Coverage: SEC denies bitcoin exchange-traded fund

The Securities and Exchange Commission on Friday rejected a proposed rule change that would’ve allowed for the creation of the first bitcoin exchange-traded fund.

Joseph Adinolfi and Ryan Vlastelica of MarketWatch.com had the news:

In its ruling, the SEC said it was unnerved by the lack of regulation in a market that is largely based outside of the U.S., and was worried about the potential for market manipulation.

Fortunately for investors who were hoping to buy into the fund, Friday’s decision won’t necessarily preclude the approval of other proposed bitcoin ETFs. Two other companies are vying to become the first bitcoin-focused ETF, but what might happen next is unclear.

The New York Stock Exchange filed a proposed rule change with the SEC on Jan. 25 to allow the Grayscale Bitcoin Trust to trade on its ETF exchange, NYSE Arca. The agency now has until Friday, Sept. 22 to issue its ruling. Barry Silbert, the chief executive officer of the Digital Currency Group, Grayscale’s parent company, declined to comment on the Winklevoss decision.

NYSE Arca filed another rule-change proposal to list shares of the SolidX Bitcoin Trust, another product vying to be the first bitcoin ETF, back in July, but it is unclear what is happening and representatives for SolidX couldn’t be reached for comment.

Russell Brandon of The Verge called the decision a setback for bitcoin:

The ETF is essentially a common stock fund pegged to the price of Bitcoin, allowing investors to purchase Bitcoin without the work of establishing a personal wallet. (In concrete terms, the ETFs investors will be buying shares whose price will always be the same as the the price of a single bitcoin, similar to an equivalent investment in gold or cattle.) Without a wallet, investors still won’t be able to spend Bitcoin, but they can buy and sell it at market price, adding more liquidity to the Bitcoin system overall.

Since the ETF is an investment tool, it requires approval from the SEC before it can be offered to the public. Many in the Bitcoin world were deeply unsure how the SEC would rule, with Fortunedescribing the odds of approval as “a coin toss.” Still, approval would have meant a massive new opportunity for the Bitcoin world, and some experts predicted the price of Bitcoin would double if the fund was approved.

Unfortunately for speculators, the commission ultimately concluded that the price of Bitcoin is still too vulnerable to manipulation for it to be certified. “Regulated markets related to the underlying asset provide a ‘necessary deterrent to manipulation,’” the commission wrote in its analysis. “To the extent there is some question as to the degree to which Bitcoin is subject to manipulation… regulated markets relating to Bitcoin would help answer that question and address instances of such manipulation.”

While today’s news is certainly disappointing for Bitcoiners, it won’t be the currency’s last shot at such a certification. There are still two other ETF proposals pending before the SEC, and there are significant differences that might allow either one to succeed where the Winklevoss proposal failed.

Jen Wieczner of Fortune looks at what the decision means for cryptocurrency:

Ironically, investors in the proposed Winklevoss Bitcoin ETF likely would not have captured any of Friday’s surge or swoon in the price of Bitcoin. That’s because the ETF was designed to calibrate the value of its Bitcoins just once per day, as determined at a 4 p.m. auction on the Winklevoss’ Gemini Exchange, Monday through Friday. Bitcoin, which is not bound by traditional market rules and can be traded 24/7 at any hour of the day, would have continued fluctuating after the Winklevoss ETF priced its holdings and went home for the weekend.

But investors in the Winklevoss Bitcoin ETF would not have gotten the same results as they would investing directly in Bitcoin anyway. The Winklevoss brothers have their own index to track the price of Bitcoin, which they call the WinkDex, averaging the price of Bitcoin across multiple exchanges. While the Bitcoin ETF did not plan to mirror it, the WinkDex provides an approximate idea of how the Winklevoss Bitcoin Trust would have performed.

The chart illustrates the lower volatility of the WinkDex (the orange line) compared to Bitcoin itself (the white line). Lower volatility, also known as lower risk, can often work in investors’ favor, but also sometimes against it. So far this year, for example, the WinkDex is up about 23%, but raw Bitcoin has climbed more than 30%. (That performance still far outpaces the gains in U.S. stocks, with the S&P 500 up a relatively modest 6% in 2017.)

The Winklevoss aimed to “insulate” the ETF from “price swings and volatility,” according to its SEC filings. Over time, that should pay off, as it protects against big losses. So far, though, in the little over five years of the WinkDex’s existence, it lagged the performance of Bitcoin itself, though both of their returns are off the charts. And if they can stomach the volatility, investors in Bitcoin have done quite well, and a little a bit better than if they had invested in the WinkDex. Even after Friday’s drop, the price of Bitcoin has had a 190% annual compound return since the beginning of 2012.