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Winklevoss twins Copyright Dimitrios Kambouris, Getty Images

The Winklevoss twins.

Five Arguments for the Winklevoss Bitcoin ETF

The reasons not to approve the ETF are obvious. Here are five reasons why the SEC should.

by Eric Balchunas

(Bloomberg View) --The Securities and Exchange Commission is torn over the bitcoin exchange-traded fund. Maybe it shouldn’t be.

The agency has been sitting on, or perhaps agonizing over, a filing for the first ETF tracking a digital asset. Since the infamous Winklevoss Bitcoin Trust was filed in July 2013, bitcoin has returned an eye-popping 610 percent, while new filings for additional ETFs tracking bitcoin and ether have rolled in. Now, the SEC has announced it is seeking additional public comment.

The reasons not to approve the ETF are obvious -- namely, the questionable security and stability of bitcoin and its platforms, as well as possible new regulations. These legitimate concerns explain why this filing has been in limbo for so long and why it remains such an object of fascination. That said, here are five non-obvious reasons why the SEC should consider approving it, from a fund analyst’s perspective.

1. Look at the premium and spread of the Bitcoin Investment Trust.

Right now, bitcoin-exchange-averse investors seeking a U.S.-based investment vehicle for the digital currency are pretty much left with the Bitcoin Investment Trust (GBTC), a private, open-ended trust traded over-the-counter that currently trades at closed-end fund-esque premiums -- the difference between the price it trades at and the value of the bitcoin -- of between 50 and 100 percent. That’s not to mention an average bid/ask spread of 1.5 percent and an expense ratio of 2 percent. This kind of situation is why people love the ETF structure, with its creation/redemption process that helps keep prices and net asset values closer together via arbitrage. While a bitcoin ETF would most likely trade at premium, it would probably be much less than GBTC’s and would steadily improve as more and more professional ETF market-makers get involved.

2. ETFs break new ground.

ETFs have a long history of penetrating new, exciting and occasionally untapped investment areas. Consider the first gold ETF, the first fixed-income ETF, or even the first equity ETF -- the SPDR S&P 500 ETF Trust (SPY) -- which took more than four years for the SEC to approve. Not that breaking ground is always an entirely good thing, but in general, it has been a net positive for investors.

A recent example of this that echoes bitcoin is the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR), which was approved in 2013. ASHR was the first-of-its kind fund to provide physical exposure to China A-shares, which at the time was only available only to mainland residents or Hong Kong firms that had a quota. ASHR sometimes limited creations as a result, and so the ETF had some periods where its price became unhinged from its net asset value. But for certain investors, it made access easy and was worth the turbulence. Since ASHR’s initial trial balloon-esque penetration, the Chinese A-share market is more liquid and easier to access, and now there about a dozen A-share ETFs.

3. It would be less volatile and more secure than other popular funds.

While there’s no precedent for an ETF tracking a digital asset, the SEC has approved vehicles that are arguably more dangerous in terms of both volatility and security. There are about 60 bona-fide ETFs that are more volatile than bitcoin. An extreme example is the Direxion Daily Junior Gold Miners Index Bull 3x Shares (JNUG). It’s more than three times as jumpy as bitcoin, sporting a near-unimaginable 60-day volatility of 180 percent versus 49 percent for the bitcoin index.

And in terms of security -- which is legitimate issue with bitcoin, given recent hacks -- it isn’t necessarily worse than the credit risk investors take when using exchange-traded notes, which have more than $25 billion in assets. Exchange-traded notes are unsecured debt obligations, and if the issuer goes bankrupt, you could lose all of your money. Lehman Brothers and Bear Stearns had ETNs, so it can happen (although it has been extremely rare).

4. It’s a wolf in wolf’s clothing.

For the most part, the risks of a bitcoin ETF are more or less obvious to average investors, since most people already view bitcoin as risky, sketchy or exotic. That suggests it would be less dangerous than the likes of the United States Oil ETF (USO), which is a wolf in sheep’s clothing: It looks innocent, but most people don’t understand is that it’s subject to crippling annual futures “roll” costs of 32 percent. In other words, the risk of a nasty surprise is much lower than it is with other ETFs on the market, such as USO.

5. The twins are utterly dedicated.

The Winklevoss twins’ dedication, resolve and patience in launching this ETF are noteworthy: It shows they aren’t some fly-by-night new issuer throwing spaghetti at the wall. They are all in on bitcoin, having spent a ton of dough on the filing process and making more than a dozen tweaks and improvements over the three years -- changing exchanges and adding security measures, a ticker, lawyers, custodians, and so forth. They could have quickly launched an OTC product, but opted to take a long, hard, expensive road.

Their dedication mixed with what will be unrelenting media scrutiny should provide some comfort that any issues with the ETF will be on the front burner. Never in the history of ETFs has a filing gotten this much media attention. Two weeks ago, they made a sleep-inducing update to a prospectus and it garnered headlines in major media outlets such as Forbes, Fortune and Reuters.

All this may not be enough to counterbalance the other issuers, but the SEC is looking for comments. So here is some more fodder for them to agonize over. That is, until someone submits a prospectus for a 3x bitcoin tracker.

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

 

To contact the author of this story: Eric Balchunas at [email protected] To contact the editor responsible for this story: Galen Meyer at [email protected]
For more columns from Bloomberg View, visit bloomberg.com/view.

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