Regulators Set to Decide Whether to OK New Bitcoin Fund | February 2024
February 2024 | Volume 15, Issue 7
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According to the article, the Securities and Exchange Commission (SEC) reluctantly approved the first exchange-traded funds that hold bitcoin, saying it is still deeply skeptical about cryptocurrencies and that its decision did not mean it approves or endorses bitcoin.
The SEC said it gave the green light to 11 exchange-traded funds for bitcoin even though it only faced a deadline for one application. The agency said that would provide competition and a “level playing field.”
Bitcoin ETFs could open the door to cryptocurrencies to many new investors who do not want to take the extra steps involved in buying actual bitcoin.
It is a major win for Wall Street, particularly trillion-dollar fund managers like BlackRock, Fidelity Investments and Invesco that have pushed hard to get the SEC to approve their applications. It is also a win for the cryptocurrency industry, which has needed a win after nearly two years of turmoil that has resulted in the failure of several crypto firms, most notably FTX in November 2022.
The “Lukewarm” Approval of Bitcoin ETFs
The SEC's approval, however, was lukewarm at best. Gary Gensler, the agency's chairman, has repeatedly said cryptocurrencies need more regulation and investor protections.
“Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto,” Gensler said.
Other commissioners expressed alarm that the SEC agreed to approve the funds.
“I am concerned that these products will flood the markets and land squarely in the retirement accounts of U.S. households who can least afford to lose their savings to the fraud and manipulation that appears prevalent in the spot bitcoin markets,” Commissioner Caroline Crenshaw said in her dissent.
Exchange Traded Funds
An exchange-traded fund is an easy way to invest in assets or a group of assets, like gold, junk bonds or bitcoins, without having to directly buy the assets themselves. Cryptocurrency advocates hope the development thrusts the once niche and nerdy corner of the internet even further into the financial mainstream. ETFs can be purchased quickly with any brokerage and trade on an exchange like the Nasdaq stock market.
Market Reaction to the SEC’s Approval of Bitcoin ETFs
The regulatory greenlight has been anticipated for several months and the price of bitcoin has jumped about 70 percent since October as crypto investors speculated the broad use of bitcoin ETFs would drive up demand for bitcoin. The price of Etherium, the second-most popular cryptocurrency, has also risen on speculation that fund managers will create ETFs around it.
Some analysts think that ETFs may help stabilize crypto prices by broadening their use and potential audience. But many remain concerned that broad use of crypto ETFs could put too much risk and volatility into Americans' retirement accounts.
“The notorious price volatility of Bitcoin, as well as its fluctuating values against stablecoins and other cryptocurrencies, could expose mainstream investors to a less familiar spectrum of investment risks,” said Yiannis Giokas, senior director of Moody’s Analytics.
In a twist perhaps appropriate for the unpredictable crypto industry, a fake tweet from the Securities and Exchange Commission’s account on X recently stated that trading of bitcoin ETFs had been approved but the agency had not issued any approval.
Here are some things to know about bitcoin ETFs:
Why All the Excitement over a Bitcoin ETF?
An exchange-traded fund, or ETF, is an easy way to invest in something or a group of things, like gold or junk bonds, without having to buy the things themselves. Unlike traditional mutual funds, ETFs trade like stocks, which means they can be bought and sold throughout the day.
Since the inception of bitcoin, anyone wanting to own one would have to buy it. That in turn would mean either having to learn what a cold wallet is or having to open an account at a crypto trading platform like Coinbase or Binance.
A spot bitcoin ETF could open the door to many new investors who don't want to take such extra steps.
The price of bitcoin has already soared in anticipation of the SEC’s approval, with bitcoin trading at $45,890 recently, up from around $27,000 in mid-October. The price had sunk as low as $16,000 in November of 2022 following the bankruptcy of the crypto exchange FTX.
How Would the ETF Work?
The Bitcoin Strategy ETF (BITO) has already been trading since 2021, but it holds futures related to bitcoin, not the cryptocurrency itself.
The new bitcoin ETF will perform like the SPDR Gold Shares ETF (GLD), which allows anyone to invest in gold without having to find someplace to store a bar or having to protect it. It is the same reason some people invest in the SPDR Bloomberg High Yield Bond ETF (JNK), which lets investors simply buy one thing instead of the more than 1,000 low-quality bonds that make up the index.
How Many Bitcoin ETFs Could There Be?
The SEC said it gave approval to 11 ETFs, but more are certain to apply for trading in the coming months.
What are the Disadvantages of an ETF?
Longtime crypto fans might object. Cryptocurrencies like bitcoin were created in part due to mistrust of the traditional financial system. Wall Street would become an intermediary between investors and cryptocurrency in the case of ETFs.
ETFs also charge fees, though they tend to be relatively low compared with the overall financial industry. These fees are shown through what is called the expense ratio, which indicates how much of a fund's assets the ETF will take each year to cover its costs.
When is it Better to Hold Actual Bitcoin?
An ETF will not put actual cryptocurrency into investors' accounts, meaning that they cannot use it. Also, an ETF would not provide investors with the same anonymity that crypto does, one of the big draws for many crypto investors.
What Concerns Should Investors Have?
The biggest concern for an investor in one of these ETFs is the notorious volatility in the price of bitcoin.
Despite failing to catch on as a replacement for fiat, or paper, currencies, bitcoin soared near $68,000 in November of 2021. A year later it fell below $20,000 as investors in general shunned riskier assets and a series of company blowups and scandals shook faith in the crypto industry.
Even as regulators and law enforcement crack down on some of cryptos bad actors, like Sam Bankman-Fried of FTX, the industry still has a modern “Wild West” feel to it. The hack of the SEC’s X account raises questions about both the ability of scammers to manipulate the price of bitcoin and SEC’s own ability to stop them.
Discussion Questions
- What is the U.S. Securities and Exchange Commission (SEC)?
The U.S. Securities and Exchange Commission (SEC) is an independent federal administrative agency that was created in the aftermath of the 1929 Wall Street Crash. The SEC’s primary purpose is to enforce the law against market manipulation. According to its web site (www.sec.gov), “(t)he SEC’s regulation of the securities markets facilitates capital formation, which helps entrepreneurs start businesses and companies grow. Last year $5 trillion was raised in public and private securities offerings, promoting economic growth and job creation.” - What is cryptocurrency (for example, bitcoin)? Is cryptocurrency a real currency? Is it a form of investment? What is an exchange-traded fund (ETF)? Do you support the SEC’s approval of ETFs for bitcoin and other cryptocurrencies? Why or why not?
Cryptocurrency (for example, bitcoin) is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or a bank, to uphold or maintain it.
Although there are competing definitions of what constitutes currency, The Economic Times defines currency as “(m)oney in the form of paper or coins, issued by a government and accepted at face value.” https://economictimes.indiatimes.com/definition/currency In your author’s opinion, since cryptocurrency is not issued by one or more governments, it is not “real” currency; instead, it would be better described as “quasi” (i.e., seemingly, but not really) currency. Cryptocurrency is not only quasi-currency, but it is also a form of investment—A considerable number of people purchase cryptocurrency with the expectation that it will increase in value, and therefore provide a return on their investment (like stock).
An exchange-traded fund (ETF) is a type of investment fund that is traded on a stock exchange.
Although student opinions will likely vary in terms of whether the SEC’s approval of ETFs for bitcoin and other cryptocurrencies, your author staunchly opposes such a move. Doing so lends credence to the notion that cryptocurrency is comparable to traditional currency, securities, and/or other types of investments, all the while with little or no regulation that would assist in determining the actual value of cryptocurrency itself.
In your author’s opinion, the SEC’s move subjects those who purchase cryptocurrency to a rogue market that is largely unregulated and rife with the possibility of consumer manipulation and abuse—after all, keep in mind that the prefix “crypto” means “concealed” or “secret!” - Are you confident that if the U.S. Supreme Court overturns the Chevron doctrine (see Article 1 of this newsletter) and the SEC does not have the authority to regulate cryptocurrency ETFs, the U.S. Congress will “fill the void” in terms of addressing the issue? Explain your response.
As mentioned previously in this newsletter, the overriding theme of the February 2024 issue of the newsletter relates to the powers of administrative agencies. In this instance, your author believes that the public would be better served if the U.S. Congress passed meaningful, substantive legislation governing cryptocurrency and its market trading. Such legislation would effectively override any inconsistent maneuverings of the SEC. That is an ambitious request, again given the prolonged intransigence of Congress in fulfilling its constitutional duty—making laws.
The SEC’s decision regarding the approval of cryptocurrency ETFs could have been, at least in part, based on the agency’s realization that it must “fill the void” in response to congressional inaction. If that is indeed the case, the SEC’s action could be more “proof positive” that administrative agencies are indispensable when it comes to the machinations of “real governance.”