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Cryptocurrency Derivatives Series: Dipping Hopes For Bitcoin ETFs But Their Benefits Suggest “Not Off-The-Table”

Of-late, the cryptocurrency exchange-traded funds (ETFs) are branded as the trump card by many aspirants of the crypto-avenue who carry great deal of optimism that exchange-traded funds likely to stimulate cryptocurrencies with more authenticity in retail and institutional investors’ perspectives.

However, the entire cryptocurrency industry has seen in a struggle ever since the U.S. SEC (Securities and Exchange Commission) declined the Winklevoss twins’ attempts of launching a bitcoin ETFs. The latest submission, from ​Bitwise​, was rejected on the grounds that the ETF did not adequately protect investors from market manipulation. 

There have been some considerable benefits of these bitcoin exchange-traded fund (ETFs), that are still lingering around the corner. We have discussed some very important ones in this write-up.

Liquidity: Bitcoin ETFs are a hot topic in the crypto community because proponents believe they will bring a host of benefits to the ecosystem. One of the most anticipated changes is the improved liquidity that a Bitcoin ETF would bring. At present, the majority of Bitcoin trading is conducted against the Tether USD stablecoin (USDT). Whilst each USDT is supposed to represent one underlying dollar, investors, especially financial institutions, may be wary of using such a vehicle due to concerns around the company that holds the USD. 

A Bitcoin ETF would allow investors to gain exposure to the Bitcoin market using fiat in the same way that other ETFs are bought into. This enables investors that were previously put off by USDT to enter the market. Additionally, ETFs are much better understood in the investment world than the alternative - buying bitcoin on a crypto exchange. 

Safe-key Storage: One key benefit to this is that buyers of an ETF share do not need to worry about storing their Bitcoin safely, as custody is handled by the ETF. This takes away one of the major obstacles that traditional retail and institutional investors have, and allows the ETF to be traded like any other commodity-backed ETF. 

As such, it is expected that these developments would result in a large inflow of capital from the traditional investment world. An investor would simply need a brokerage account to be able to purchase shares in the ETF and having a more traditional on-ramp would likely broaden who this type of investment appeals to. For example, hedge funds could now speculate with ease on the movements of the bitcoin market, whilst pension funds could invest as a hedge against uncertainty in the equity market.

Assets kept On-shore: A secondary benefit of permitting a Bitcoin ETF is that it would help to keep assets ‘onshore.’ Because cryptocurrency exchanges are frequently subjected to stringent requirements which may be hard to comply with, many engage in what has been referred to “regulatory arbitrage” - the act of moving to a jurisdiction where the regulatory requirements are light. As a result, investors that wish to purchase cryptocurrency have to send money off-shore to be able to purchase from these exchanges. Typically they are based in small island nations with relaxed financial laws, such as the Cayman Islands, Gibraltar, Malta, or Seychelles.

By allowing a Bitcoin ETF to be established, investors that want to purchase Bitcoin can buy a share in the Bitcoin ETF, rather than sending money off-shore. This is beneficial because it allows for better visibility and taxation of investor assets, and improved security of investor assets as the custodians of the ETF would have custody insurance. It would also clarify the tax process for investors who want to hold crypto in a tax-compliant manner. 

Tom Lee of Fundstrat has been quite reluctant about bitcoin, but in a recent interview, he says that the space is way too small for a bitcoin-based exchange-traded fund (ETF) to work.

However, bitcoin ETFs are inevitable, though the timeframe is unknown. The SEC’s key concerns are around market manipulation and these concerns have yet to be adequately addressed by any of the bitcoin ETF sponsors. This issue is largely structural in nature as a large amount of trading volume is, and is likely to remain, offshore in jurisdictions with loose financial laws, beyond the gaze and authority of the SEC. The situation may be resolved if US institutional bitcoin trading platforms, such as BAKKT and CME bitcoin futures, are able to obtain a level of volume that satisfies the SEC’s surveillance requirements. Courtesy: BNC

By Niranjan Patil
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