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Bitcoin: 'Red Tape', ETF Filings & Withdrawal Explained

Sanghamitra Saha
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The last few hours were very crucial in bitcoin investing as four likely issuers removed requests from the U.S. Securities and Exchange Commission for approval to list their exchange-traded funds based on the largest cryptocurrency. Direxion Shares ETF Trust indicated that the SEC “expressed concerns regarding the liquidity and valuation of the underlying instruments” that its proposed funds would invest in (read: Bitcoin ETFs: What Lies Ahead in 2018?).

Direxion Asset Management was about to launch five bitcoin ETFs that seek up to double the moves of the cryptocurrencies daily futures trading. Their names were Direxion Daily Bitcoin Bear 1X Shares, Direxion Daily Bitcoin 1.25X Bull Shares, Direxion Daily Bitcoin 1.5 Bull Shares, Direxion Daily Bitcoin 2X Bull Shares and Direxion Daily Bitcoin 2X Bear Shares (read: Bitcoin ETFs: More Issuers Join the Race).

Inside the Withdrawals

However, the desire to launch leveraged products (which are known to be extremely volatile) on an already volatile asset was found “insane” by a Wall Street analyst. In letters dated Jan 8, Direxion and Exchange Listed Funds Trust pulled their requests, citing negative feedback from the SEC. And on Jan 9, ProShares withdrew its four bitcoin ETFs. VanEck Vectors ETF Trust also dropped its request recently.

Not only these proposed funds, the SEC has halted trading in shares of UBI Blockchain Internet, a Hong Kong-based company, pointing at possibly inaccurate information in its disclosures to the regulator and unfamiliar market activity in the stock since November.

SEC’s skepticism about bitcoin is not new. The Winklevoss Bitcoin ETF (COIN) which targets physical bitcoin, not futures, is being reviewed by the SEC on appeal. The tussle between the U.S. Securities Exchange Commission and Winklevoss over the launch has been going on for about three years. In fact, the issuer has restructured the proposal for the Bitcoin ETF multiple times.

Why Such Stringency?

Many analysts are issuing warnings about a bitcoin bubble. Though the cryptocurrency saw a slight correction in mid-December, it still shot up to $14,135.96 at the time of writing on Jan 10, 2018 from $775.98 on Jan 11, 2017. So, the valuation concern is understandable.

Most recently, Federal Reserve Chair Janet Yellen termed bitcoin as speculative, not a stable store of value or a legal tender. UBS Wealth Management said, “cryptocurrencies only have value if accepted as currencies. However, they cannot be used for the most important transaction in an economy, and cryptocurrency supply can only rise and never fall (making them a poor store of value).” The SEC Chair also asked cryptocurrency investors to be cautious.

How Is Bitcoin Viewed by the Globe?

From China, Australia to Japan and Singapore, Asia and Pacific countries are getting uncomfortable with the monumental rise of bitcoin. Japan, South Korea and Vietnam together made up about 80% of bitcoin trading activity at the end of November, as per the Wall Street Journal, as quoted on CNBC. But the Bank of Japan Governor Haruhiko Kuroda termed bitcoin prices as "abnormal."

China enacted a crackdown on cryptocurrencies, with authorities banning bitcoin trading and initial coin offerings (ICO) in September. The Reserve Bank fears that cryptocurrencies may be used to escape taxes, launder money or finance terrorism. South Korea, which makes up about 20% of global bitcoin trading, put an embargo on its financial institutions from dealing in virtual currencies.

Reserve Bank of Australia's sees it as "speculative mania" and finds bitcoin more popular in the illegal economy, not among consumers. Governor of the Reserve Bank of New Zealand, sees it a "classic case" of a bubble.

Bitcoin’s Impact on the ETF World?

While it is still unclear if we will get a bitcoin ETF soon, the sheer success of cryptocurrencies should benefit semiconductor ETFs like iShares PHLX Semiconductor ETF SOXX and VanEck Vectors Semiconductor ETF SMH. This is because mining of cryptocurrencies needs the usage of semiconductors. A hardware known as an ASIC (Application-Specific Integrated Circuit) is designed explicitly for mining bitcoin. ARK Innovation ETF ARKK will also benefit as the fund invests about 5.43% of its assets in bitcoin.

On the other hand, since some view the currency as “digital gold,” bitcoin trading may snatch some buyers from SPDR Gold Trust GLD. Bitcoin’s un-correlated nature to the other asset classes and strong momentum may hurt GLD in the current scenario.

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