therefore seems doubtful that a license will be granted for a product for the retail market, but we may see an institutional product get the green light by early next year.
So, will an ETF lead to a rally of as much as 500% in the price of Bitcoin? The report that is being widely sited was published by Tom Alford on Totalcrypto.
He points to the way the Gold price rallied after the first Gold ETF was launched in 2004. While it’s true that the Gold price did rally strongly between 2004 and 2011, there were several other factors that contributed to the rally. The analogy also breaks down when we look at other ETFs that have been launched around specific market themes in the past. Very often, the launch of an ETF that invests in a specific market sector has signaled a peak for that sector. ETFs are launched when demand is strong, something that usually happen before a market top.
However, this does not mean the introduction of a Bitcoin ETF won’t lead to a rally. Institutional investors are eyeing the crypto market, and an ETF will remove one more barrier to their entry. One of the biggest challenges for institutions wanting to invest in cryptocurrencies is custody. Institutions have a fiduciary duty to look after their client’s investments, and the nature of cryptocurrencies makes this difficult. An ETF solves this problem to a large extent, and allows institutions to use their current infrastructure geared toward equities.
If an ETF is given the green light, there is no doubt that there will be an immediate knee jerk rally, even before the ETF is launched, based on sentiment alone. And then, once the fund is launched there will probably be another rally as initial investments flow into the fund. The tricky part is estimating how much capital will be available to invest immediately.
Institutions usually have to follow internal compliance processes before adding a new asset class. Some institutions probably already have approval, while others will still need to follow internal processes.
The real test for Bitcoin will occur after that initial wave of buying is over. There has been much speculation about the institutional capital that is ready to flow into the crypto market, but of course there is no way to measure it.
While the price of Bitcoin has been under pressure, there has been no reasons for institutions to rush their decisions. However, if a sustained bull market begins, institutions may be forced to act. It’s possible that even if inflows to a Bitcoin ETF are relatively modest, a rally could be triggered, and this could cause other institutional managers to follow, whether they do so via an ETF or by making direct investments.