Bitcoin Tips Scales in Favor of a U.S. ETF

(Bloomberg Opinion) -- Add my name to the list of  those who say it's time for the Securities and Exchange Commission to approve a Bitcoin exchange-traded fund.

U.S. investors are watching their neighbors to the north with envy. The first Bitcoin ETF in North America debuted in Canada on Feb. 18. To no one's surprise, Purpose Bitcoin ETF has been a huge hit. If it traded in the U.S., it would rank among the top 20 most popular ETFs by trading volume.

Meanwhile, the wait continues for a U.S. Bitcoin ETF. The SEC has agonized for years about whether to allow them, and the answer so far is no. The securities regulator has a long list of concerns that includes insufficient liquidity, enabling criminal financing, hacking, price manipulation and funds' ability to validate ownership and value their coins. There's also the ever-present worry about investor protection, in this case that Bitcoin's wild swings will maul investors. 

Those are all legitimate concerns, but delaying the inevitable — yes, Bitcoin ETFs are coming — has only made things more complicated. Bitcoin is gaining acceptance as an investment. Endorsements are piling up from money mavens such as Paul Tudor Jones and Stanley Druckenmiller. Telsa Inc. just plunked $1.5 billion into Bitcoin, Square Inc. bought an additional $170 million, and other companies may follow. The cryptocurrency's surging popularity all but guarantees that Bitcoin ETFs will be overrun with investors.

That enthusiasm is great for Bitcoin, but it raises the stakes for regulators. Bitcoin is hovering around $50,000 after a 16-fold price spike during the last two years. Each of the last two price surges were followed by a collapse of more than 80%. Regulators can't relish the idea of handing investors an ETF just as Bitcoin may be poised for another wipeout, particularly in light of their hand-wringing over the continuing GameStop saga.

The demand for a Bitcoin ETF also puts regulators in the awkward position of kingmakers. Most ETFs launch without knowing whether they'll fly or fail — indeed, the odds are long for any ETF whose name doesn't start with iShares or Vanguard. But a Bitcoin ETF is a sure thing, and the ETF that launches first has a huge advantage over those that follow. So in effect, whoever receives the SEC's blessing gets the crown.

A third Bitcoin bust might relieve some of those pressures, but short of an all-out collapse, a scenario only the most rabid Bitcoin naysayers envision, time isn't on regulators' side. Bitcoin isn't going away, and demand is likely to grow. Imagine how much more perilous a Bitcoin ETF will seem when the price climbs to $100,000 or more, and how much louder the clamor will be from investors ready to pile into an ETF when it's finally available.

And if investor protection is the objective, regulators don't gain much by blocking Bitcoin ETFs because plenty of other ways already exist to bet on the cryptocurrency. Anyone can buy Bitcoin now, for one. Crypto fans will soon be able to invest in Coinbase Global Inc., the biggest U.S. cryptocurrency exchange, which filed to go public last week. Its shares are likely to move in close step with Bitcoin. And if more public companies put money into the cryptocurrency, it will be virtually unavoidable.  

There's also the unfortunate fact that “accredited” — read rich — investors can already invest in Bitcoin funds while retail investors are locked out. As the push to democratize markets continues to gain ground, regulators will be asked to explain why some investors have access to Bitcoin funds but not others. 

It's not even clear investors need protection. As I pointed out recently, the available data on Bitcoin flows suggests investors have been unusually savvy, exploiting its freakish volatility to sell when it moves higher and buy when it plunges. Sure, some people have undoubtedly lost money on Bitcoin, but that hardly makes it unique. There's no way to eliminate risk of loss without shutting down markets altogether.  

I don't envy the SEC's decision. There are legitimate concerns around Bitcoin, and this feels like a particularly toppy time to give a go-ahead to Bitcoin ETFs. But those concerns won't go away any time soon. The stakes will only get higher and continuing to single out cryptocurrencies will become harder to justify. All things considered, it's time to clear the way for Bitcoin ETFs.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Nir Kaissar is a Bloomberg Opinion columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young.

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