Five reasons why the SEC should approve a Bitcoin ETF

If President Joe Biden ’s nominee Gary Gensler to lead the Securities and Exchange Commission is confirmed, Gensler should move quickly to get the agency’s staff to approve a bitcoin exchange- traded fund, demonstrating that the U.S. not only understands cryptocurrencies but also wants to protect investors and put the country on a level playing field with the rest of the world. This move is long overdue .

The SEC is seen as dragging its feet unnecessarily on approving cryptocurrency-focused ETFs. An informal Twitter poll I recently conducted found that nearly 80% of 2,192 people believe the SEC should approve a Bitcoin ETF. About 50% would invest in one. I’ve been running these polls for years, and this is by far the highest approval rating I’ve ever seen .

My poll aligns well with the bit-for-bit survey of financial advisors. Of those, 63% said ETFs are the preferred vehicle for investing in Bitcoin, compared to 16% who own the digital currency directly and 10% who own mutual funds. People say this is not about being crypto fans, but rather fans and users of the very durable and efficient ETF structure. They would feel the same way if the SEC rejected a gold ETF or a China A-share ETF, both of which are great examples of ETFs breaking new ground and successfully democratizing a unique asset class.

Here are five reasons why the SEC approves ETFs:

The premium on the Grayscale Bitcoin Investment Trust is dangerous: Investors seeking a U.S.-based digital currency investment vehicle are typically left with a bunch of over-the-counter trusts that resemble closed-end funds but don’t offer the key share creation or redemption processes of an ETF — a feature that allows arbitrage.

The most popular is the Grayscale Bitcoin Investment Trust , which has grown its assets from $2 billion last year to more than $20 billion. If Grayscale were an ETF, it would rank 50th, in the top 2% of all ETFs. Those who bought shares of the trust in the last year paid an average premium of about 18% over the price of Bitcoin, which is historically low. In recent years, the premium has been as high as 132% and as low as 3%. In an ETF, investors know that the price they get will be very close to the underlying asset.

Of course, the Bitcoin ETF may also trade at a premium, but it will be small compared to Grayscale . Even if the Bitcoin price rises, it will not be affected by artificial forces that tend to push Grayscale's stock price lower, and vice versa. History tells us that as more professional market makers get involved, the premium of the ETF will steadily decrease.

They work well in Europe: there are already more than 20 cryptocurrency ETFs outside the U.S. , most of which are in Europe. The premiums on exchange-traded notes (e.g., Bitcoin Tracker EUR, introduced in Sweden more than five years ago) are typically minimal, as the share creation/redemption process allows for arbitrage.

Although the US Bitcoin ETF is much larger in terms of volume and assets , it will essentially function in the same way. And, while the premiums and discounts to net asset value are wider than most equity ETFs, they are very tight across the board and tighter than Grayscale et al.

The sharp rise in Bitcoin prices — and then the fall — provides a case study of how a U.S. Bitcoin ETF would react to such a sharp change. Looking at the large number of ETFs and ETNs in Europe , most closed on January 11 (Bitcoin fell 17.6% in two consecutive days) at a discount of 3% to 4% to NAV. Clearly, the "arbitrage band" was stretched, but not broken. Those who wanted to exit can do so . If the biggest and best market makers were in the U.S., my guess is that the discount would be half as large.

ETFs are more volatile: Although there is no precedent for ETFs tracking digital assets, the SEC has approved instruments that are more volatile. There are about 70 ETFs that are more volatile than Bitcoin. For example, the Direxion Daily S&P 500 ETF, which was approved and launched less than a year ago,   The Beta Bear 3X Equity ETF, for example, has a 60-day standard deviation between 100% and 200% (depending on the month), while the Swedish Bitcoin ETN is between 25% and 100%.

This is obvious : the risks of a Bitcoin ETF are obvious to the average investor , as most people have at least some new , alternative, and volatile knowledge about cryptocurrencies. This suggests that it is unlikely to give investors nasty surprises without them knowing, which has happened with some ETFs in the past . One example is the U.S. Oil ETF, which is akin to a wolf in sheep's clothing: it has a vanilla name and looks innocent enough, but it holds futures contracts , and most people have no idea how expensive it is to "roll" those contracts.

Second, the SEC said that the broader Bitcoin market, which is more susceptible to manipulation and fraud, is becoming more efficient with greater institutional participation. If anything, having an ETF could speed up this process, further increase transparency, and provide greater oversight of crypto exchanges as they compete to attract professional market makers.

No need to remember passwords: Investors love ETFs because they are convenient. Any individual investor can copy any ETF (which literally tells you what they hold every day) and save on expense ratios, but most investors want convenience. As an added benefit, investors don't have to worry about losing the password to their digital wallet ; they just need to be able to log into their brokerage account.