Is a Bitcoin ETF Destined For Failure?

Bitcoin  •  Digital Currency  •  SEC  •  Virtual Currency

bitcoinFor the last three and a half years, the Securities and Exchange Commission (“SEC”) has been considering whether to approve placement of the Winklevoss bitcoin ETF (“COIN”) on the Bats exchange. However, the SEC’s inaction will end by March 11th, which is the SEC’s deadline to either reject COIN, or have it be automatically approved due to the SEC’s inaction.  An approval of COIN would likely be a game changer for both the digital currency and the global financial markets, and could cause hundreds of millions of dollars flow into it in the first week alone from traditional investors who have remained on the sidelines.  Were traditional investors to jump in, quantitative analysis and value research firm Emerita Capital estimates that the price of bitcoin could skyrocket, to as much as $3,678 if it is approved.

Of course, if it not approved, the price could plummet to $551, which is half of its current price.  Many analysts, from Needham & Company, to Willy Woo, to Emerita Capital, currently predict the digital currency is simply too volatile for the SEC to approve COIN, and prediction markets have fluctuated between a 24-40% likelihood of SEC approval, but they fell to 18% yesterday before climbing back to 24% today.  No one is particularly sure what caused the drop, though some believe it may just be due to the volatility of bitcoin as a currency.  And, the reasons cited by others that COIN is likely to be rejected by the SEC remain the same: (1) it is not safe enough; (2) the market is not big enough; (3) the price remains extremely volatile; and (4) the SEC may feel that its inability to control bitcoin would hamper its main job of protecting consumers.  Of particular concern is that the market may be too small to absorb so many additional investors upon the approval of COIN, and could instead create a bubble.  And, the SEC may want to wait for more guidance from the new administration to decide what direction it wants to take with respect to bitcoin before approving COIN.

However, there is also a case to be made that the SEC may be just bold enough to approve COIN.  First, bitcoin has improved by leaps and bounds over the past three and a half years on two of the above fronts (safety and volatility).  Two factor authentication and cold storage have vastly increased the safety and security of bitcoin since the digital currency came on the scene eight years ago.  The strength, stability, and resilience of bitcoin have also been borne out by the markets despite several scandals over the past year.  Moreover, Japan and Singapore’s financial markets have continued to deepen their involvement in bitcoin exchanges, with a bill set to go into effect in Japan legalizing bitcoin as a method of payment and implementing certain regulations.

While on balance it is likely that the SEC will reject COIN before the March 11 deadline, other bitcoin ETFs are still in the pipeline, so the SEC’s decision is not a make or break event for the digital currency.  With the new administration signaling plans to cut regulations left and right, and installing pro-bitcoin nominees in the cabinet and other areas of government, there are plenty of reasons for bitcoin enthusiasts to be optimistic in the long term, even if they may not be successful in the short term.

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