BNC Research: The what, why, how and when of a Bitcoin ETF

There have been multiple proposals for a bitcoin exchange-traded fund (ETF) in the US submitted to the SEC over the past three years, but so far none have been approved. The latest submission, from Bitwise, was rejected on the grounds that the ETF did not adequately protect investors from market manipulation.

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THE BITCOIN ETF: The what, why, how and when

A Bitcoin ETF continues to elude the US public, but does the market really need one and what are the mechanics behind ETFs and what are the implications for digital assets?

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However, it is also important that investors educate themselves about the mechanics of exchange-traded-products generally as they come with trade-offs over holding the underlying asset outright. Also, the benefits of making a ‘paper’ derivative of a digital asset has not been widely discussed beyond the promise of more liquidity.

In this report, we look at the structure of exchange-traded products (ETPs) in the legacy and crypto markets. We also assess the implications of a bitcoin ETF, its pros and cons, and whether creating a paper derivative of a digital asset will bring any extra utility to Bitcoin at all.

The Process of creating a traditional ETF

The most obvious benefits to retail investors are tax-compliant crypto investing and perhaps 401k inclusion; and for institutional investors it could provide the deep liquidity needed to exit and enter without going over-the-counter (OTC).

The SEC is primarily concerned with the risks to retail investors due to the potential for market manipulation and a lack of market oversight. These concerns have yet to be adequately addressed by an ETF sponsor. This is a difficult issue to solve due to the jurisdictional distribution of crypto exchanges, which inhibits visibility into the trading that occurs there.

However, at the end of October, in Canada, the Ontario Securities Commission (OSC) allowed crypto fund manager 3iQ to issue a prospectus for its prospective exchange-traded Bitcoin fund, signaling that Canada’s counterpart to the SEC may approve North America’s first Bitcoin ETF.