Five Reasons the SEC Should Approve Bitcoin ETFs

If President Joe Biden’s nomination of Gary Gensler to lead the Securities and Exchange Commission is confirmed, Gensler should act swiftly to get the agency’s staff moving toward approving a Bitcoin exchange-traded fund, showing that the U.S. not only understands cryptocurrencies but is looking to protect investors and put the country on a level playing field with the rest of the world. This move is long past due.

The SEC is seen as dragging its feet unnecessarily on the issue of approving ETFs that focus on cryptocurrencies. An informal Twitter poll I recently conducted found that almost 80% of the 2,192 people who responded believe the SEC should approve a bitcoin ETF. About 50% would invest in one. I’ve been doing these polls for years and this is the highest by far in favor of approval.  

My poll lines up nicely with a Bitwise survey of financial advisors. In that one, 63% of respondents said an ETF was the preferred vehicle to invest in Bitcoin, compared with 16% for directly owning the digital coin and 10% for a mutual fund. People say this not as crypto advocates but as fans and users of the very durable and efficient ETF structure. They would feel the same way if the SEC denied a gold ETF or a China A-share ETF, 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 in Grayscale Bitcoin Investment Trust is Dangerous: Those seeking a U.S.-based investment vehicle for the digital currency are generally left with a bunch of OTC-traded trusts similar to closed-end funds but without the crucial share creation or redemption process offered by an ETF – a feature that allows for arbitrage.

The most popular is the Grayscale Bitcoin Investment Trust, which has grown from $2 billion to more than $20 billion in assets over the last year. If Grayscale was an ETF, it would rank about 50th in size, putting it in the top 2% of all ETFs. Those that bought shares of the trust over the last year paid an average premium of about 18% more than the value of 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 an ETF, investors know they are getting a price that is going to be very close to the underlying asset.

Of course, a Bitcoin ETF would also likely trade at premium, but it would be microscopic compared with where Grayscale trades. It also would not be subject to artificial forces that tend to push the price of Grayscale’s shares lower even if the price of Bitcoin is rising and vice-versa. History shows us that the premium in an ETF would steadily shrink as more and more professional market-makers get involved.
They’ve Worked Fine in Europe: More than 20 cryptocurrency ETFs already exist outside the U.S., mostly in Europe. Exchange-traded notes such as the Bitcoin Tracker EUR introduced in Sweden over five years ago have typically trade at miniscule premiums thanks to the arbitrage allowed by the share creation/redemption process.

Although a U.S. Bitcoin ETF would be a much bigger deal in terms of volume and assets, it would effectively work the same. And although the premiums and discounts to net asset values are wider than most equity ETFs, they are pretty tight all around and much tighter than Grayscale and the like.

The steep run up - and then down - in Bitcoin prices provided a case study in how a U.S. Bitcoin ETF would react to such sharp moves. Looking at the lot of ETFs and ETNs in Europe, most ended Jan. 11 (following a two-day 17.6% plunge in Bitcoin) at a 3% to 4% discount to net asset value. Clearly, the “arbitrage band” was stretched but it didn’t break. Those who wanted to exit, could. Put that in the U.S. with the biggest and best market makers and my guess is that the discount would have been half as much.

There Are Plenty More Volatile ETFs:  Although there’s no precedent for an ETF tracking a digital asset, the SEC has approved vehicles that are arguably more dangerous in terms of volatility. There are about 70 ETFs that are more volatile than Bitcoin. For example, an ETF approved and launched less than a year ago, the Direxion Daily S&P 500 High Beta Bear 3X Shares ETF, has a 60-day standard deviation between 100% and 200% - depending on the month – while the Swedish Bitcoin ETN is between 25% and 100%.

Five Reasons the SEC Should Approve Bitcoin ETFs

It Would Be Obvious What It Is: The risks of a Bitcoin ETF are obvious to average investors, as most have at least some knowledge of cryptocurrencies as being new, alternative and volatile. That suggests it would be less apt to result in a nasty surprise for unknowing investors, which has happened in the past with certain ETFs. One example is the United States Oil ETF, which is akin to a wolf in sheep’s clothing: It has a vanilla name and looks pretty innocent, but it holds futures contracts and most don’t understand how big the costs of “rolling” those contracts can get.

Second, the broader Bitcoin market, which the SEC has said is prone to manipulation and fraud, is becoming more efficient with bigger institutions participating. If anything, having an ETF will speed this along and further help transparency and foster better surveillance of crypto exchanges as they’d compete to attract professional market makers.

No Worries About Remembering Password :  One reason why investors love ETFs is because they are convenient. Any individual investor could replicate any ETF -- they literally tell you what they hold every day – and save the expense ratio, but most investors want the convenience. As an added bonus, investors don’t have to worry about losing passwords to digital wallets; they just need to be able to log into a brokerage account.

And please don’t ask me about the 4.6% that don’t think the SEC should approve a bitcoin ETF but would invest in one if they did. That’s a special kind of person

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Eric Balchunas is an analyst at Bloomberg Intelligence focused on exchange-traded funds.

©2021 Bloomberg L.P.

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