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4 reasons why the market is ready for a BTC ETF

BTC ETF

On September 17th, news broke that the Chicago Board Options Exchange’s BZX equity exchange has withdrawn its VanEck/ SolidX Bitcoin Exchange Traded Fund (ETF) proposal, according to a report by Cointelegraph. And with this development the main contender to gain regulatory permission from the SEC has dropped out from the race, leaving the possibility of a BTC ETF gaining approval uncertain. 

In this article, we’ll explain why it’s time for Bitcoin ETF and how the SEC's ETF concerns have largely been addressed over the past two years. Bitcoin as an asset has been performing really well this year, recovering from its lows and trading at around $10,000.

 

BTC ETF

 

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What’s a BTC ETF or Bitcoin Exchange Traded Fund

An ETF or an Exchange Traded Fund is a collection of securities that tracks its underlying index. It’s essentially an investment vehicle that tracks the performance of its underlying assets. ETFs can include numerous investment classes like stocks, commodities, bonds, or a mixture. Hence, ETFs allow investors to diversify their assets without actually owning the assets whose performance is being tracked. A Bitcoin ETF would mimic the price of the cryptocurrency

So why buy into a Bitcoin ETF if it’s just merely mimicking the price of Bitcoin? Why not just buy Bitcoin itself and cut out the middleman?

There are a couple of reasons for this, the major one being Bitcoin is still a largely unregulated asset and there’s a lot of risks involved with directly trading the asset. If you’re investing in Bitcoin then you have to safely store your private keys somewhere and manage your wallet, this could potentially turn away investors. The cryptocurrency space is very new and there’s a lot of innovation happening.

For an investor new to this space, the task of understanding how the cryptocurrency market functions itself could be a daunting task. The learning curve involved is extremely steep but with an approved ETF, that wouldn’t be a major problem as it’s an investment vehicle investors are more familiar with. As of September 2019, the global ETF market is valued at a whopping $3.9 trillion market, thus the approval of a Bitcoin ETF could introduce Bitcoin to the broader audience.

As of September 2019, the US Securities and Exchange Commission (SEC) has not approved a Bitcoin ETF yet citing several issues from insignificant futures trading volumes to the possible risk of manipulation and fraud as most cryptocurrency exchanges are traded on unregulated exchanges.

So is the US regulator’s concerns valid? Here are the four reasons why we think the world’s ready for a Bitcoin ETF. Note, all the data used for the explanation is borrowed from the publicly available presentation submitted by Bitwise Asset Management to the SEC. Notably, the deadline for the SEC to either approve or dismiss the Bitwise Bitcoin trust ETF is coming up on October 13th.

#Reason 1 for BTC ETF: The Bitcoin spot market has become more efficient

In the presentation submitted by Bitwise to SEC, it points out how the Bitcoin Spot trading market has evolved over the past 18 months. Here’s a snapshot of the presentation.

BTC ETF

Several key events have taken place as the launch of CME Bitcoin futures in early 2018, BitLicense adds market surveillance requirements for crypto exchanges, the launch of an institutional Bitcoin lending market, and the public entry of institutional market makers like Jane street. These events have drastically increased the efficiency, creating “a dynamic, institutional-quality, two-sided market for the first time”, according to the report. 

The average spread across the top exchanges with real volumes ranging from 0.01–0.1%. Also, the arbitrage among the top exchanges is nearly perfect with no sustained deviations. This means that the Bitcoin spot market is currently operating at an efficiency much higher than most other major markets. Also,

#Reason 2 for BTC ETF: Bitcoin market is more resistant to market manipulation

Bitcoin, although invented as p2p payments protocol, is the world’s first truly digital commodity and its inherent characteristics like fungibility, transportability and exchange tradeability, makes it uniquely different than traditional commodities. 

Historically, some of the largest cases of market manipulation took place as a consequence of coordinated price-fixing. But Bitcoin’s price is set on the open market. Also, the fungibility and transportability of Bitcoin ensure a nearly perfect arbitrage between various trading avenues. This results in incredibly difficult to manipulate the market as any attempt would require overcoming a majority of the global liquidity. 

# Reason 3 for BTC ETF: Bitcoin futures market is significant 

The CME Bitcoin futures market is much more significant than previously thought. The misconception that it isn’t significant stems from the fact that as much as 95% of the reported spot trading volume of Bitcoin is fake, according to a study by Bitwise itself.

BTC ETF

The reported volume of spot trading volume of Bitcoin ~$17 billion, as of August 2019 but the actual trading volume is around $1 billion according to the report. The Futures trading volume is 1/4th that of the spot trading volume. Also, since the beginning of 2019, the futures market represents a good portion of the actual Bitcoin market.

# Reason 4 for BTC ETF: Bitcoin custody has become mainly institutionalized

BTC ETF

A major hurdle to investing in Bitcoin is securely holding private keys, because of the anonymous and immutable nature of Bitcoin’s network. If a hacker gains access to someone’s private keys and Bitcoin is transferred it’s impossible to get it back unless a majority of the network agrees to reverse the transaction (nearly impossible). This is where custodians come in.

In the past two years, a majority of the custodians Bitgo have become regulated and are insured by established firms such as Llyod’s of London, a specialist insurance market. Bitgo has a $100 million insurance for digital assets and is given to its clients free of charge.

These are the reasons why the world is ready for a Bitcoin Exchange Traded Fund (ETF) as it seems like most of the SEC bitcoin ETF criteria have been met.

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