A Time of Reckoning for Bitcoin ETFs

Approximately twenty months after it first listed a multitude of concerns as reasons for its refusal of a Bitcoin ETF, the SEC has come to the same moment of reckoning.

The next couple of weeks are critical for Bitcoin ETFs as the agency takes a decision on applications filed by New York-based Wilshire Phoenix and San Francisco’s Bitwise Asset Management. The prospects of approval for either (or both) are better this time around.

A Shift in Narrative

The main reason for this is a shift in the narrative about cryptoassets from 2017. The hype and mania surrounding cryptocurrencies has dampened considerably. Trading volumes are down and the market for initial coin offerings (ICOs) which became a popular form of fundraising to accompany swelling crypto valuations is all but dead. Shrill rhetoric about the world-changing capabilities of blockchain and cryptocurrencies is also muted. Bitcoin itself is trading at roughly half its peak price from December 2017.

The crypto ecosystem has matured during this “trough of disillusionment”. A concerted effort is underway from industry participants to clean up their act and prove the viability of cryptoassets as an investment asset for institutional investors. For example, Bitwise produced research that claimed 95% of total volume for crypto exchanges is fake earlier this year. Institutional investors, key to ensuring the stability of crypto markets, are moving in.

Bakkt, which claims to be the world’s first end-to-end regulated platform, launched this week with daily and futures monthly contracts. The futures platform is expected to inject more liquidity into the cryptocurrency ecosystem. The Winklevoss brothers-backed Gemini Trust also did its bit and introduced an institutional grade cryptocurrency service. The CME Group reported an increase in bitcoin futures contracts trading and has plans to introduce bitcoin options early next year.  Facebook’s Libra cryptocurrency has instigated a discussion on the uses of crypto in mainstream societies.

The SEC has taken note. The agency’s chairman Jay Clayton, under whose direction the federal agency has aggressively cracked down on suspect ICOs, told journalists that the markets were closer to a Bitcoin ETF earlier this month.

“There’s Still Work to be Done”

But the SEC is still holding the Bitcoin ETF cards close to its chest. “There’s still work to be done,” SEC Chair Clayton told CNBC.

Several negative factors could influence its decision.

The biggest problem facing crypto markets (and bitcoin) is liquidity. While it has increased in recent times, liquidity for cryptocurrencies is still a fraction of that available in mainstream markets.

The introduction of futures trading platforms (and ETFs) is expected to change the situation. But that is still an untested hypothesis in the case of bitcoin. Bakkt’s launch was trumpeted in the media but institutional investors are still to bite the bait. As of this writing, only 92 contracts are being traded on the platform. That figure will hardly make a difference to the overall liquidity numbers for bitcoin.

Crime and scams are a dominant theme in the tangle of crypto narratives. News of SEC crackdowns have highlighted the extent to which dubious characters and criminals pervade the cryptocurrency ecosystem. More recently, crypto seems to have become caught up in the opioid crisis that has gripped America.

Finally, the workings of cryptocurrency markets are still a mystery. As an example, consider the variety of explanations offered for bitcoin’s price movement. They range from technical analysis to retail demand to news developments and, even, the Fibonacci series.

This is partly to do with Bitcoin’s technology antecedents. The simple economics of supply and demand that explain workings of most commodities fail in the case of bitcoin. Instead, a stream of complicated technical jargon obfuscates, rather than illuminating, its workings. In turn, this has affected public perceptions of the cryptocurrency as an asset class.

Not surprisingly then, a recent survey by Barron’s to the National Association of Personal Financial Advisors network received “mostly hostile responses and a few positive ones.”

“We have no interest in Bitcoin in any form, ETF or otherwise. It’s a waste of time, and pure speculation. With a bit of knowledge, one would have better odds in Las Vegas,” wrote Bob Kargenian, president of Orange County’s TABR Capital Management, to the magazine.

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