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You Still Can’t Buy the Bitcoin ETF
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You Still Can’t Buy the Bitcoin ETF

Bitcoin ETF fail.

Right now if you want to buy Bitcoins, you mostly have to buy Bitcoins. Presumably a lot of people who want to buy Bitcoins want to buy Bitcoins, but a lot of people don’t. A lot of people, that is, want to buy Bitcoins, but they don’t want to set up their own Bitcoin wallet or remember their private key or give their credit card number to some shady foreign crypto exchange or deal with the various other headaches inherent in the actual ownership of Bitcoins. Some of those people can buy Bitcoins without buying Bitcoins by buying Bitcoin futures, which trade on big regulated U.S. exchanges. But Bitcoin futures are expensive a contract is five Bitcoins at CME Group, one at Cboe, and a Bitcoin is currently trading at almost $8,000 and some people don’t want to be bothered with futures contracts. They just want to buy Bitcoins in their brokerage accounts, their retirement accounts; they want to buy Bitcoins like they’d buy a stock.

I have asked, in the past: Why? I think it remains a good question. If you’re buying Bitcoin like a stock through your broker, it seems to betray a lack of confidence that Bitcoin will displace the traditional financial system. But that is I suppose a pedantic concern, and plenty of people might think that Bitcoin is a good investment (or speculation) without thinking it is actually a good system for storing their wealth.

The natural product for those people would be a Bitcoin exchange-traded fund: A pot buys some Bitcoins, it sells shares in the pot, and the shares trade on a stock exchange with a price that tracks the price of Bitcoin. If more people want to buy shares, arbitrageurs can create those shares by buying Bitcoins and delivering them to the pot in exchange for shares; if more people want to sell, then the arbitrageurs can deliver shares to the pot, get out Bitcoins, and sell them. It works for stocks, and bonds, and abstract concepts like volatility; why not have an ETF for Bitcoins?

The Winklevoss twins have been pushing a Bitcoin ETF, which would trade on the Bats exchange and would be linked to Bitcoin trading on their own Gemini exchange, for a while now. They got turned down by the Securities and Exchange Commission last March, and they tried again, and they got turned down again yesterday.

The SEC’s decision is pretty unedifying. Basically it asked Bats (which would have listed the ETF), what if Bitcoin prices are manipulated? And Bats said, well, it’s pretty hard to manipulate Bitcoin prices. And the SEC said, well, you haven’t really proven that to our satisfaction. It’s not that the SEC has any evidence that Bitcoin prices are manipulated, or even any belief that they would be easy to manipulate. (Though it does mention that recent paper examining Tether and Bitcoin.) It’s just that Bitcoin trades on a lot of unregulated under-policed venues, and the SEC doesn’t really trust them, and Bats and the Winklevosses didn’t do enough to assuage that mistrust.

It is tempting to say: So what? Let’s say Bitcoin prices are manipulated. Then if you buy Bitcoins through the Winkle-ETF, you will get a price that doesn’t reflect fundamental supply and demand for Bitcoin. That’s bad! But if the SEC bans the Winkle-ETF, then you’ll have to buy Bitcoins on some unregulated under-policed venue (or, yes, fine, Gemini, or some other fairly regulated U.S. venue), and you will also get a price that doesn’t reflect fundamental supply and demand—because, the hypothesis is, Bitcoin prices are manipulated—and also you’ll have to worry about the exchange being hacked or generally being unregulated and under-policed. The ETF is better, even if it is not objectively good.

(Also there is a good argument that the ETF will improve the ecosystem and make manipulation less likely: If the ETF is big and popular, then market makers will arbitrage it, and it will drive demand, and Bitcoin will be harder to manipulate just because there will be more volume coming from real economic demand. There is an alternative argument that the ETF will make things worse and make manipulation more likely, since it and its mechanism of using the Gemini auction to set prices will be a big target for manipulators to shoot against. Both of these arguments are fairly theoretical, though, as the SEC never claims that any actual manipulation is going on or explains how it would work.)

This is a deep tension in a lot of securities regulation, and you see it play out in debates about whether and how to relax rules for companies that go public. There are areas of the markets that are lit up, public, protected; and then there are vast other areas that are dark and unregulated. If you are the regulator in charge of policing the lit areas, you are constantly facing the question: Is it better to let some things into the lit areas even though they are imperfect and risky and not exactly what we want public investors to buy? Or is it better to keep them in the dark, even though investors are going to find a way to buy them there anyway? Do you want to let some bad stuff into the public markets, where at least you can keep an eye on it and try to improve it, or do you want to leave it on the private markets knowing that it’ll probably be worse?

Elsewhere in ETFs, here is a story about how State Street Corp., which pioneered ETFs and still has some of the most recognizable ones (like SPY for the S&P 500 index and GLD for gold), lost its lead and fell to third in the ETF rankings. Part of the problem is this:

To amp up its brand recognition, State Street consolidated all of its ETFs under the SPDR name in 2007, but there was a downside: The SPDR trademark belongs to S&P. When it expanded its use of the name, State Street also extended until 2031 a contract under which S&P gets one-third of the fees paid by SPY’s investors. S&P’s cut alone $3 a year for every $10,000 invested is almost as much as the entire fee BlackRock and Vanguard charge for their comparable funds.

Three basis points on absolutely zillions of dollars for the name and a list of stocks! Every time I read stuff like this I feel like I should get into the index business. I’d happily give State Street a list of stocks for two basis points.

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