One article to understand whether Bitcoin needs an ETF

This week, the U.S. Securities and Exchange Commission (SEC) published a 112-page report rejecting the Bitcoin ETF application submitted by Bitwise and New York Stock Exchange Arca. The application, which was submitted on January 9, failed, but Bitwise said it was a constructive step in the history of cryptocurrency and would continue to apply when the time was right.

Some people pointed out that Bitwise's ETF application is the last hope this year. As the savior of Bitcoin's rise, this rejection has more or less hit market confidence. It is understood that since 2013, many institutions have submitted Bitcoin ETF applications to the SEC, but none of them have been approved. How should we view the entanglement between Bitcoin and ETF?

What is ETF?

Before explaining why the cryptocurrency world is so concerned about ETFs, we must first understand what ETFs are.

The full name of ETF is Exchange Traded Fund, which is an index fund issued by a fund company.

ETFs include stock ETFs, bond ETFs, commodity ETFs, currency ETFs, and other types. Taking stock ETFs as an example, they contain a basket of stocks, which can be understood as a package. When users invest in ETFs, it is equivalent to purchasing each product in the package. Such a basket of stocks can effectively prevent investors from stepping on landmines and spread the risks. Moreover, purchasing this package is equivalent to purchasing the entire sector, saving time in researching each stock.

Compared with ordinary funds, ETFs can be subscribed to fund companies and traded in the secondary market. They have good liquidity, low transaction costs and are very transparent, so this form is very popular in the securities market.

As a fund, ETF needs to be reviewed by the SEC before it can be listed in the United States, so Bitcoin also needs to be examined before applying for ETF. It should be noted that since ETF is an index fund, buying Bitcoin ETF products is not buying Bitcoin directly, but the price of the cryptocurrency itself, so buyers do not need to consider the security and legality of holding Bitcoin. As an investment tool, ETF is also convenient for users to short sell and is more flexible.

Bitcoin ETF is an excellent choice for institutions and individuals who do not want to buy Bitcoin, do not want to learn about Bitcoin storage and management, or worry about compliance or coin loss risks, but do not want to miss the Bitcoin revolution (the opportunity to get rich with Bitcoin).

Why are you so keen on applying for Bitcoin ETF?

ETFs have only a 20-something-year history, but due to their cost advantages and diversified options, they have become an important part of investors' portfolios, with dozens and hundreds of ETFs issued around the world almost every year.

If Bitcoin ETFs can also be listed and circulated, it means that they are recognized by mainstream regulators, and this weight is self-evident. At the same time, the issuance of ETFs can bring Bitcoin to the public's attention and lower the threshold for public participation. Users do not need to go to a special digital currency exchange to invest, they can directly purchase ETFs. It is also a compliant channel for institutional investors, and traditional funds can also invest in Bitcoin. Since buying ETFs does not mean holding real Bitcoin, buyers will not worry about risks such as theft and hacker attacks.

So in general, the listing of Bitcoin ETF is definitely a big boon to the currency market. Therefore, after Bitcoin ETF was rejected many times, some institutions continued to apply for it. Bitcoin is often compared with gold. The first gold ETF fund was listed in 2003 and began trading on the New York Stock Exchange in 2004. Analysts believe that this is the reason for the subsequent bullish gold price.

This is why everyone is looking forward to the passage of the Bitcoin ETF. With the price of the currency constantly fluctuating, no halving in sight, and even the difficulty of reaching $10,000 in the short term, the currency circle urgently needs some external stimulation to start a bull market.

Over the past six years, many institutions have submitted ETF applications to the SEC, but without exception, none of them have been approved.

The SEC's reasons for rejection have hardly changed, and are nothing more than concerns about fraud and manipulation of Bitcoin, low liquidity, and transactions taking place in places not regulated by the United States.

Does Bitcoin Really Need an ETF?

Since it has been rejected repeatedly, we have to think about a question: Does Bitcoin really need an ETF?

First of all, the issuance of Bitcoin ETF will be limited to the United States, and there will only be a regional impact. For Chinese users, Bitcoin is restricted from purchase, let alone Bitcoin ETF. In the United States, there are already legal and compliant channels to purchase cryptocurrencies, such as spot exchanges Coinbase, futures exchanges CME, CBOE, Bakkt, LedgerX, etc., and there are more non-compliant exchanges. Therefore, American users, whether institutional or retail, who want to participate in the Bitcoin revolution, already have a variety of ways to choose from, and do not have to wait for the ETF to be launched.

For gold, high-frequency trading of gold ETFs is more convenient, because the spread between buying and selling paper gold is relatively large, and the handling fee for cashing out physical gold is also high. However, gold ETFs need to pay commissions to brokers, and during the fund holding period, the fund company will extract an annual operating fee of 0.6% from the assets.

We all know that in the past few years of Bitcoin development, spot exchanges, futures and options and other derivatives exchanges have sprung up everywhere, and the trading experience has gradually improved. If the gold ETF is moved to the Bitcoin ETF, buying a Bitcoin ETF is not necessarily more cost-effective than buying spot or directly using Bitcoin derivatives tools.

Bitcoin does not need to wait for others to take over

The Bakkt exchange, which has attracted much attention this year, was launched. As the first exchange to use spot delivery, it was also called the savior of Bitcoin before it went online. However, after its launch, it not only did not bring much fluctuations to the price of the currency, but its trading volume was also far less than that of traditional cryptocurrency exchanges. Although the daily trading volume has reached 200 BTC, it is still two orders of magnitude behind the mainstream cryptocurrency exchanges. Will the Bitcoin ETF also have such a dull response after its launch?

Everyone is looking forward to ETFs, hoping to lower the threshold for outsiders, making it easier for others to enter the market and "take over", thereby promoting a sharp rise in the price of the currency. In December 2017, the Chicago Board Options Exchange (CBOE) and the Chicago Mercantile Exchange (CME) successively launched Bitcoin futures contracts, which indeed pushed Bitcoin to $20,000, but what happened afterwards? Bitcoin plummeted, losing more than 80% of its market value.

There is a difference between Bitcoin and gold now. The consensus on gold has existed for thousands of years. It is rare, easy to store, and easy to divide, making it a commodity that serves as currency. In ancient Rome and ancient Egypt, it was used to measure the value of other items. From the 16th to the 19th century, the gold and silver standard system gradually formed in various countries. Under this premise, the launch of gold ETFs led to a rise in gold prices.

What about Bitcoin? Bitcoin's consensus comes from the guarantee of cryptography and the endorsement of non-sovereign countries. Its value comes from the recognition of investors, not the speculation of speculators. For Bitcoin value investors, opportunities to invest in Bitcoin are everywhere, and there is no need to wait for the launch of Bitcoin ETF.

It is a speculative behavior for the industry to expect ETFs to boost the price of Bitcoin. Facts have proved that the bubble brought by speculation will not last long. In the absence of a consensus among all, Bitcoin may not necessarily bring buying like gold. Instead of waiting for the Bitcoin ETF to be passed, it is better to wait for Bitcoin to be recognized by more people.

Bitcoin is not a pyramid scheme. To expand consensus, there is no need to tell others that buying Bitcoin will bring financial freedom, but rather to recognize its value after realizing the advantages of Bitcoin.

People working in the OTC market have a clear understanding of this point: large-scale bitcoin transactions of more than 500 coins have always been a seller's market. There are always a large number of mysterious buyers with deep pockets waiting to purchase the coins, and as long as the sellers are willing to sell, the intermediaries will surely flock to them.

The prosperity of secondary market transactions, especially those that are one or two orders of magnitude larger than the current ones, actually depends on the expansion of its own scenarios. Bitcoin has gone from being worthless to 10,000 bitcoins buying two pizzas, WikiLeaks accepting Bitcoin donations, the dark web accepting Bitcoin payments, and now the United Nations accepting Bitcoin donations. The consensus on Bitcoin is constantly expanding, and its value is getting higher and higher.

If Bitcoin is firmly implemented, one more merchant accepting Bitcoin payments, one more Bitcoin technology developer, and one more Lightning Network node will be much more meaningful than one more ETF deposit channel.

Then we just have to wait for a major event similar to that in the traditional world, or a major event in the blockchain world itself, to trigger a huge amount of funds to enter the market and cross the critical point.

Regardless of the size of the funds, the “funding channel” is never a problem. Have you ever seen smart funds want to go somewhere but can’t? (Coin Circle Bond)