Cryptocurrencies are having a major moment in 2021.
The prices of the leading crypto assets, such as Bitcoin and Ethereum, have surged to new all-time highs. Numerous altcoins have blasted off into the stratosphere. And cryptocurrency is taking popular culture by storm. Coinbase’s (ticker: COIN) trading application recently even took the top spot as the most downloaded application in the Apple App Store. That’s no doubt been helped by prominent figures such as Elon Musk spreading the cryptocurrency message far and wide.
One important player has not yet been swayed, however. The U.S. Securities and Exchange Commission remains a noteworthy holdout from cryptocurrency enthusiasm. In the past, the SEC has repeatedly blocked efforts to launch a Bitcoin exchange-traded fund. Other countries such as Canada have now approved cryptocurrency ETFs in their markets, but the SEC hasn’t followed that example.
As of now, the U.S. only has cryptocurrency trusts such as the Grayscale Bitcoin Trust ( GBTC). While trusts like GBTC are arguably better than nothing, they don’t trade on major exchanges, have poor liquidity and often sell at wide premiums or discounts to their underlying asset values. A Bitcoin ETF might offer a much cleaner and more investor-friendly solution.
Crypto ETFs: Their Time Has Come
With the new presidential administration, there’s also a new chairman at the SEC, Gary Gensler. This led to hopes that the SEC might immediately change course on cryptocurrency funds. However, it may be a more gradual process. On May 11, the SEC issued a public statement regarding Bitcoin closed-end funds, mutual funds and ETFs.
In this statement, the SEC continued to show caution about the cryptocurrency marketplace. “Among other things, investors should understand that Bitcoin, including gaining exposure through the Bitcoin futures market, is a highly speculative investment. As such, investors should consider the volatility of Bitcoin and the Bitcoin futures market, as well as the lack of regulation and potential for fraud or manipulation in the underlying Bitcoin market,” the statement read.
Cryptocurrency proponents believe that the SEC should already approve ETFs. Matthew Le Merle is managing partner of Blockchain Coinvestors, which operates funds of funds and invests directly in numerous blockchain companies. Le Merle believes it’s time for cryptocurrency ETFs. “It’s difficult for a regulator to approve an ETF if the underlying asset is a new or not that well understood asset, but that is nonetheless their job — to make investable assets easily accessible to the broadest possible audience, and ETFs are one of the best solutions to that,” Le Merle says.
What might explain the SEC’s hesitancy so far? The SEC looks for a broad market with significant trading volume and pricing transparency before approving an ETF. Crypto proponents push back on this argument.
After all, the SEC has approved ETFs for a variety of esoteric instruments such as equity volatility, dry bulk shipping and various metals and grains.
Le Merle acknowledges that, say, two years ago, the SEC’s concerns about underlying market liquidity for Bitcoin were valid. The SEC wants to make sure that there’s no management or manipulation of prices on the underlying assets going into an ETF. While Bitcoin used to be on a limited number of popular exchanges, there is now enough liquidity and price discovery in Bitcoin to make it functionally equivalent to something like gold or copper where there are approved ETFs.
“We feel like the lawmakers and regulators are supposed to open up access to democratize investing in appropriate ways, and fundamentally ETFs provide more access, so they’re a good thing,” Le Merle says.
Will Crypto ETFs Stifle the Industry?
SEC regulation of the industry could in theory put a damper on the industry’s innovation. Some things have been possible in cryptocurrency simply because it’s such an open environment. However, it’s not all bad news by any means to have the SEC play a more active role with its new chairman.
“Gensler knows a lot about crypto and taught classes on the subject. Once you understand and see the potential, it’s hard to be opposed to it. Regulations are good for the industry and he’s knowledgeable and can make smart and sensible regulation,” says Ben Weiss, CEO and co-founder of CoinFlip, the largest crypto ATM provider.
Plus, if the SEC doesn’t approve Bitcoin ETFs, it could potentially prove quite harmful, stifling innovation in a field with a ton of promise. It’s not necessarily a desirable image for the world’s premier capitalist society.
[Read: Should You Invest in Dogecoin?]
On a related note, there has been some concern in the Bitcoin community that ETFs could make life more difficult for a lot of independent cryptocurrency exchanges and businesses. There’s a streak of anti-Wall Street sentiment in much of the trading community. So having crypto centralize at an institutional ETF level could lead to backlash.
Not everyone is worried, however. “The point of Bitcoin is to hold your own coin. But there’s room for every sort of business and player in the industry and as much access as possible. I think people should hold their own coin, but for people that can’t such as pension funds, ETFs won’t monopolize the market,” Weiss says.
Crypto proponents aren’t worried about folks using ETFs to bet against the market, either. “A high-quality market needs to have two sides. (As) much as we may not like the people who focus on shorting, the market does work better if there are two sides to every trade,” Le Merle says. Weiss brushed off concerns about short sellers as well, rightly noting that shorting crypto has rarely been a profitable trade.
How Celebrities and Memes Affect the Market
Some analysts have expressed concern about the rise of Dogecoin, SafeMoon and other such alternatives to the more established cryptocurrencies. However, it can easily be seen as part of the evolution of a rapidly developing ecosystem. “The free market determines which altcoins succeed. The memecoins are about the retail investor. It’s nice to see retail investors have a seat at the table. Collectively, retail is serious money even if individuals don’t have the same money as Goldman Sachs,” Weiss says.
This isn’t the first time retail investors have followed the lead of prominent personalities, either. “Celebrity investors like Warren Buffett or Paul Tudor Jones are highly influential and always have been. So I think Elon Musk or Mark Cuban speaking about investable opportunities is nothing new.” Le Merle says. That being noted, he does caution that given the large fan bases involved and some of the thinner liquidity in altcoins, short-term price impact from their comments can be dramatic. However, more broadly, having celebrity investors in the crypto space shouldn’t necessarily put it in a different regulatory light than other assets such as stocks.
More from U.S. News