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Bitcoin ETF: Coming to an exchange near you

Written By | Mar 10, 2017

WASHINGTON, March 9, 2017 – A bitcoin ETF is going to happen. The SEC may not approve the cyber-currency ETF this weekend, but it is going to happen, probably sooner rather than later.

Current investor anticipation centers on an ETF application submitted to the SEC four years ago by the Winklevoss twins, Cameron and Tyler Winklevoss, best known for their fight against Mark Zuckerberg for control of Facebook (symbol: FB).

Always slightly ahead of the next-big-thing, the Winklevoss brothers saw the potential for bitcoin even during the lowest lows experienced by the currency. They put together their own ETF proposal and have been wrangling with the SEC for years over how to get this thing approved. After a private meeting between the SEC and the brothers in February, the SEC announced it would make its final decision by March 11.

Read also: A lesson in Bitcoin, currency and the nature of money

Bitcoin has migrated from its lair in the strange world of millennials and techno-geeks to something approaching the mainstream. With trust in central government plummeting, many are looking for alternatives to fiat currencies, and bitcoin appears to fit the bill. Bitcoin is confidential, transacts instantly, and is inflation proof. It’s also not subject to the whims of central banks or despotic leaders and is immune from liens or collections.

The need for some form of non-federal currency has also increased thanks to the growing marijuana industry. Because marijuana remains illegal in the US at the federal level, states with legal marijuana industries are prohibited from putting their massive cash stashes in the federal banking system. They either transact in cash or trade or bitcoin. And bitcoin is becoming more and more popular as an alternative to piles of cash in the store room, which creates a serious security problem.

Back to the bitcoin ETF: For now, there isn’t one. The SEC doesn’t really know what to do with this bitcoin phenomena. It’s certainly not a stock or a bond, and even the “currency” moniker seems to give SEC-types a headache. But it’s here, and it’s real, and the rapid movement is putting pressure on the SEC to do something.

Making things even more complicated, the Winklevoss brothers aren’t the only ones maneuvering to make a bitcoin basket. Two other names, Grayscale and SolidX Partners, Inc., are also applying to list bitcoin ETFs and are anxiously waiting for the SEC’s final announcement.

Currency traders are shivering with anticipation over the decision because of the impact it may have on the price of the currency itself. Bitcoin is trading around $1261 pre-announcement, and no matter which way the SEC goes, it’s going to impact that price. An ETF approval will send the currency skyward, probably doubling the price by year-end. A rejection will cut the price in half.

If the ETF passes, the market for bitcoin will grow, at least initially. Average investors will become even more aware of the currency and will take a gander at investing in it. Some analysts see a $300 million infusion in the bitcoin market within the first week of trading if an ETF is approved.

That anticipated outcome is primarily due to the perception of legitimacy. If the SEC approves a bitcoin ETF, it suggests that the federal government is admitting that the currency is legitimate. And because of the hulking behemoth that the U.S. is in global markets, that could impact other governments around the world.

Another reason a bitcoin ETF will have a positive impact on a bitcoin’s price is ease of use. An ETF will make the bitcoin market about a million times easier for the average investor to access. Instead of jumping through bitcoin wallet account hurdles and dealing with online exchanges or paying huge premiums to invest in the Bitcoin Investment Trust, they can buy the ETF just like any others. Easy. We like easy.

The fact is, it is time for a bitcoin ETF. The environment is right, the market has expanded, and there is certainly demand. Bitcoin has also matured, moving from its role as the anarchist’s preferred currency to becoming an “alternative” currency, with bitcoiners now willing to at least talk about working within a regulatory framework and self-regulation.

That said, the SEC still may not approve an ETF this weekend. Government institutions aren’t the most innovative guys on the block, and defining bitcoin still eludes them. To regulators, bitcoin is a technology. And how do you put a technology into an ETF? Security is still almost certainly a concern, and high-profile hacking of supposedly secure systems is not likely to assuage those concerns.

The SEC also could reject the proposed bitcoin ETF based on some of the mechanics of the Winklevoss application. It is clear that there are some pretty screaming conflicts of interest issues involved with this proposed ETF, which the SEC, in general, does not like.

The application, for example, calls for the Winklevoss brothers to keep multiple parts of the ETF in-house. They want to be the sponsor and provide the reference price for bitcoin, which seems a little, um, opaque. They are also one of the largest owners of the currency, which might just make the whole idea too much for the SEC to handle.

Today is the day to go long or short, depending on your view of the SEC leanings. You can also bet on the SEC decision. Right now, the betting is running about 35 percent that it will get approved and 65 percent that it won’t.

Book review: ‘Bitcoin and the Future of Money’ by Jose Pagliery

But you may not want to stampede to your broker to invest in a bitcoin ETF. While a bitcoin ETF will reduce the bitcoin risk around the edges, it’s still a high-risk investment.

Bitcoin is still essentially new and remains misunderstood — or not understood at all — in many places around the world. Although its use has grown dramatically, it is still a relatively small market, and untested. Any problems with the cyber-currency likely won’t arise until it is more widely used. Financial systems aren’t really sure how to integrate bitcoin into the mainstream, and bitcoin is wildly volatile.

There is also a very real possibility that enthusiasm for a bitcoin ETF will outperform the actual currency, or that the currency will boom based on an ETF frenzy, only to bubble and burst when reality sets in.

Outside of all that, there is the additional problem that sovereign governments still don’t love it. In fact, several countries have banned it or limited its use. If world leaders decide the threat from bitcoin is too much and want to seriously crack down, that could be the end of that particular foray into cyber-currency. The Winklevosses know this, and even noted in their application that one major risk is that the investment itself could become illegal. That’s not something you read in a prospectus every day.

It’s frankly not likely that a full-scale global ban will happen. Exactly because bitcoin is outside the control of the government, a government ban is not only ineffective but can also be counter-productive. China, which prohibits banks or banking institutions from using bitcoin, is now the largest bitcoin market. Outlawing bitcoin draws attention to the cyber-currency and would likely increase, rather than decrease, the market. Plus, such a ban is almost impossible for a government to enforce. Read: prohibition.

If the cyber-currency doesn’t become outlawed, a bitcoin ETF is a foregone conclusion. Maybe not this week, but soon. But, if the SEC rejects the Winklevoss proposal, the bitcoin ETF is not dead.

A rejection will include an explanation, which gives other ETF-seekers information they can address in their own ETF applications. Given the current environment and the growing demand for bitcoin, an ETF is going to become increasingly attractive to investors as a higher risk investment. Moreover, holders of bitcoin are going to benefit, at least initially, from an ETF and the excitement it will bring.

Yes, it may not happen this week or this month. But a bitcoin ETF is going to happen. Bet on it.

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Lisa M. Ruth

Lisa M. Ruth writes on international events, intelligence, and other topics. She has worked with CDN as a journalist since 2009. Lisa is also President of CTC International Group, Inc., a research and analysis firm in South Florida, providing actionable intelligence to decisionmakers. She started her career at the CIA, where she won several distinguished awards for her service. She holds an MA in international relations from the University of Virginia, and a BA in international relations from George Mason University. She also serves as Chairman of the Board of Horses Healing Hearts, and is involved with several other charitable organizations, including Habitat for Humanity, The Boys and Girls Clubs of America, and AYSO.