The Securities and Exchange Commission (SEC) has denied approval for a proposed exchange-traded fund that tracks the price of the cryptocurrency, bitcoin. Gemini, a bitcoin exchange backed by the Winklevoss twins, who found fame suing Facebook founder Mark Zuckerburg, had applied to list the ETF on the Bats exchange. The SEC decision, citing the risk of fraudulent activities due to the lack of regulation in major bitcoin markets, comes after more than three years of deliberation.
Bitcoin fell 18% after the SEC announcement but is still up 198% in the past year.
The price of Bitcoin against the US dollar fell by 18% to $1,100 on the announcement, although it has since recovered much of the initial fall. Bitcoin has seen a volatile year, with prices as low as $415 in March 2016 before setting a new all-time high of $1,230 this month. The SEC judged that the major markets for bitcoin are mainly unregulated overseas markets that are potentially subject to price manipulation and which would make effective supervision too difficult to implement.
Bitcoin first appeared in a white paper posted on the internet in 2008 by the mysterious Satoshi Nakamoto, which outlined a method of using a peer-to-peer network to create “a system for electronic transactions without relying on trust.” The first bitcoin client came online in 2009, with the first real-world payment being the purchase of two pizzas in Florida for 10,000 BTC, a transaction worth some $12.5m at the current exchange rate. Bitcoin adoption has continued to grow since then and the price of one bitcoin climbed above the price of an ounce of gold for the first time in March this year.
Blockchain, the technology that underpins bitcoin, has long been thought of by many commentators as having the potential to make a much larger impact than the currency itself. The distributed ledger and one-way encryption at the heart of bitcoin remove the need for an intermediary to verify transactions between two parties, with huge potential benefits to virtually any industry where two parties must provide authentication to interact. However, blockchain has so far taken longer to become a commercial success than some hoped, with implementation proving difficult for a technology that, by its very nature, must be readily accessible for it to be useful.
After this latest setback for bitcoin ETFs, it will be interesting to see what happens next as the cryptocurrency continues its uneven path towards mainstream finance. It seems unlikely that the prospect of a bitcoin ETF is entirely dead in the water, especially if its adoption continues at the same pace, and there are doubtless many investors who would welcome easier access to bitcoin.
The effect on the bitcoin price if an ETF does come along remains to be seen – when the first gold ETFs were launched in the mid-2000s, the gold price tripled over the next five years. The current supply of bitcoin is around $20 billion and there are fears that opening up the level of access an ETF would provide could create a significant bubble. A UCITS listing in Europe seems unlikely, however, due to the strict requirements around diversification – a UCITS fund must be made up of no more than 10% from a single issuer
For investors who cannot wait to get bitcoin exposure, there’s already Bitcoin XBT, an exchange traded note (ETN) listed on the Nasdaq Nordic exchange in Stockholm, available in SEK and EUR versions with a slightly eye-watering annual fee of 2.5%.