Exchange Traded Funds- What do they mean for the future of Cryptocurrency and Blockchain?

David Thomas, director and co-founder of London based Cryptocurrency broker Global Block (www.globalblock.co.uk).

What is an ETF?
An ETF (Exchange-Traded Fund) trades like a stock and can be pegged to a commodity, an index, an index fund or a bond and is fully regulated by a country’s regulating body depending on the exchange jurisdiction it is trading within.  ETF’s tend to be liquid and were originally created to allow investment entities like Pension Funds gain exposure to the asset classes mentioned above in the form of trading shares.

Bitcoin- the modern day equivalent of Gold? 
After the first gold ETF was introduced back in 2003, traders of traditional stocks were suddenly able to trade gold a lot easier as opposed to holding the commodity itself, and the direct impact of this was a subsequent rapid increase to the gold price.  Essentially, being able to buy or sell the gold without holding the underlying commodity was a huge change to the market and dramatically changed the way that anyone could access the gold market.  Therefore, if the same logic is applied to Bitcoin, expectation would not only be on better accessibility, but in line with this a significant increase in price of the underlying coin.

How would a crypto ETF affect the market?
The introduction of a Bitcoin ETF would bring more liquidity to a wider breadth of people in the market.   By taking this notion to traditional markets that investors operate in such as equities, commodities, FX, bonds etc, the introduction of a Bitcoin ETF would allow such investors to come into the crypto space as the barrier to entry would lessen.   In addition, it would also give credence to Bitcoin as a financial trading tool and store of value.  Furthermore, certainly in the short term we would also expect a surge in the BTC price as a result of simple rules of supply and demand.  Bitcoin supply is capped at 21 million coins, but should a BTC ETF be introduced this is likely to create greater demand for BTC and therefore cause positive price actions in the market.

The wider impact of an ETF in the Crypto market?
When looking at the market as a whole, by BTC increasing in price, this would likely cause the price of Alt-Coins (Alt’s) to increase. As price increases in BTC this gives crypto investors more buying power to diversify.  If we add inevitable regulation into the mix then more investors will gain exposure to the market as a result of regulation and ease of trading, as opposed to speculation which is currently the sole fuel for the market.

When will we see an ETF signed off?
The latest application to be decided on by the SEC was submitted by the CBOE to list and trade Shares of “SolidXBitcoin”, with the shares being issued by the VanEck SolidX Bitcoin Trust.  The SEC’s decision was delayed and their statement on the issue included the below:

“The Commission finds it appropriate to designate a longer period within which to issue an order approving or disapproving the proposed rule change so that it has sufficient time to consider this proposed rule change. Accordingly, the Commission, … designates September 21, 2018, as the date by which the Commission shall either approve or disapprove the proposed rule change.”

Before this latest application delay by the SEC, the other high profile submission by the Winklevosses (think Facebook and Rowing!) was also rejected in the latter part of July. It it our opinion that it’s only a matter of time before an application is accepted, although the space will have to move forward considerably in its thinking and actions.

What is going to assist the market in moving forward? There are a number of factors that will assist the overall acceptance of crypto from both a regulatory and investor standpoint:

• Regulatory bodies like the FCA and SEC feeling more comfortable and gaining a further understanding of the crypto and blockchain space, i.e the FCA’s sandbox coming to fruition.
• The thought of storing BTC worries many financial institutions due to the recent hacks that occur on exchanges. All of which means that more crypto storage solutions will have to become more prevalent and proven in the marketplace in order to give financial institutions confidence
• More merchant banks like that of Mike Novogratz’s Galaxy Digital entering the marketplace will inevitably encourage others and provide confidence that the sector is here to stay, and that in itself will mean the SEC and FCA accelerate their input, after all it is their job to protect the underlying investors.
• ICO’s need to start abiding to securities laws- as opposed to clearly breaking them and this means oversight from regulatory bodies.  Additionally, practically anybody can currently perform an ICO at the moment which has meant there have been a significant number of scams and frauds in the marketplace
• Finally, its a tough one to admit but whether the market acknowledges it or not, it definitely doesn’t work in BTC’s favour that the likes of Jamie Dimon and Warren Buffet are not fans of cryptocurrency!

To Conclude
It is hard to see the SEC warming to the idea of an ETF until the issues mentioned above are resolved or at least are being addressed.  If BTC is to reach a market cap like that of gold (which is currently at over $7trillion), then financial products like ETF’s are definitely a necessity. ETF’s will help create greater liquidity synthetically as well as in the underlying.  As things stand, with the increase in  BTC price over the last couple of years, the market is currently illiquid with miners “hodling” until BTC sees price actions of up to and beyond $22,000.  To demonstrate this point, at the beginning of 2017 with BTC priced at $894 there was over $10b in daily trading volume. Compare this to the present day where there is currently $6bn of daily volume with BTC priced at under $6,400.  If we see an ETF authorised then this will surely spark the start of another price rally, further widespread acceptance of crypto-currency and every financial institution in the world scrambling to get a piece of the action- won’t it??