The ease to which investments can be made in an asset class seems a leading indicator of maturation. As investors are afforded more accessible avenues to market exposure, there is a greater encouragement of new capital inflow. This seems universally relevant, but can be spotlighted in the current context of the cryptocurrency industry. Over the past months, there has been increased attention on whether traditional financial products backed by digital currencies will be introduced as a means of expanding the market reach to new potential investors.
One product in particular that has been emphasized as potentially viable is Bitcoin exchange-traded funds (ETFs).
An ETF is a type of investment fund that allows investors to gain exposure to an underlying asset such as Bitcoin, without requiring the investors to own the asset themselves. The value of the ETF follows the price of Bitcoin, however investors own and trade individual shares of the mutual fund rather than having to hold custody of the actual asset. Given the technical barrier to entry of investing in the crypto industry, this would allow for a wider demographic of investors to participate.
Thus far in 2018, there have been over ten separate applications to introduce such ETFs.
Jan van Eck, CEO of VanEck, an investment firm who have recently proposed the listing of their own Bitcoin ETF, outlined the value he believed this product would bring to facilitating wider market adoption of digital currencies.
“A properly constructed physically-backed Bitcoin ETF will be designed to provide exposure to the price of Bitcoin, and an insurance component will help protect shareholders against the operational risks of sourcing and holding Bitcoin.”
For the Australian market, the launch of an overseas ETF would progress consolidation of the asset class’ wider legitimacy. Investors and institutions who may have leaned back from deploying capital because of necessitated technical acumen would be afforded greater accessibility to investing via traditional exchanges. This would position similar investment sentiment to follow locally.
However, despite the hopeful optimism of the ETF submissions, last week the U.S Securities and Exchange (SEC) announced they had rejected nine applications for Bitcoin ETFs for now.
The justification from the SEC remained consistent with their stance since disapproving two submissions from the Winklevoss brothers earlier this year, citing the immaturity of the market’s liquidity as a pointed area of concern.
A statement from the agency correlated the current size of the Bitcoin market with a vulnerability for potentially fraudulent activity and price manipulation.
“… the Exchange has offered no record evidence to demonstrate that Bitcoin futures markets are ‘markets of significant size.’ That failure is critical because, as explained below, the Exchange has failed to establish that other means to prevent fraudulent and manipulative acts and practices will be sufficient, and therefore surveillance-sharing with a regulated market of significant size related to Bitcoin is necessary.
There have since been uncertain responses to this decision reflected in the market’s overall price volatility over the past weeks.
Australian tokens such as Power Ledger, Havven and Ivy have moved as much as 30% in price over the last fortnight. This seems a microcosm of the local eco-system’s overall sentiment. The hesitation to amend the exchange rules as per the ETF propositions validates the current evaluation of the crypto asset market as embryonic. Such public acknowledgment of infancy seems to have underpinned uncertainty from more speculative investors, which may have led to recent dips in market price.
This appears pertinent to the general market’s movement, however, it hasn’t appeared to mute the confidence in the asset class’ underlying value.
Importantly, the SEC made clear that the decision on the Bitcoin ETFs reflected an evaluation of the market’s maturity, not its innovative viability.
“[The SEC] emphasizes that its disapproval does not rest on an evaluation of whether Bitcoin, or blockchain technology more generally, has utility or value as an innovation or an investment.”
Furthermore, SEC Commissioner Hester M. Pierce released a statement last month dissenting the decision of the Commission to act as the “gatekeepers of innovation” and emphasized the nuances of digital currencies as an asset class.