Introduction
Bitcoin ETFs have always been highly anticipated by many people in the cryptocurrency circle, and are even seen as a lifeline to revive the current market downturn. However, the SEC has always been extremely cautious about Bitcoin ETFs.
On August 22, the SEC announced that it had rejected nine ETF applications again, but just two days later, the SEC secretary said in a letter that senior officials would review the nine applications. The SEC's uncharacteristic behavior has touched everyone's heart, and the Bitcoin ETF, as always, carries the expectations of investors and awaits the SEC's verdict.
What impact will ETF have on Bitcoin? This article attempts to study the event of precious metal ETFs and observe the price changes before and after the event. I hope it will bring some inspiration to everyone. Welcome to leave a message for discussion.
main conclusion
1. The timing of the launch of the gold ETF was chosen at a relatively low level at the time, and the cumulative return in the 60 trading days before the event was negative, but no corresponding pattern was found in other precious metals.
2. Judging from the historical data of other precious metals, the launch of ETFs has not shown a favorable effect on the prices of underlying assets in the short term.
3. After the launch of the first gold ETF, the market seemed to have anticipated the launch of other precious metal ETFs, and prices reflected this in advance.
4. From a relatively long-term perspective, what attracts funds to enter the market is undoubtedly its strong fundamentals.
1. What is ETF?
ETF is the abbreviation of Exchange Traded Funds, which means "Exchange Traded Fund" in Chinese. It is an open-end fund with variable fund shares that is listed and traded on an exchange.
An ETF is an investment fund that is tied to the price of an underlying asset — a commodity, an index, bond or a basket of assets — like an index fund, traded on an exchange and available to both retail and institutional investors.
ETFs are traded similarly to stocks, but with lower risk. Investors can invest in underlying assets safely and conveniently by holding ETFs instead of directly holding the underlying assets.
2. Benefits of Bitcoin ETF
Most people believe that the launch of an ETF is significant for Bitcoin for the following reasons:
1. Reduce investment risk. As mentioned above, the advantage of Bitcoin ETF is that holders can indirectly own Bitcoin, so they can enjoy the growth of Bitcoin prices without worrying about private key issues and potential asset theft. Bitcoin ETF will make investing in Bitcoin safer and more convenient.
2. Increase exposure. The launch of Bitcoin ETF products will undoubtedly increase the popularity and topicality of Bitcoin, so that more people will be willing to learn about Bitcoin.
3. Strong endorsement from regulators. Given the SEC’s authoritative status, if a Bitcoin ETF can be approved by it, it is equivalent to obtaining strong endorsement of the legitimacy of Bitcoin from the official regulatory agency, thus paving the way for future regulation of Bitcoin.
4. Attract institutional investors. Combined with the above points, the launch of ETFs is likely to attract institutional investors. The capital flow of ETFs, a regulated financial market, reached $3 trillion last year (the current market value of Bitcoin is about $110 billion). Investors are looking forward to ETF products to bring more capital flow to Bitcoin and improve its liquidity. The entry of institutional investors is also seen as a booster for the rise in Bitcoin prices.
The operating structure of Bitcoin ETF
3. The ill-fated Bitcoin ETF
Historically, the SEC has been extremely cautious about Bitcoin ETFs
▲On March 10, 2017, the SEC finally rejected it after three years of review.
▲ On March 29, 2017, the SEC rejected the Bitcoin ETF listing application submitted by SolidX in 2016.
▲ On April 27, 2017, the SEC unexpectedly announced that it agreed to review the Winklevoss Bitcoin ETF's listing application, but it was not approved.
▲ In October and November 2017, the SEC once again rejected a wave of large-scale ETF applications, including four ETF products such as the top 50 comprehensive index ETF.
▲ In July 2018, the SEC once again rejected the Winklevoss brothers’ Bitcoin ETF application.
▲ On August 22, 2018, the SEC announced the rejection of a total of nine Bitcoin ETF applications from ProShares, Direxion, and GraniteShares.
▲ On August 23, 2018, the SEC said it would review these nine applications.
▲ On September 20, 2018, the SEC announced the delay of the VanEck SolidX Bitcoin Trust ETF proposal until December 29.
▲ On October 4, 2018, the SEC required "any party or other person" to submit a statement supporting or rejecting the proposed Bitcoin ETF by November 5.
Table 1 Bitcoin ETF Application
SEC’s concerns
In January this year, Dalia Blass, director of the SEC's Investment Management Division, published an open letter detailing the reasons why she had repeatedly rejected cryptocurrency exchange-traded funds (ETFs), mainly due to issues such as pricing, liquidity, custody, arbitrage and possible manipulation.
1. Pricing. The SEC raised a series of questions: Given the volatility of cryptocurrencies, market incoherence, lack of regulation, and unstable trading volume, how can cryptocurrency ETFs ensure that there is enough information for pricing? How does a fund price based on important changes in a cryptocurrency itself (such as blockchain forks)? How should new cryptocurrencies generated by events such as airdrops be priced? What are the differences in pricing rules between different cryptocurrencies?
2. Liquidity. The SEC is concerned that the fund cannot guarantee effective liquidity through appropriate cryptocurrency investment methods, and therefore cannot meet daily demand. In addition, how to judge the liquidity of cryptocurrencies and cryptocurrency products? Should in-depth market research be conducted to study the trading history, price volatility, and trading volume of cryptocurrencies?
3. Custody. The SEC believes that the current cryptocurrency custody service is not perfect and the security of the key cannot be guaranteed.
4. Arbitrage. For the sake of fairness, the market price of an ETF cannot deviate from its net asset value, but the SEC believes that the volatility of cryptocurrencies and the instability of trading volume make this difficult. In addition, the SEC asked: Will the closure of cryptocurrency exchanges affect market prices or arbitrage mechanisms?
5. Market manipulation and other risks. The SEC pointed out that the current cryptocurrency market lacks investor protection mechanisms and there is a possibility of fraud and market manipulation, which will also cause pricing and liquidity problems.
The most recent rejection of nine Bitcoin ETFs was on the 22nd of last month. The reason given by the SEC was that the applications of the three companies "have not yet fully prevented fraud and manipulation," and because these nine products are all linked to the Bitcoin futures market , the SEC also stated that the exchange failed to provide direct evidence that the Bitcoin futures market was “significant in size.”
Although the SEC decided to re-examine the issue two days later, contrary to its usual practice, the fate of these nine ETFs remains unclear given the precedent of failed re-examinations.
Although Bitcoin ETFs have been repeatedly applied for and rejected, there is still one Bitcoin ETF, VanEck SolidX Bitcoin Trust, that is highly anticipated.
Unlike the nine products that were rejected previously, VanEck SolidX Bitcoin Trust's Bitcoin ETF product mainly invests in OTC spot and has the characteristics of "equipped with insurance" and "high investment threshold". At the same time, the application documents show that CBOE has signed a comprehensive regulatory sharing agreement with the Gemini Exchange, which just meets the requirements of the SEC.
However, the SEC still kept people on suspense and postponed the decision on VanEck SolidX Bitcoin Trust's Bitcoin ETF application to December 29.
5. Market’s view on ETF approval
Most people believe that if the Bitcoin ETF is approved, it will have a positive impact on the market in the short term. Daniel Masters, executive chairman of CoinShares, said that CoinShares is offering exchange-traded notes (ETNs) similar to ETFs for crypto assets including Bitcoin and Ethereum. ETNs have attracted a group of non-traditional investors for the company, including individuals, family offices and hedge funds.
Similarly, ETFs should also be able to effectively attract new investors to participate. Eric Balchaunas, senior ETF analyst at Bloomberg Intelligence, predicts that if a coin-based Bitcoin ETF is listed, its size may reach $5 billion within a year, and perhaps $10-15 billion in the next two years, and eventually become one of the top ten ETFs in the world.
More people are willing to compare Bitcoin ETFs with gold ETFs. Since the first gold ETF was launched in Australia in 2003, the price of gold has been rising for a long time from 2004 to 2012.
Many analysts believe that this rise should be attributed to, or partly attributed to, the introduction of new financial products such as ETFs. (The following article will also follow this line of thought and try to predict the short-term impact that Bitcoin ETFs will have on the market by studying several precious metal ETFs)
But there are also different voices. Andreas Antonopoulos, the author of Mastering Bitcoin and a Bitcoin advocate, claims that Bitcoin ETFs are already unstoppable, but in the long run they will do more harm than good. Because ETF investors do not actually hold Bitcoin, but can trade it as easily as buying and selling stocks, this gives speculators a lot of room to manipulate Bitcoin prices. He also believes that ETFs will cause "quasi-centralization" damage to the Bitcoin system.
ETF investors cannot participate in the decision-making process of the Bitcoin system because they do not have private keys, and these powers will be concentrated in the hands of intermediaries that hold a large number of Bitcoins. This is contrary to Satoshi Nakamoto’s original intention of designing peer-to-peer electronic transaction cash.
Ethereum founder Vitalik Buterin said that people are too focused on Bitcoin and Ethereum ETFs. He believes that although ETFs can increase the price of coins, people should pay more attention to the large-scale use of cryptocurrencies, because only it can have a long-term impact on cryptocurrencies.
6. Simple event study of gold and other precious metal ETFs
Because Bitcoin is called "digital gold", it is similar to precious metals such as gold in some aspects, and the logic behind the beneficial effects of Bitcoin ETF on Bitcoin is also largely similar to that of precious metals.
So below we take gold, silver and platinum as examples, and the launch of their first ETFs as events, and study the price changes of the corresponding underlying precious metals before and after the events, so as to try to observe the timing of ETF launches and whether the event has promoted the rise in the prices of the underlying assets.
During the event period, we selected the date when the first ETF of each precious metal was launched and began trading. The estimation window before the event was selected as [-60, 0]. The highest price percentile during the window period was set to 100% and the lowest price was set to 0%. We observed whether the price was in a relative position (lower than 25%) when the ETF was launched. The post-event window period was selected as [0, 60]. We compared the post-event window period with the pre-estimation window period yield to observe whether the launch of the ETF partially caused the short-term price increase of the underlying asset and to determine whether the price reflected this news in advance.
Gold ETFs
On March 28, 2003, the world's first gold ETF was listed and traded on the Australian Stock Exchange. The timing of the launch of the gold ETF seemed to be relatively low at the time, with a cumulative return of negative in the 60 trading days before the event. Observations in the window period after the event showed that gold prices rose, which may have benefited in part from the launch of the ETF, or it may have been due to the low gold price before that.
Figure 1 Gold price trend in the 60 trading days before and after the first gold ETF was listed
Table 2 The impact of the launch of the first gold ETF on the gold price
Silver ETFs
On April 21, 2006, the world's first silver ETF (iShares Silver Trust) was listed and traded on the New York Stock Exchange. In the 60 trading days before the incident, the price of silver rose all the way, with a cumulative return of more than 37%. The good news may have been leaked in advance and over-reacted in the price of silver. The correction of the silver price in the following 60 trading days also indirectly supported this point. Unlike gold, the launch of the silver ETF was not chosen at a relatively low price.
Figure 2 Silver price trend in the 60 trading days before and after the first silver ETF was listed
Table 3 The impact of the launch of the first silver ETF on the silver price
Platinum ETFs
On April 24, 2007, the first platinum ETF was listed and traded on the London Stock Exchange. Similar to the silver ETF, judging from the effect of the actual ETF launch, the market seems to have digested the positive information in advance. The platinum price rose by 13% in the 60 trading days before April 24, while the platinum price fell slightly in the 60 trading days after the event. In addition, judging from the price trend before the event, the launch time of the ETF was not the relative low point of the previous price range.
Figure 3 Platinum price trend within 60 trading days before and after the first platinum ETF was listed
Table 4 The impact of the launch of the first platinum ETF on platinum prices
The revelation of precious metal ETFs
Judging from the price trends of the above three precious metals, it seems that the launch of ETFs has not shown a favorable effect on the price of underlying assets in the short term. In addition to silver and platinum, which had negative cumulative returns within 60 trading days after the launch of ETFs, although gold had positive returns in the post-event window period, it seems difficult to distinguish whether the returns should be attributed to the launch of ETFs or to the low price of gold itself at that time that attracted funds to enter.
In addition, we also noticed that after the launch of the first gold ETF, the market seemed to have anticipated the launch of other precious metal ETFs. In the 60 trading days before the launch of the first ETF, the cumulative returns of silver and platinum exceeded 37% and 13% respectively. This may be that the good news was leaked in advance and reflected in the price of the underlying assets.
What is more intuitive is that on November 21, 2006, there were rumors that the platinum ETF was about to be launched, and the price of platinum rose by 13.4% on the same day. However, when the platinum ETF was actually launched, the price of platinum did not show an abnormal increase.
In addition, from a relatively long-term perspective, it is undoubtedly the strong fundamentals that attract funds to the market. For example, precious metals such as gold, as a means of hedging, may soar sharply in the short term during any period of turmoil or war. The Soviet invasion of Afghanistan, the Iran War, and the 9/11 incident have all significantly driven up gold prices.
In addition, supply and demand are also important factors affecting the price of precious metals. In 1992, due to the increase in gold costs, many gold mines stopped production, and the shortage of supply caused the price of gold to rise all the way. Whether from the perspective of risk aversion or the impact of mining on supply and demand, precious metals and Bitcoin have similarities, so it is also worth learning from them.
7. ETFs are not a panacea for all problems
The problem of mainstream funds taking a wait-and-see attitude towards Bitcoin may not be solved by just an ETF. The precedent of precious metal ETFs seems to show that ETFs are not a panacea that can cure all diseases and produce immediate results.
Historical experience tells us that perhaps only when the market can provide sufficient safety margin for funds, the price of the currency is at a relatively low level, and Bitcoin governance is relatively controllable and can assume its existing attributes, can funds be truly voluntarily attracted in the long term, and the development of cryptocurrencies such as Bitcoin can be healthy and long-lasting.
ETFs may be more like icing on the cake for Bitcoin, but what can ultimately keep investors coming back is the high-quality paving tapestry.
