So how has Bitcoin been performing and is expected to perform in 2020? Let’s analyze the trends in Bitcoin and the concerns related to it that we have been recently hearing about in cryptocurrency news.
What is a Bitcoin ETF?
There are a couple of principle reasons why we want a Bitcoin ETF to be approved. A Bitcoin ETF would offer investors the protections and disclosures of federal securities laws that are not afforded through existing Bitcoin ownership options. Furthermore, ETFs bring with them transparency in the underlying asset ownership through a net asset value (or NAV), intra-day liquidity and simplicity in tax reporting. Finally, the US operates some of the most trusted and liquid markets in the world as a globally respected regulator. The SEC’s approval could be viewed as a signal to other financial regulators around the globe regarding the legitimacy of Bitcoin and the crypto asset space.
What are SEC’s concerns towards ETF proposals?
But as you may know, it has not been smooth sailing up to this point. The SEC’s top concern, as indicated by its past rejections of ETF proposals, is that price manipulation in the underlying markets will negatively affect any listed products. So, this term price manipulation gets thrown around a lot, but what does it actually mean and why is it preventing a Bitcoin ETF from getting approved? Well, quite simply, price manipulation occurs when someone seeks to move a market artificially by driving the securities price higher or lower and in turn, this issue presents a significant roadblock to the launch of a true crypto product on an SEC registered exchange. Of the 26 crypto ETF applications that we’ve seen, 12 of which were denied and another 12 of which have been withdrawn, the common approach has been to demonstrate that manipulation isn’t happening on “trustworthy: exchanges, but the SEC’s concerns extend further than that.
Regulators are looking for assurance that activity in the Wild West parts of the crypto space isn’t affecting overall market prices. This is what the SEC is looking for, and we know this because in its disapproval notice of the Bitwise Bitcoin ETF application in October, the SEC brought up a new issue not addressed in previous ETF denials. “The relationship between prices on digital asset exchanges with ‘real’ volume and those that do not currently pass vetting standards.” The SEC itself called for more information on lead-lag relationships and its rejection of the Bitwise ETF. Stating, “the commission has no basis on which to conclude that prices on the real platforms are insulated from prices in the rest of the market.” So to address this, we’ve seen analysis from firms such as Digital Asset Research who said of their findings, “We believe this shows that in the time period analyzed activity on digital asset exchanges that failed to pass our vetting process have a limited impact on price discovery.” And, more lead lag studies are well underway in the coming months. Regulators and market participants can expect greater clarity on whether venues that exchange in questionable activity have a tangible impact on prices. If they don’t, this could be highly promising for an ETF and help further discussion with the asset management industry, regulators, and crypto native investors. I think this is also perfectly coupled with the absolute explosion of Bitcoin Futures and Options products hitting the market right now, which opens the door further to risk adverse traders and firms — exposure to a new asset class with all the comforts of the old world, without the custody headaches and signup hassles.
What’s the role of the Options market in this?
In particular, the Options market is really driving some of the growth we’ve seen lately. In a sense, Options offer optionality allowing traders to purchase an asset at a certain price, known as a strike price, at a future date. For instance, if the price of Bitcoin is trading at $7,500 a trader could buy a call option to purchase Bitcoin at $10,000 a month later. If at that point Bitcoin is trading above $10,000, known as being in the money, then the trader would reap the profits of the spread between the strike price and Bitcoin’s market price. Importantly, Options also allow investors to manage risk. Options offer investors the ability to buy downside and upside protection. Where I think this is really useful is for one of the most important corners of the Bitcoin market: miners. As it stands right now, it’s not exactly clear what will happen to Bitcoin’s price following the so-called halving event, which will cut Bitcoin miner rewards in half, so miners need to get more efficient and to do so, they need to invest more and Options are integral to risk management — but let’s not discount the other potential effects of the having event in May.
How would the halving event affect the Bitcoin price?
For those unaware, there will only ever be 21 million Bitcoin in circulation and that ensures that Bitcoin remains a deflationary asset that is designed to rise in value over time. The halving event is not only a symbolic reminder of this concept, but as a tangible milestone at which the tokens incoming supply is decreased. We should see decreased sell pressure on the markets primarily due to a lower number of Bitcoins being available to miners. This makes it more likely that we’ll see a medium-term increase in the price of Bitcoin. Furthermore, the halving is also a sign of a healthy market as it demonstrates a fundamental difference between Bitcoin and Fiat — predictability and transparency. It demonstrates that predictable math and code can substitute for the subjective whims of politicians and bankers in a transparent manner. With Fiat, no one really knows how many dollars exist, how many will be created next year, what the inflation rate will be 12 months from now, and how exploding debt will continue to affect the markets. But in contrast, as the halving demonstrates with Bitcoin, everybody knows how many Bitcoins exist, how many will be created next year, and even what the inflation schedule will look like 10 or 20 or 50 years from now. That sort of predictability of supply is simply non-existent in Fiat today and proves to be even more transparent than a limited supply commodity like gold, regardless of one’s personal opinion on the future of this asset class.
Enough quantitative evidence exists from Bitcoin’s first decade to suggest that it has a role to play in everyone’s portfolio. But let’s talk about your portfolio. What are you investing in in 2020? Do you think Bitcoin is primed for an ETF? What do you think will happen after the halvening?