Ain’t Gonna Be No Bitcoin ETF


After repeated attempts to convince the SEC to approve a bitcoin ETF, the Cboe is back once again with another Bitcoin ETF application. Earlier this year, the SEC asked the bitcoin fund sponsors to withdraw all applications because of fears of fragmentation and extreme volatility.  But the Cboe just won’t quit.

The Cboe is again filling to list the Van Eck SolidX Bitcoin Trust which has already been rejected twice by the SEC. This application looks fairly similar to their previous ones so we’re not sure why the Cboe thinks the SEC will have a change of heart.  Maybe SEC Chairman Clayton’s recent remark that “bitcoin is not a security” gave them hope that the SEC will treat their application more like a currency ETF application?  Either way, the Cboe application is causing the bitcoin aficionados to get very excited and they are writing comment letters (lots of comment letters) in support of the application.  However, unlike the comment letters that our industry files on market structure issues, the bitcoin supporters don’t seem to have many facts or well-thought out arguments to support their enthusiasm.  Here’s a taste of a few of their letters:

  • “ETF has potential to take the price of Bitcoin from $6K to $30K in few days and that can start the new crypto cycle and help US economy during these trade wars.”
  • “Many long term investors and retail investors lost a lot of money during the bear markets and an ETF can help them.
    An ETF will surely boost the price and will help current and future investors as the crypto market goes more and more mainstream.”
  • “Continuing to refuse applications for Bitcoin ETFs means that investors are forced to contend with unregulated or less regulated providers in order to access the asset.”
  • “Allowing a bitcoin etf would increase liquidity which would make manipulation much harder.”
  • “ETF approval for Bitcoin is critical for the future of innovation in the FinTech industry. It will provide for the fuel needed to further drive adoption and acceptance of the cryptocurrencies.”

Most of the comments are very short and most are supportive of the ETF.  While the commentators are certainly passionate with their pleas, their comments show little understanding about underlying bitcoin market structure.  They don’t seem to understand that the lack of any real regulatory surveillance of the underlying exchanges is a major problem for ETF pricing.  The commentators seem to be looking for just an easier way to trade bitcoin since the current method is costly, insecure and cumbersome. Lucky for them, one of the SEC’s missions is to protect investors. And in this case, the SEC needs to protect investors from themselves.

It is no secret that the underlying bitcoin spot market is filled with manipulation and fraud.  Last week, the Justice Department indicted 12 Russian agents for US election hacks and it turns out these agents used bitcoin to fund their operations.  The anonymity of the transactions was fostered by layered transactions through various bitcoin exchanges.  According to the Justice Department :

“In addition to mining bitcoin, the Conspirators acquired bitcoin through a variety of means designed to obscure the origin of the funds. This included purchasing bitcoin through peer-to-peer exchanges, moving funds through other digital currencies, and using pre-paid cards. They also enlisted the assistance of one or more third-party exchangers who facilitated layered transactions through digital currency exchange platforms providing heightened anonymity.”

We understand why investors are enthused about a bitcoin ETF (they want to make money), but just like in Vegas, the real money maker is not the gambler but the casino and that is exactly why we think the Cboe is pushing so hard for a bitcoin ETF.  We are fairly sure the SEC will see through the Cboe’s latest attempt and will continue to reject all bitcoin ETF applications until there is proper surveillance and regulation of the underlying spot markets.