Bitcoin trusts are like Pinocchio—they very much want to be “real” exchange-traded funds. Earlier this September, VanEck SolidX Bitcoin Trust launched to halfhearted fanfare because, despite its outstanding ETF application with regulators, the trust that invests in the popular cryptocurrency still isn’t a public ETF that the average investor can buy and sell. As of now, only brokers, hedge funds, and institutions can purchase, and privately trade, shares with one another.
Regarding VanEck’s and other Bitcoin ETF applications, Securities and Exchange Commission Chair Jay Clayton recently remarked that there is still “work left to be done.” Clayton pointed to concerns that have dogged such applications for a long time—that Bitcoin itself trades on unregulated exchanges, and could be subject to price manipulation.
The battle with the SEC for a Bitcoin ETF began in July 2013, when the Winklevoss twins, Cameron and Tyler, applied to launch the Winklevoss Bitcoin Trust. After years of legal wrangling, the SEC rejected their second application in July 2018.
Now, there’s VanEck’s application, plus two other ersatz ETFs up for SEC approval: Bitwise Bitcoin ETF Trust and Wilshire Phoenix’s United States Bitcoin and Treasury Investment Trust. The SEC has delayed ruling on these ETFs, but now has a final decision date for Bitwise on Oct. 13 and for VanEck on Oct. 18, with a tentative deadline for Wilshire on Sept. 29.
Matt Hougan, Bitwise Asset Management’s global head of research, says much has changed recently that should allay regulators’ concerns: “Bitcoin markets historically were not regulated and didn’t have traditional market surveillance technology. But in January of 2018, the New York Department of Financial Services put in place a requirement that the Bitcoin exchanges need to have surveillance technology, and six of the 10 major ones now have the same technology as the Nasdaq and NYSE stock exchanges. So, even though that’s not the same as national securities regulation, these are state-regulated exchanges with significant market surveillance.”
Hougan also points out that Bitcoin’s trading volume has grown significantly, to $1 billion a day, making it harder for any player to manipulate prices. Yet some experts still have doubts that ETF approval is imminent. “The SEC has been very clear about what its concerns are regarding a Bitcoin ETF,” says Bart Smith, co-head of Susquehanna International Group’s ETF Group. “The Bitcoin, ETF, and market-making communities have been working very hard to address those concerns, and to date we have not gotten there.” Susquehanna is a major ETF and Bitcoin trader.
Even if the ETFs are approved, it’s hard to say what their reception will be. Their target investors are financial advisors who can’t allocate their clients’ retirement portfolios to cryptocurrency easily. Yet advisors seem ambivalent about Bitcoin as an investment. A Barron’s email blast interview request to the advisor network at the National Association of Personal Financial Advisors received mostly hostile responses and a few positive ones.
“We have no interest in Bitcoin in any form, ETF or otherwise,” wrote Bob Kargenian, president of TABR Capital Management in Orange County, Calif. “It’s a waste of time, and pure speculation. With a bit of knowledge, one would have better odds in Las Vegas.”
Until that attitude changes, it may not matter whether these Pinocchio investments are real ETFs or not.