A Guide to Bitcoin ETFs

Jason Yanowitz | July 31, 2018

On July 26th, the U.S. Securities and Exchange Commission (SEC) denied the Winklevoss twins of their proposed Bitcoin ETF.

Citing concerns about reliability of trading and volume data for Bitcoin, as well as liquidity and manipulation concerns, this marks the second time that the SEC has denied the Winklevoss twins of a Bitcoin ETF.

In addition to denying the Winklevoss' Bitcoin ETF, the SEC announced that they would be delaying further Bitcoin ETF decisions until September.

This is nothing new though, as the SEC has been delaying Bitcoin ETF decisions since 2016.


Overview of the Bitcoin ETFs That Have Been Shut Down

March 2017, Winklevoss Twins #1

Proposed that the Bitcoin-only fund would trade like a regular stock under the ticker symbol “COIN.” The SEC made a decision to prevent the proposed ETF then as it cited “concerns about the potential for fraudulent or manipulative acts and practices”.

March 2017, SolidX Management

August 2017, VanEck #1

VanEck first filed for an ETF based on bitcoin futures in August, but withdrew the application in September at the request of SEC staff since the futures didn't exist yet.

December 2017, VanEck #2

VanEck several other firms filed again when Bitcoin futures launched on CME and CBOE in December. However, they withdrew those applications in January at the request of the SEC.

July 2018, Winklevoss Twins #2

The Winklevoss ETF was intended to do the following:

  • ETF would hold spot BTC bought via Gemini.
  • NAV would be based on Gemini’s daily auction.
  • Each share was set to be worth 0.01 BTC.”



Controversy over the Recent Winklevoss Denial

For the first time, the SEC's decision to block a Bitcoin ETF was not unanimous.

This time, SEC's sitting commissioners voted 3 to 1, with Hester Peirce voting in favor of the Bitcoin ETF. In a public statement, Peirce said she believed the product met the legal standard.

In her statement, Peirce stated that she felt the SEC looked at Bitcoin and the associated sentiment that follows it rather than whether or not the Winklevoss' proposal would work.

As she mentions, the SEC's role is not to make judgements on the value of an investment, but rather to enable investors to make their own judgement on the value of investments.

She is not alone when she states that a Bitcoin ETF could bring transparency to a market that many institutional investors want access to.

Anthony Pompliano, a Partner at Morgan Creek running their Digital Asset Group, recently published a letter that the Morgan Creek team sent to the SEC announcing why the SEC should vote in favor of a Bitcoin ETF.

You can find that letter here


What's Next for Bitcoin ETFs?

There are two ways to go about creating a cryptocurrency ETF.

1. Create an ETF that tracks Bitcoin

2. Create an ETF that tracks the market

Let's look at the main proposals for each option.

VanEck, SolidX, and CBOE Propose a Bitcoin ETF

In June, an application for Bitcoin ETF reached the US SEC office again.

This time, the proposal is led by VanEck, an active asset manager, SolidX, a reputable blockchain company, and the Chicago Board Options Exchange (CBOE), which is the US’s largest options exchange.

VanEck, SolidX, and CBOE, the co-applicants this time, have all individually faced rejected Bitcoin ETFs in the past.

This ETF is different than the Winklevoss' ETF for a couple reasons.

The VanEck SolidX Bitcoin Trust would be a Bitcoin only investment mechanism offering baskets of 25 BTC (around USD$200,000 today) per share.

Whereas the Winklevoss ETF was accessible to retail because it was set to 0.01 BTC per share, the VanEck SolidX proposal has chosen to focus on institutional investors only by setting each share to be worth 25 BTC. This could help it get approved.

In addition to the high share price, the VanEck proposal’s pricing model will be based on the OTC markets for the NAV, using multiple exchanges for pricing data. The Winklevoss ETF only used the Gemini spot price.

On July 20th, VanEck's CEO and President sent a public letter to the SEC.

The letter is broken down into 5 sections, each focusing on a different point of SEC concern: Valuation, Liquidity, Custody, Arbitrage, and Potential Manipulation and Other Risks.

You can find the VanEck letter here


BitWise Proposes a Cryptocurrency ETF

Last week, Bitwise, a San Francisco-based asset management firm, filed a proposition to the SEC, looking to launch a cryptocurrency index ETF.

Bitwise is the creator of the world's first privately-offered cryptocurrency index fund, the Bitwise HOLD 10 Private Index Fund.

Rather than a Bitcoin-only ETF, this marks the first-ever attempt at a crypto index ETF.

If approved, investors would be able to invest in a basket of ten cryptocurrencies, which are a part of the firm’s fittingly named “Hold 10” index.

“We introduced a private index fund last year that we’ve been operating since then. In our experience operating the (investment) vehicle — dealing with the questions around custody, dealing with all the trading partners, striking the NAV (Net Asset Value) daily, audits, tax, hard forks, airdrops (etc.) — we feel that it is possible to effectively operate an index vehicle.” - Hunter Horsley, CEO of Bitwise

When will a Cryptocurrency or Bitcoin ETF get Approved?

As more institutions come into the space, it's inevitable that an ETF will be approved.

While we don't know exactly when an ETF will get approved, what we do know is that when we open up markets and allow more participants to gain access to any given asset, markets flourish.

For more on our timeline of institutional investment in the cryptocurrency space, click here.

For more guidance on the regulation of crypto assets, click here.

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Jason Yanowitz

Co-Founder of BWG