Winklevoss Bitcoin ETF Rejected Again

In March of 2017 the Winklevoss twins had their first Bitcoin ETF proposal rejected and now the second Winklevoss Bitcoin ETF proposal was dismissed in July of 2018 by the Securities and Exchange Commission. The reason all of this matter is because the Winklevoss twins where the first to have the SEC rule on a Bitcoin ETF back in 2017, and now that their proposal has been rejected for a second time things are starting to look a little bleak for investors who want a Bitcoin ETF.

First and foremost, the Securities and Exchange Commission that made the ruling expressed concern about Bitcoin’s trading reliability and security; two significant issues which don’t appear to be easy fixes anytime soon. The commission went on to say “The record before the commission indicates that a substantial majority of bitcoin trading occurs on unregulated venues overseas that are relatively new and that, generally, appear to trade only digital assets.” The commission stated that more than 75% of Bitcoin trading happens on unregulated foreign exchanges.

But, the commission did note that regulated Bitcoin markets are in their early stages of development and that if they further grow, the commission would then review the idea of allowing a Bitcoin ETF based on SEC requirements.

There was, however, one of the four Commissioners who voted in favor of allowing the Winklevoss Bitcoin ETF. That commission wrote, “The Commission's mission historically has been, and should continue to be, to ensure that investors have the information they need to make intelligent investment decisions and that the rules of the exchange are designed to provide transparency and prevent manipulation as market participants interact with each other.”

While I agree with the lone dissenting Commissioner, her interpretation of Commissions guidelines and mine may be different. Even in her dissent letter, she stated “prevent manipulation” which I believe was what the other Commission members were trying to do when voting against the ETF.

The SEC will likely never be able to stop or indeed “prevent manipulation” within the Bitcoin or cryptocurrency world. But the SEC does have a mandate to try to prevent manipulation, which I believe is what they are doing by not allowing a Bitcoin ETF until the majority of the exchanges the currency is traded on are up to par with security and reliability standards.

Also, while some investors are more than willing to invest in Bitcoin regardless of whether or not the SEC gives the cryptocurrency its blessing or not, the average investor whom otherwise would not invest in Bitcoin unless they could quickly do so through an ETF will now continue to avoid the cryptocurrency world.

Which I think is the important point here, regardless of whether or not you are a believer in cryptocurrencies.

The SEC has once again told the average investor that Bitcoin and other cryptocurrencies are not the safest investments. The SEC is not saying Bitcoin itself is a fraud. They are simply saying Bitcoin in its current environment is not the safest investment option. Also, the SEC has continued to make it slightly more difficult for the average investor to buy or sell Bitcoin’s. An SEC approved ETF would also open the door up to institutional investors who are only permitted to invest in SEC approved investments.

Keeping a large number of institutional investors out of Bitcoin and making it more difficult for small investors essentially reduces the overall demand for Bitcoin and other cryptocurrencies, which in turn reduces their value. Bitcoin and cryptocurrencies believers are disappointed by the SEC’s decision because of this fact because remember the true believers already own Bitcoin and don’t care about the hassle they have to endure to buy cryptocurrencies.

A Bitcoin ETF would open the floodgates of new investors to the asset, and we likely would have seen another big jump in the price of the cryptocurrency, but instead, Bitcoin has once again fallen from the $8,000 range to the mid $7,000 range following the news of the SEC denial.

Longer term, Bitcoin and a Bitcoin ETF could potentially happen, but based on what the commission has told us, only if oversight and size of the current exchanges dramatically improves. Even an ETF based on Bitcoin futures, which have also been recently proposed, will not likely happen anytime soon based on the commission's comment that “the record does not support a conclusion that bitcoin derivatives markets have attained significant size.”

With that, all said, it would appear a Bitcoin or Cryptocurrency SEC approved ETF is not going to happen anytime soon.

Matt Thalman
INO.com Contributor - ETFs

How Bitcoin Helped ARK Win 'Top ETF' in 2017

ETF.com’s “ETF of The Year” award went to the ARK Innovation ETF (ARKK) for 2017. The award was given to ARKK for a number of reasons, but the top two were due to its exposure to disruptive technology in 2017 and its strong performance. Both of those key metrics for winning the award were partly due to the fund's exposure to Bitcoin.

ARKK owned Bitcoin through buying shares of the Bitcoin Investment Trust (GBTC). ARKK had anywhere between 6% and 10% of its assets in GBTC during 2017 while the cryptocurrency rose higher during the end of last year. During that time Bitcoin was often ARKK’s top holding. This helped the fund produce an 85% return for investors in 2017. Just for comparison, GBTC was up roughly 1,550% in 2017.

What’s more interesting though is that while GBTC is now down more than 65% year to date in 2018, ARKK is up more than 21% this year. The main reason for this reversal is because sometime in January of 2018 ARKK’s management team started selling their position in GBTC. As of today, ARKK still has a small position in GBTC, but it represents just 0.26% of the fund's assets.

ARK, the issuer of the ARKK ETF recently told ETF.com that it was a “complicated decision” to cut its Bitcoin investments, but that it was driven largely by regulatory and tax concerns, more so than the true “merits” of Bitcoin.

It should also be noted that in 2017 the only other ETF investors could buy to gain substantial exposure to Bitcoin was another ARK issued and managed ETF, the ARK Web X.0 ETF (ARKW). ARKW was also up more than 80% in 2017, has risen more than 20% thus far in 2018, and currently has just 0.33% of its assets in GBTC.

The performance of both ARKK and ARKW in 2017 and 2018 highlight how a smart and at times slightly lucky management team can provide value for investors when it comes to ETF’s. Anyone who owned either fund in 2017, or up to this point in 2018 is more than happen to pay the 0.75% expense ratio both funds carry.

More so, with the S&P 500 up a mere 2.4% in 2018 and both ARKK and ARKW up more than 20%, it is hard to say that ARK’s investment team was just a one hit wonder with Bitcoin and bought and sold at the perfect times.

Having said that, both funds hold shares of Twitter (TWTR) and Square (SQ) in their top ten holdings. These are two stocks that have performed exceptionally well year to date, up 83% and 76% respectively. Both of these stocks again show ARK’s management teams value. But, at the same time, both funds have Tesla (TSLA) represent their top holding at 8.16% of assets and 6.20%. While I am a fan of Tesla and a shareholder, this does highlight the fact that while ARK’s management team has made some profitable picks in the past, they do tend to lean say on the dangerous side.

A year ago, Bitcoin was trading around $1,000 per coin, and its future was very much so in question. Around the same time, investors were questioning whether Jack Dorsey was capable of running both Twitter and Square because Twitter was in the weeds and early investors had been burned by a weak share price. Square has for the most part always had a strong life as a public company, but its jump over the last year and a half can largely be contributed to the fact that Wall Street wasn’t sure if the payment processing company could compete with PayPal (PLPY), Visa (V), and the others in a very competitive and crowded space. Lastly, where should we start with Tesla, it’s one of the companies with the highest short interest, the CEO Elon Musk constantly makes promises and then misses his set goals, the company is struggling to become profitable, and most analysts believe there is no way possible that the company will not have to raise a massive amount of debt soon, despite Musk adamantly disagreeing.

My point for the history lesson is that ARK’s investment team may be really, really good, or they could just be on a nice run over the last 12 months. Investors need to be cautious when buying into a “Top Performing” ETF and take a look at how and why the fund achieved that title before buying shares. If the Tesla trade goes bad and I mean really, really, bad, which it certainly could, ARK’s investment team may not look so smart, while their funds and the investors get to pay the price of their risk taking.

Matt Thalman
INO.com Contributor - ETFs

Matt Thalman on How Bitcoin Finished An Astonishing Year

If you look at a chart of Bitcoin during 2017, it really only went higher during the first 11 months. The in the middle of November it was as if the cryptocurrency was strapped to a rocket ship as the price shot higher until mid December.

While early investors made a killing on Bitcoin in 2017, the real excitement all happened in December. Bitcoin started 2017 at $996, began the month of December at $10,500, then peaked on December 17, 2017, at $19,206, but ended the year at just over $14,000. When Bitcoin hit its peak, it was up nearly 100% for just the month of December, but even after falling $5,000 in only 14 days, it still ended the month up more than 30%.

While Bitcoin may have only risen 30% in December, it increased more than 1,350% in 2017, with nearly 400% of that gain coming in December and 800% of its coming after November 1st. So what happened in the last two months of the year that caused the price of Bitcoin to rocket higher, in such as short period?

In one word, Exposure!

In early November the general public, those outside the world of finance, began hearing about Bitcoin and cryptocurrencies for the first time. They were being told Bitcoin and cryptocurrencies where the wave of the future. Blockchain technology was going to change how business transactions were being processed. They were being told that investors were making money hand over fist and this was the time to get in. There would only be 21 million Bitcoin’s ever mined, thus not allowing others to manipulate the price and that no one person, government, or central bank controlled this new digital currency.

They were told, buy a cryptocurrency now, and you will make a killing, Bitcoin only keeps going higher, it’s easy money.

None of the information the average person was being told was a lie. It was all true.

This increased exposure hit a tipping point when Thanksgiving rolled around. With the holiday falling on a Thursday, it is believed that the conversation at many dinner tables across the U.S. touched on cryptocurrencies and Bitcoin at some point, because over the course of the following three days coinbase, the largest and most well known cryptocurrency exchange had over 100,000 new accounts open up.

The price of Bitcoin jumped more than $2,000 from November 24th to the end of the month.

The coming December 2017, which will be known as the month of Bitcoin Futures. The two largest U.S. future’s markets both saw their proposals to offer Bitcoin futures approved, and trading of said futures began during the month. The Commodity Futures Trading Commission approved the bitcoin futures and the CBOE, CME, and the Cantor Exchange all began trading Bitcoin Futures during the month.

The reason Bitcoin Futures where so important is because simply by gaining the ability to have a futures market, Bitcoin’s legitimacy increased in a blink of an eye. Furthermore, now that there where Bitcoin futures trading, the big Wall Street funds and investors could now get in on the cryptocurrency action.

The new money would start flowing into Bitcoin through the trading of its futures. This was huge in terms of making the asset more well known and respectable. But, unfortunately, it only hurt Bitcoins greatest attribute, its limited supply.

See Bitcoin Futures, unlike other futures contracts, are not settled with Bitcoins, they are settled for cash. This means when you buy Bitcoin’s through the use of a futures contract; you don’t end up owning Bitcoin’s, you just get the value of the agreed-upon Bitcoins in cash.

Therefore, when Bitcoins are traded with futures contracts, the actual supply and demand of actual Bitcoin’s is not affected. There was one other thing that happened in December which affected the supply and demand of Bitcoin, Bitcoin Cash.

Bitcoin Cash was created when Bitcoin’s blockchain was forked back at the beginning of August. Those who owned one Bitcoin, now owned one Bitcoin and one Bitcoin Cash when the fork occurred. But, Bitcoin Cash was difficult to trade until Coinbase, began offering an exchange in December. Once it was easy to trade Bitcoin Cash, Bitcoin itself saw its price take a hit.

Furthermore, this event publicized the fact that Bitcoin had been forked in the past and that there were a lot of people planning to fork it again in the future. Each time Bitcoin is forked, and a new cryptocurrency begins, it increases the supply of cryptocurrencies available in the market. It hurts the original idea that there would only be 21 million Bitcoin’s ever mined. It hurts the idea that 1 Bitcoin is worth more than 1 Bitcoin Cash, or 1 Litecoin or 1 Ethereum or any of the other hundreds of cryptocurrencies now available.

Bitcoin futures are still new, how Bitcoin Cash or the other cryptocurrencies will affect Bitcoin, and how different world governments and agencies will handle cryptocurrencies is still very much unknown. But, after a wild end to 2017, the cryptocurrency industry isn’t yet showing signs of slowing in 2018. It should be fun to watch it unfold.

Happy New Year and Happy Investing in 2018,
Matt Thalman
INO Contributor - ETFs

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