Five Reasons Why the SEC Should Approve Bitcoin ETFs

Bitcoin ETFs may be here soon.

If President Joe Biden’s nomination of Gary Gensler to lead the Securities and Exchange Commission is confirmed, Gensler should act quickly to get agency staff to move toward approving a Bitcoin-exchanged fund, showing that the United States is not only understands cryptocurrencies but looks to protect. investors and putting the country on a level playing field with the rest of the world. This move is long overdue.

The SEC is seen as unnecessarily dragged its feet on the issue of approving ETFs focused on cryptocurrencies. An informal Twitter poll I conducted recently found that nearly 80% of the 2,192 respondents believed that the SEC should approve a bitcoin ETF. About 50% would invest in one. I have been conducting these opinion polls for years and this is by far the highest in favor of approval.

My poll is nice with An honest survey of financial advisers. In that one, 63% of respondents said ETFs were the preferred medium for investing in Bitcoin, compared to 16% for directly owning the digital coin and 10% for a mutual fund. People say this not as crypto advocates but as supporters and users of the highly durable and efficient ETF structure. They would feel the same way if the SEC denied gold ETFs or China’s share A ETFs, both of which are great examples of ETFs breaking new ground and successfully democratizing a unique asset class.

Here are five reasons the SEC should approve an ETF:

The Premium at Grayscale Bitcoin Investment Trust is Dangerous: Those seeking a US investment vehicle for the digital currency are generally left with a bunch of OTC-traded trusts similar to closed-end funds but without the essential share creation or redemption process offered by ETFs – a feature that allows for arbitration.

The most popular is the Grayscale Bitcoin Investment Trust, which has grown from $ 2 billion to more than $ 20 billion in assets over the past year. If Grayscale was an ETF, it would rank about 50th in size, putting it in the top 2% of all ETFs. Purchasers of the trust’s shares over the past year paid an average premium of around 18% more than Bitcoin – and that’s on the low side of where it has traded historically. The premium has been as high as 132% and as low as 3% in recent years. In ETFs, investors know that they are getting a price that will be very close to the underlying asset.

Of course, the Bitcoin ETF would also likely trade for a premium, but it would be microscopic compared to where Grayscale is trading. Nor would it be subject to artificial forces that tend to push the price of Grayscale shares lower even if the Bitcoin price rises and vice versa. History shows us that the premium in ETFs would gradually shrink as more and more professional market makers became involved.

They’ve Worked Fine in Europe: More than 20 cryptocurrency ETFs already exist outside the US, mostly in Europe. Exchange traded notes such as the Bitcoin Tracker EUR introduced in Sweden over five years ago have typically traded at small premiums, thanks to the arbitration allowed by the share creation / redemption process.

While the US Bitcoin ETF would be a much bigger deal in terms of volume and assets, it would work much the same. And while the premiums and discounts to net asset values ​​are broader than most equity ETFs, they are quite tight around and many tighter than Grayscale and its like.

The steep upward – and then down – rise in Bitcoin prices provided a case study on how the US Bitcoin ETF would react to such sudden shifts. Looking at many ETFs and ETNs in Europe, the majority closed on January 11 (following a two-day dive of 17.6% in Bitcoin) at a 3% to 4% discount to net asset value. The “arbitrage band” had obviously been extended but not broken. Those who wanted to leave could. Put that in the US with the biggest and best market makers and my guess is that the discount would have been half as much.