Bitcoin ETF, long considered a pipe dream of hardcore cryptocurrency enthusiasts, seemed to be on the verge of materializing earlier this year amid a broad-based crypto rally, which was spurred by Tesla’s (NASDAQ:TSLA) decision to accept payment for its EVs in Bitcoin (BTC) and accumulate a $1.5 billion stake in the leading cryptocurrency.
Alas, the rip-roaring crypto rally ended in a bloodbath this month as Elon Musk criticized the Bitcoin network’s energy consumption, using it as a precursor to reverse Tesla’s endorsement of this novel payment medium. The final nail in the proverbial coffin came as China initiated and then deepened its crackdown on cryptocurrencies over the past few days, in effect completely banning the mining of Bitcoin and other crypto tokens. This crackdown then led the crypto exchange Huobi to restrict certain amenities, including its mining hosting services. Obviously, the Chinese Bitcoin hashpower, which accounted for around 70 percent of the overall hashrate for mining Bitcoin in early May, is now widely expected to relocate offshore. Given these seismic changes in the crypto panorama, it is hardly surprising that Bitcoin collapsed by over 50 percent last week relative to its all-time high, precipitating a similar swoon in the broader crypto sphere.
Before discussing the implications of this price action on the prospects of a Bitcoin ETF, let’s first review what exactly it entails. An ETF is simply an investment vehicle that is listed on a stock exchange – hence, it bears a unique ticker symbol – and which tracks the price of an asset or a group of assets. Crucially, investors in an ETF do not own the underlying asset but still benefit from the two-way price action given that an ETF can be shorted even if the underlying asset can’t be.
This brings us to the crux of the matter. Bitcoin proponents have long called for a dedicated ETF as it would expand Bitcoin’s reach and influence in the financial world, attracting a host of new investors who are currently intimidated by the complex process of acquiring cryptocurrencies on unregulated exchanges. The ETF would also eliminate the need to securely store one’s Bitcoin stake in order to gain exposure to the cryptocurrency’s price performance. However, given Bitcoin’s legendary volatility, this seems impossible for now. Bear in mind that crypto penetration has exploded over the past few months, with 46 million Americans now owning some exposure to Bitcoin. As this base continues to grow, the sector’s intrinsic volatility should continue to decline. However, we are not yet at a stage where this volatility meets the comfort threshold of the SEC. Some may argue that we already have Bitcoin futures. True, but then these securities are mostly traded by professionals. Since a Bitcoin ETF lowers the threshold of eligibility, roping in even mom and pop investors, the SEC is likely to apply a more stringent approval criterion. Besides, the Futures market is regulated by the CFTC and not the SEC.
Readers should note that ARK Invest’s Cathie Wood noted last week that Bitcoin’s price correction actually improves the odds of an ETF. I would respectfully disagree. While this correction has restored a balance to its former nosebleed valuation, Bitcoin is still extremely volatile on an intrinsic basis – a point that the SEC is likely to consider far more important than a supposed valuation mismatch. Therefore, we may have to wait another year or two for the Bitcoin ETF to become a reality.