Markets

Bitcoin ETFs: Crypto for Dummies…

By John Del Vecchio  |  August 31, 2018

Sponsors of exchange-traded funds (ETFs) have tried in vain several times to get a bitcoin product launched.

Each time they’ve come knocking, the Securities and Exchange Commission (SEC) has sent them home without a new ETF to market.

And it doesn’t look like the SEC is going to relent any time soon.

Last week, the SEC rejected seven more applications for crypto-focused funds. Among the denied were several that planned to provide levered returns based on bitcoin’s daily moves.

I wouldn’t blame you if your first thought turned to our Nanny State.

But I actually applaud the SEC for slamming the door on these products.

The SEC seems most worried about the potential manipulation of bitcoin itself. That could expose unsuspecting investors (like your Aunt Mary) to serious harm.

There are some bad actors in the cryptocurrency space, and too much leeway now could spoil everything for everyone forever.

It’s much harder to unbreak a space than it is to keep it clean from the get-go, and there just might be something to blockchain technology and “decentralization.”

It’s also going to be a big challenge to maintain orderly action for an ETF where the underlying market is still so immature and volatile.

ETFs are typically priced every 15 seconds. Spreads between “bid” prices and “ask” prices and the impact a particularly large order can make are extremely difficult to measure because there still just isn’t that much liquidity in the cryptocurrency market.

So, pricing for a bitcoin ETF is anyone’s guess.

Bitcoin itself moves violently, sometimes in both directions, on a daily basis.

For smaller cryptos, the moves are even more dramatic.

Speculators are already playing with fire. Throwing leverage on top of that is adding rocket fuel to an already combustible situation.

It’s a stupid idea for the average person to trade levered ETFs. It’s even more boneheaded to do it with a cryptocurrency.

Consider the fact that movements in the price of the cryptocurrency is strongly correlated to the number of Google searches for “bitcoin” that occur each day.

Based on this analysis, by the time the general public caught on to the bitcoin train, the trend was very close to topping out.

Now, bitcoin has been spanked hard and is far from its highs. And the general public is massively underwater.

To be sure, cryptocurrencies have the potential to be disruptive and could evolve in a large and sustainable market. I’m not sold yet.

On the other hand, I’m very bullish on blockchain technology, and I have little doubt about its disruptive qualities.

For example, in financial services, blockchain technology is a boon to short-selling. It can locate shares to short and provide a digital “locate receipt” of the borrowing.. This greatly improves compliance practices.

It basically facilitates the near-instantaneous settlement of trades.

Several ETFs already seek to capitalize on the growth of blockchain technology. What’s more, many of the diverse underlying companies have real businesses and cash flow. They can be analyzed and valued.

You can still get you crypto-fix with blockchain ETFs seeking to disrupt a multitude of sectors.

We’ll be talking about these and many, many more issues related to disruption at this year’s Irrational Economic Summit.

I won’t be talking about blockchain, but I am presenting on a company that’s using a critical innovation to potential upend a trillion-dollar industry.

I look forward to sharing this and other ideas in Austin, Texas, this fall.

John Del Vecchio

Author of Rule of 72: How to Compound Your Money and Uncover Hidden Stock Profits and What’s Behind The Numbers: A Guide To Exposing Financial Chicanery And Avoiding Huge Losses In Your Portfolio, John is a forensic accountant at heart. Standing on the shoulders of the great David Tice, James O’Shaughnessy and Dr.Full Bio