Green light for Bitcoin ETFs?

Update : The SEC has now issued a ruling.

By March 11 at the latest, the US Securities and Exchange Commission (SEC), similar to the Dutch Authority for the Financial Markets (AFM), must make a ruling on a rule change that is needed to give the Bitcoin ETF of the Winklevoss brothers the green light. to give. The application for the proposed rule change has been pending since June 30, 2016, and should allow the Winklevoss brothers’ ETF to be traded on the Bats international trading market.

The Bitcoin fund of the Winklevoss brothers is the best-known fund that wants to take off if the rule change goes ahead. The separate application for this has been running since 2013. The fund will use COIN as a ticker .

In addition to the application for the COIN ETF, there is also an application for the SolidX ETF, a similar fund. A ruling will be made on March 30 on the rule change needed to make this ETF tradable on the New York Stock Exchange Arca (NYSE Arca). Barry Silbert ‘s Bitcoin Investment Trust ( BIT ) also wants to trade as an ETF, and the application for this is also pending.

If the rule changes and the various ETFs are approved by the SEC, it will be a big step for Bitcoin’s legitimacy. The COIN ETF makes it possible for investors worldwide to take a share in bitcoin from their investment accounts.

Exchange traded fund

The so -called exchange-traded fund (ETF) allows investors to invest in bitcoins through a publicly traded fund. The units of an ETF can be traded throughout the day, just like stocks. Each ETF tracks an index, they are also known as index followers or trackers . In the case of the COIN ETF, this will probably be the Tradeblock index, which consists of a weighted value of the price on the exchanges GDAX, Bitfinex, itBit, OKCoin and Bitstamp. Update: The index that the COIN ETF will track will most likely be the price set by the daily auction on the Gemini exchange, a platform also set up by the Winklevoss brothers, or the Winkdex index.

The fund will start with 10,000,000 shares, of which the underlying value of each share is represented by 0.01 bitcoin. So the price of a single share will be around one-hundredth of the price of an entire bitcoin on the mainstream markets.

How exactly does the ETF work?

When the fund is approved by the SEC, so-called authorized participants will be able to create shares of the ETF and make them tradable on investment platforms. The authorized participants do this by buying bitcoins, for example on the open market or from individuals, and sending them to the Gemini Trust Company . Authorized participants are usually large institutional organizations specialized in providing liquidity to financial markets. The Gemini Trust Company is a trust of the Winklevoss brothers, which functions as the custodian of the underlying bitcoins. The Gemini Trust stores these bitcoins in cold storage.

The authorized participants serve as market makers . They ensure that the price follows the price of the index (and therefore the underlying good) as closely as possible. When the demand for a share increases and the price threatens to exceed the index, an authorized participant creates new shares to push the price back to its true value. When there is too little demand and the price threatens to fall below the true value of the good, the authorized participants buy up shares. They can exchange these for actual bitcoins at the Gemini Trust and then sell them on the open market.

By playing with supply and demand, the authorized participants ensure that the price of the ETF follows the index price and that sufficient liquidity is available in the ETF. At the same time, the authorized participants profit from the arbitrage opportunity they have between the ETF and the open market.

Approval

It remains to be seen whether the fund will be approved. A hard fork clause has been added in the latest amendment to the application. There has been a lot of criticism of this addition, as it is unclear which chain the fund will hold in the event of a hard fork.

If Bitcoin were to split into two different chains, two different coins would also be created – each with its own value. It is important for the ETF to keep the “right” coin as the underlying asset in such a scenario. However, it is often subjective what the “right” coin is, so a wrong decision can potentially have negative consequences for investors. The application may not be approved yet, as the SEC wants to see this scenario fleshed out.

In addition, the SEC has expressed doubts about the extent to which it will be able to provide liquidity for the ETF. There is only a limited number of exchanges in America where it is possible to buy bitcoins. In addition, the liquidity on those exchanges is often low. This makes the market susceptible to manipulation, something the SEC naturally guards against. The SEC therefore asked the public for input on this topic.

On the other hand, it is positive that no adjustments have been made to the application after the last meeting about the ETF. This may mean that the SEC is satisfied with the input that has been provided and they are now moving on to a decision.

Thanks to Roy van Zanten

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