These Interesting Developments are Paving the Way for a Bitcoin ETF
Exchange Traded Funds(ETFs) have become one of the most popular investment vehicles in today’s financial markets. In the last 18 months, many investors have gravitated towards all kinds of ETFs as an alternative to more traditional vehicles such as hedge funds which(as a group) have regularly underperformed the market. ETFs have long been seen as a logical model to create a bridge between traditional investors and the digital currency community. While the attempts to create a Bitcoin ETF have not succeeded there have been a couple of interesting new developments that might help to warm the heart of the US Securities and Exchange Commission(SEC) towards the new investment model.
The most famous attempt to create a Bitcoin ETF came from Cameron and Tyler Winklevos last March. At the time, the SEC rejected the proposal citing that “significant markets for Bitcoin are unregulated”. Before and after the SEC decision, I wrote extensibly about the market implications of a Bitcoin ETF and you can find the articles in this blog. Has anything changed since March? Well, not directly but there are a couple of new developments that are making a strong case for a Bitcoin ETF.
ETFs mostly trade financial products using derivatives. The common wisdom in financial markets is that if a derivative exists for an asset, then it should traded in an ETF. Derivatives are a relatively simple financial product to assemble but its been notoriously in the Bitcoin ecosystem. Until now…
Recently, cryptocurrency startup LedgerX won approval from the US Commodity Futures Trading Commission(CFTC) to start offering options based on Bitcoin. The approval opens the door to the creation of Bitcoin-based options and futures contracts which are two of the most important products used by investors to hedge positions. From there to an ETF is not a very long road.
Digital Currency Index Funds
There is a strong correlation between ETFs and Index Funds. In the case of Bitcoin and other digital currencies, the market has not yet created indices that can be used as a single investment vehicle. Now a company called Bitwise Investments is trying to change that dynamic.
Called the HOLD Index, the new Bitwise Investments Fund is designed to hold the top 10 digital currencies by market cap. Based on the current market, the initial version of the HOLD 10 includes the following currencies: BTC, ETH, XRP, BCH, LTC, DASH, NEO, ZEL, XMR AND ETC. Index funds are a great vehicle for passive investors that would like to protect their exposure to individual cryptocurrencies. This is another financial products that could influence the creation of a Bitcoin ETF.
Maybe the most important factor that can trigger the creation of a Bitcoin ETF is the increasing demand for it in the investor community. Despite the increasing popularity of ETFs as an investment model, they haven’t seen a lot of innovation in terms of their core product. Something new it would be certainly welcomed in the ETF world.