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Will 2019 Be the Year of the Bitcoin ETF?

As we have often opined before, there is often no sense in investing in most active crypto funds (and arguably in active funds in general). All you are paying for is market beta most of the time. If you really do not want to be hassled with the complexities of even opening up an exchange account, the best thing you should do is invest in a passive fund with low fees.

2019 looks likely to be the year that we might finally see the launch of a Bitcoin ETF in the US, and the race to launch the first ETF is getting more interesting.

Bitwise, an operator of cryptocurrency indices, is the latest to file an application with the SEC for the launch of an ETF. Not long ago, the prospect of an ETF would be the occasion for a mild rally in the crypto markets, on the expectation of increased mainstream investor interest. However, these expectations continue to be pipe dreams for now, as the SEC, erring on the side of caution, has so far rejected all such applications. The SEC cited lack of market depth and price discovery, including potential market manipulation by whales as reasons behind its rejection. According to a press release accompanying the newly filed form, the firm’s proposed Bitcoin ETF reportedly differs from other previously proposed Bitcoin ETFs in that it draws prices from a variety of crypto exchanges, with the aim of better representing the market.It is important to note that as opposed to outright rejections, the SEC has typically kept kicking the can down the road with frequent deadline extensions. It has specifically left the door open for continued engagement with some of the leading applicants, such as the Van Eck ETF and the Winklevoss twins, and has even suggested changes in the application in a couple of cases, to make it more likely to eventually sail through the SEC’s own regulatory filters. This is a positive, and indicative of a fundamentally progressive underlying approach to crypto regulation, similar to regulators in many other developed nations such as Singapore and Hong Kong. We have looked at crypto regulations in the past on a couple of occasions, here and here.  Bitwise’s Bitcoin ETF reportedly also differs from other applications in that it would require regulated third-party custodians to hold its physical bitcoin. With a growing number of traditional custodians ramping up support for cryptocurrencies, we feel that the case made by Bitwise’s ETF application is stronger than other previous applications in terms of asset custody, one of the areas that the SEC had expressed concerns about. It remains to be seen if the SEC will find Bitwise’s latest proposal, with better asset custody design and a more reliable price discovery mechanism adequate enough to finally approve an ETF at some point in the next couple of quarters.

It is perhaps worthwhile to reflect on how strangely things have turned out here. What started as a fringe, underground, technological movement, intended to upend existing structures of finance, has instead been adopted and subsumed into the heart of mainstream finance and the relentlessness of the Wall Street machine. Wall Street has always viewed crypto, as it was always likely to in any case, almost reductively, as an asset class and as a tradable commodity that it could sell as-it-is plain vanilla, as well as in fancy packaged structures. Ultimately Wall Street does what it does. And that is not necessarily a bad thing. The final culmination of this process, the rounding of the circle, will be the approval of a crypto ETF, that most traditional of structures. At this point, crypto would truly have arrived.

Meanwhile in Crypto Wonderland….

“Gibraltar Grants 5 Crypto Licenses” 5 crypto exchanges have been granted licenses to operate in Gibraltar since the Digital Ledger Technology (DLT) Regulatory Framework went into effect in January 2018. According to Gibraltar’s trade minister, Albert Isola, the government is now focused on creating a “supportive environment” for the sector. The regulations are designed to attract companies from the cryptocurrency and blockchain industry while ensuring proper protection for customers’ interests and maintaining Gibraltar’s own reputation.

“7/21 Exchanges Pass Korean Government Audit” Only a third of cryptocurrency exchanges inspected got a full pass in a recent government security audit. A panel of ministries and government bodies inspected a total of 21 crypto exchanges from September to December 2018, examining 85 different security aspects. Only 7 of them – Upbit, Bithumb, Gopax, Korbit, Coinone, Hanbitco, and Huobi Korea – cleared all the tests. The remaining 14 exchanges were “vulnerable to hacking attacks at all times because of poor security”

.“NYC Opens New Blockchain Center” After recently launching a new crypto-focused task force, New York City is now doubling-down on crypto despite the bitcoin bear market. The NYC Economic Development Corp. opened a 4,000-square-foot Blockchain Center on Thursday with partners such as Microsoft and IBM. The Blockchain Center is located in the trendy Flatiron district in downtown Manhattan. It joins other crypto and tech startups that populate New York’s Silicon Alley tech hub.

“Seed CX Launches Digital Asset Wallet” Crypto exchange Seed CX — a Chicago-based licensed platform targeting institutional clients — has launched a digital asset wallet solution with on-chain settlement together with its settlement subsidiary, Zero Hash — a crypto and fiat currency custodian providing on-chain settlement services. Zero Hash reportedly has FinCEN’s regulatory approval to operate as a money transmitter across 25 American states, and is also under review for a prospective BitLicense from the New York State Department of Financial Services (NYDFS).

“UK Blockchain Startups Bloom in 2018”According to figures published by the UK’s London & Partners and Pitchbook, British tech firms raised a total of GBP 2.49 billion in 2018, down from GBP 3.12 billion the previous year. Meanwhile, cryptocurrency and blockchain startup companies achieved record growth last year, with British firms receiving over GBP 200 million in venture capital funding. This is a jump by an order of magnitude from just GBP 19.11 million raised in 2017, and quadrupling the 2016 figure of GBP 51.96 million.

Crypto Twitter Pick

What We’re Reading / Listening To

Two sides of the coin: The bifurcated near future of money by Arthur Hayes
The Ethereum Classic 51% Attack: How It Happened and Why the Price Didn’t Crash
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