Investors in bitcoin have had two things to get particularly excited about of late: the prospect of the first bitcoin exchange-traded fund coming to market, and the digital currency‘s massive 2016 gain, when it more than doubled in value.
But whether those gains hold may depend, in part, on whether the ETF is approved.
Commodity-based ETFs—which a bitcoin ETF would likely be deemed as, given that both the IRS and the U.S. Commodity Futures Trading Commission classify bitcoin as a commodity rather than a currency—are typically structured as grantor trusts, and they have to hold the underlying commodity to cover a portion of their assets. If a bitcoin ETF saw heavy inflows, that would require the fund provider to purchase bitcoin, and that demand could lead to a spike in prices.
Spencer Bogart, a bitcoin analyst at boutique investment bank Needham Co., on Tuesday wrote that the launch of a bitcoin ETF would, in the first week alone, lead to an influx of $300 million in new investor capital into the bitcoin ecosystem. Such inflows could expand the cryptocurrency’s size to nearly $15 billion. By comparison, that is about $1 billion more than the market capitalization of Twitter Inc.
The Securities and Exchange Commission last week designated March 11 as the date by which it would either approve or disapprove the Winklevoss Bitcoin Trust ETF. Tyler and Cameron Winklevoss, who run Winklevoss Capital, first announced plans for one in 2013; the pair also run both WinkDex, a bitcoin price index, and Gemini, a bitcoin custodian and exchange.
A spokesman for the SEC declined to comment, while a spokeswoman for Winklevoss Capital couldn’t immediately be reached.
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There is little historical precedent to gauge what impact an ETF launching could have on the price of the underlying asset, as bitcoin would be the first asset to trade in an ETF wrapper before being offered as a mutual fund. Currently, registered investment advisers are unable to directly buy bitcoin for their clients.
Some analysts pointed to the launch of a popular gold ETF, which helped to bolster the price of the underlying commodity, as a possible example of how bitcoin might perform.
However, the SPDR Gold Trust
which was launched in 1994, isn’t a perfect analogy, as investors had other avenues—including futures and bullion—to get exposure to gold.
Still, some argue that “the launch of gold-based exchange-traded products democratized access to physical gold in a way that few other inventions or technologies ever had before,” said Ben Johnson, director of global ETF research at Morningstar. “Individual investors were suddenly able to get access to physical gold, and that widened the circle of the prospective ownership base for the commodity. Any time you see an influx in demand, basic economic logic indicates that prices will go higher.”
According to data from the World Gold Council, the top 15 physically backed gold-based exchange -traded products, which include ETFs, held 2.14 tons of gold, as of the end of 2016.
Johnson said he was dubious that an ETF would have a long-term impact on bitcoin prices, but he said that “what’s inarguable is that a bitcoin ETF would widen the circle of investors who hitherto haven’t been able to invest in bitcoin directly. Whether that means anything for price discovery…well, who the heck knows what drives day-to-day moves in cryptocurrencies.”
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Should the ETF be approved, it would go a long way toward promoting the mainstream acceptance of bitcoin, and signal a detente between the bitcoin community and its regulators. Bogart and Jake Smith, an account manager at bitcoin.com, believe this would also help support the price in the long term by eliminating some of the stigma surrounding cryptocurrencies, which many still view as risky and unstable.
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Approval would be “a great stride toward bitcoin’s mainstream acceptance, perceived soundness and regulatory approval,” Smith said.
He also noted that a bitcoin ETF would open the doors to retail investors allocating some of their retirement savings to bitcoin.
Despite that, approval of the ETF is far from certain. Bogart said the probability was “very low.”
“To be clear, we don’t see any specific reason to disapprove the Winklevoss Bitcoin ETF but, instead, think that the confluence of fear, uncertainty and doubt coupled with basic incentives at the SEC will make it very difficult to get approval,” Bogart wrote to clients.
In its brief history, regulators and the digital-currency community have mostly been at loggerheads. Bitcoin advocates blamed the New York State Department of Financial Services for stifling innovation in the space by requiring companies providing bitcoin-related services like trading to apply for a bitlicense, without which they are prohibited from operating in the state.
“Through smart and careful regulation, New York State continues to flourish as a virtual currency leader in the global marketplace,” said a representative for NYDFS. “The Department of Financial Services will continue to encourage the development and long-term future of this growing industry.”
Late last year, the IRS issued a summons to coinbase, a popular cryptocurrency exchange, demanding it turn over client records, provoking outrage and speculation about a protracted legal battle.