For years, the bitcoin industry has been hoping that the U.S. Securities and Exchange Commission (SEC) would approve ETFs, which would theoretically open the door for more money to flow into bitcoin. Although to date, U.S. bitcoin ETF applicants have received disappointment so far, despite the approval of similar bitcoin ETF products in other countries, such as Canada, which has approved multiple bitcoin ETFs. But with Bitcoin institutional adoption on the rise, could 2021 finally be the year of the Bitcoin ETF? Eric Balchunas, ETF analyst at Bloomberg Intelligence, says he’s more optimistic than ever. In this Q&A, he explains why, and dissects the current situation.
Joe Weisenthal: Eric, for a long time, the bitcoin community has been hoping that it could see a bitcoin ETF approved by the U.S. SEC. No one in the ETF space knows ETFs as well as you do. It feels like the entire industry is watching your work for clues or signs of what’s going to happen. From your perspective, what is the focus of ETFs?
It’s something that no one really knows the full details of unless you’re an SEC insider. But we’ve been fascinated by this story since the Winklevoss Twins first filed for a bitcoin ETF in 2013, so we’ve been trying to provide our shot in real time and keep track of every little stage of what’s going on. I will say that there has been a real shift this year. We’re more optimistic than we’ve ever been.
Joe: What changed your mind? Why does it feel like 2021 is different from 2017 or 2018, when the last bull market played out?
First is the greater institutional adoption of cryptocurrencies and the involvement of money centers. Secondly, you have the dramatic growth of “default” crypto products like GBTC, which is not ideal for retail investors, and the SEC knows that. Ultimately, a number of new bitcoin ETFs were launched in Canada, which worked well, and a lot of action was taken. Canada was always going to be six months to a year ahead of the U.S. in that regard. Finally, [Gary] Gensler became chairman of the SEC. While he does have some concerns, he’s involved in the crypto industry and has offered teaching courses on it at MIT.
Joe: Speaking of Canada, you’ve published a lot about the great success of these initial bitcoin ETF approvals. Can you give some insight into how much demand there is for these products?
Some of the statistics are crazy to say the least. First of all, Canadian crypto ETFs already have C$2.3 billion in assets in three months. Canada’s market is 1/27th the size of the US, which equates to $60 billion here! Furthermore, Bitcoin ETFs have become the largest traded in Canada. There are typically three to four crypto ETFs in the top 20. finally, the recently launched ethereum ETFs have actually seen an increase in trading volume (rare for new ETF launches), which indicates widespread interest. They also have moderate net asset value premiums (OTC trusts like GBTC are facing high negative premiums).
Joe: In the US, regulators clearly have a lot of other things to consider. We’ve learned the whole GameStop / Robinhood story. There are concerns about SPACs and their accounting treatment. There’s a growing discussion about the energy implications of Bitcoin. Now, we have the ransomware attack against gasoline pipelines that just happened in the US. Regulators have too many other things to deal with right now for them to be able to make a decision on bitcoin ETFs right now?
Totally. There are bigger things at hand, and that’s a huge variable that could delay approval. Gensler also notes that “we don’t have the federal government to oversee cryptocurrency exchanges” and doesn’t seem to be entirely happy with the exchanges. That said, I do think that time is of the essence for this issue due to the increase in these “default” ETFs (like GBTC) and the inclusion of bitcoin on the balance sheet. The longer they wait, the larger the scale of cash coming into these instruments when they are approved, and the more confusing it becomes. Likewise, the longer they delay, the more effectively they can play the controller. So, I think there is a risk of waiting too long and I think they understand that.
Joe: Interesting. So you mentioned that Gensler is involved in cryptocurrencies. What does that mean exactly?
He taught a course at MIT on Blockchain Technology and Cryptocurrencies. We studied the course carefully and he knows a lot of stuff, arguably more than most bitcoin investors. He calls fiat currencies “a social structure”, but on the other hand, he’s also very clear that he thinks the crypto market is “full of scams and frauds”. The content of this course provides great insight into his position on cryptocurrencies. For those interested, here’s a link.
Joe: So presumably whatever bitcoin ETF applicant becomes a GLD (gold trust) for bitcoin can make a lot of money (if that analogy makes sense). There are a lot of participants who want to join. Assuming the SEC is eventually willing to approve a Bitcoin ETF, how will it judge the various contenders? Or when and if it gives the green light to allow them all to open up?
That’s by far the most fascinating part of the story. Because who comes out of the gate first is a matter of survival. In Canada, one bitcoin ETF issuer actually had a one-day lead, but ended up taking almost all of the ETF issuance. What we think the SEC is going to do is approve 2-3 bitcoin ETFs at the same time on the same day – probably veteran ETF issuers like VanEck or WisdomTree or Fidelity, not newbies. They then line up the rest of the applicants, like planes on a runway, and release them one by one over the next few weeks. Again, this is just speculation on our part. It makes sense to us, rather than just letting one lucky issuer issue first, or releasing more than 10 ETF issuers on the same day, which could cause confusion.
Joe: But what are the differences when the SEC considers individual applications? Or are they all the same?
There are some nuances, but to a large extent they are all the same (i.e., like GLDs), and the SEC may work with them in advance to eliminate any deal-breaking type differences or missing details. That said, VanEck has also filed for an ethereum ETF, which we think will likely follow the bitcoin ETF.
Joe: You mentioned crypto trading rules as an area where Gensler has expressed dissatisfaction with this. It still feels like this area is more lax than the traditional financial area, such as advertising specific coins. Do you have any insight into what the SEC might see in terms of exchanges?
We recently saw Gensler’s attitude that he views some of these tokens and cryptocurrencies as securities and that he’s interested in cleaning them up since securities fall under the purview of the SEC. He may also be looking for any fraud or potential fraud. We haven’t seen anything directly on the marketing side of things, but the way the SEC has responded to Robinhood could give us some insight into that. That said, crypto ETPs in Canada and Europe have been using these same exchanges for years without any significant issues and with minimal NAV premiums/discounts, suggesting that market makers are able to properly arbitrage ETFs and the underlying cryptocurrencies. We also spoke with market makers and they are not concerned about this. But, Gensler’s point is important.
Joe: The last question is not crypto-related, but what else in the ETF world should people be concerned about right now?
One thing that is emerging, growing, and probably bigger than many people think is the conversion of active mutual funds to ETFs. We saw that happen for the first time a month ago, and it’s happened again since then, and big fish like DFA are also being looked at. Since mutual funds have about $18 trillion in assets in the U.S., this will be interesting to watch. Some of them will convert. Some will not. The question is how much?
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/bloomberg-etf-analyst-bitcoin-etfs-likelihood-of-being-approved-this-year-at-an-all-time-high/
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