What will happen to top cryptos if the SEC approves Bitcoin ETF?
Bitcoin’s metaphorical head would explode. The price would shoot up immediately, before the ETF is open for business, simply from speculators. This is not “buy the rumor, sell the news” stuff where the price rises until the announcement and then tanks, as we so commonly see in stocks. This is a totally different situation, because you’re opening up an ocean of passive investment capital into a teeny, tiny pond.
Once the ETF is open for business, it will end up a small part of all professionally-managed aggressive investment portfolios and many DIY investor portfolios.* It’s an uncorrelated asset that sometimes booms, and keeping a small portion of your capital in an ETF is an easy way to get the benefits of bitcoin without having to do KYC/AML, without having to set up a wallet, without having to actually own bitcoin, without worrying about somebody scamming you. Put .5 percent of your money in the ETF and next time it booms, you can take some profits. If it all goes to shit, you don’t worry about losing .5 percent or less of your portfolio. You can lose more in the stock market any given week (often, in a day). And, unlike ETFs that speculate on boring things like wheat and cotton and nickel and euros and collateralized debt obligations, bitcoin’s ETF will attract casual investors who will “throw a few shekels” into it just because they heard from a friend or saw on the news that you can make money from bitcoin.
All that BEFORE considering what your average person will do when the price goes skyrocketing. This is really unpredictable but I suspect you’ll have 2017 FOMO all over again, with people all over the world buying some bitcoin directly (not through ETF). Except, unlike the 2017 explosion, we now have more people who know about bitcoin, use bitcoin, and did KYC/AML to set up bitcoin wallets linked to their bank accounts. Not just US, but all around the world. I expect the next boom will be insane, simply insane. I mean, look at this classic “anatomy of a bubble” chart:
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We’re in the awareness phase with our first sell-off that people had heard about (not the previous sell-offs that happened before bitcoin became a “thing”). Can you imagine what would happen if a bitcoin ETF propelled us into the mania phase?
Maybe that FOMO won’t happen…tough to predict. Maybe other factors will carry us into the Mania phase — e.g., Bakkt, alt-coin breakthrough, IBM/XLM combo, Lightning Network, crypto businesses…but suffice to say, a bitcoin ETF will lead to bitcoin’s price going up, possibly significantly. It will also bring a lot of liquidity into the market, which will reduce daily volatility over the long term (not short term).
Is SEC likely to approve a bitcoin ETF? SEC exists to protect investors, not decide what investors can invest in. There’s an ETF for pretty much everything — euros, CDOs, tungsten…it’s tough for them to say no to an insured, compliant bitcoin ETF with adequate custody, information transparency, and investor safeguards, but allow ETFs for oil and cobalt and other assets that are just as compliant and see just as much volatility, sometimes more depending on what specific time-frame you’re looking at. Also, the SEC commissioner wants to approve a Bitcoin ETF. SEC Commissioner: Bitcoin Is Regulated And Mature Enough To Have An ETF
That doesn’t mean ETF approval is a slam-dunk. I expect SEC will reject some ETFs and delay approval of all the ETF proposals in front of it. It’s probably not a pro- or anti-bitcoin thing, but simply the reality of the US’s federal decision-making process. I know, I work in the policy office of a US government agency. Not affiliated with SEC but, if the SEC takes its job as seriously as my agency’s leadership, it will need more time to weigh its decision. This is such a non-traditional asset — it’s not like approving an ETF for gold or euros. Those were well-established commodities with lots of market participants. Bitcoin is new, unproven, and relatively small compared to other markets (e.g., the $7 trillion gold market or more than $1 trillion worth of euros in circulation). There’s a lot of risk in exposing investors to such a small market — e.g., manipulation, unfair trading practices, low liquidity.
Also, it’s not realistic to expect any federal bureaucracy to intake and review public comments in 45 days, especially with the massive number of responsesthis recent proposal received. Even 135 days is tough. Bitcoin ETF is one of many important decisions in front of the SEC (just look at the SEC Proposed Rules, Orders/Notices, and Enforcement Actions). In the grand scheme of things, it’s not that big a deal compared to the trillions and trillions of dollars worth of other types of investments they deal with.
On top of that, SEC officials need time to consult with stakeholders and other federal agencies affected by their decision. It takes time to schedule meetings, gather input and research, and do so in a way that’s honest and respectful and makes people feel like their opinions are truly valued, not collected a a perfunctory public-policy exercise. You want to make good decisions that have support of stakeholders, or at least clear rationale for your decisions. Wouldn’t you want that from your government? It takes time to do that well. SEC doesn’t exist in a vacuum and millions of people are affected by its decisions, even small ones.
That said, even if SEC rejects all bitcoin ETFs as currently proposed, somebody else will succeed eventually. Each failure is a learning opportunity and there are many rich, well-connected people who want a Bitcoin ETF and will continue to press the SEC to allow one.
*Assumes ETF’s minimum shares are small enough to allow small investors. CBOE’s VanEck/SolidX proposal, for example, requires 25 bitcoin minimum share, making it inaccessible to small investors. If that’s the only ETF approved, then bitcoin will end up a small part of all big professionally-managed aggressive investment portfolios and few DIY investors. But that will be enough to send the price higher, probably significantly higher, and sets the precedent for new ETFs geared for smaller investors.