The first Bitcoin ETF has a chance to win approval from the Securities and Exchange Commission (SEC) as soon as March 11 - just five weeks away.
A Bitcoin ETF (exchange-traded fund) would be a huge deal. Needham & Co. analyst Spencer Bogart estimated last month that the first Bitcoin ETF would attract $300 million in its first week of trading.
In his Jan. 10 note, Bogart said a Bitcoin ETF would "drive the price of Bitcoin up significantly," although he didn't give a price target. In a previous report, Bogart forecast the increasing adoption of the digital currency would push the Bitcoin price to $17,473 by 2025.
But most experts (including Bogart) see a March approval as unlikely. They cite reasons like the newness of the digital currency, the unsettled regulatory environment, volatility, China's dominance in Bitcoin trading, and that Bitcoin doesn't exist in physical form.
And yet several mitigating factors could nudge the SEC to approve the first Bitcoin ETF in March anyway.
Before we get to those, here's where things stand now...
Who's Ahead in the Race for the First Bitcoin ETF
At the moment, three contenders are seeking SEC approval to become the first Bitcoin ETF: the Winklevoss Bitcoin Trust (BATS: COIN), the SolidX Bitcoin Trust (NYSE Arca: XBTC), and the Bitcoin Investment Trust (OTCMKTS: GBTC).
The Winklevoss Bitcoin ETF filed the earliest, back in July 2013. The Winklevoss Bitcoin ETF is the one that has the March 11 last day for approval of a requested rule change that would allow the ETF to trade.
Last July, the second contender, the SolidX Bitcoin ETF, filed its S-1 form with the SEC. The last day for approval of SolidX's request for a rule change is March 30.
The third contender, the Bitcoin Investment Trust, has been trading on the OTC market since May 2015 but as a fund for accredited investors.
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Last month, the Bitcoin Investment Trust filed with the SEC to become a full-fledged Bitcoin ETF that would trade on the New York Stock Exchange. BIT's recent filing means any SEC approval is several months away.
While such activity might seem to bode well for SEC approval of at least one Bitcoin ETF, the prevailing thinking is that it's a very long shot.
Bogart puts the odds at less than 25%. He cited the "fear, uncertainty, and doubt" surrounding Bitcoin and the SEC's duties to protect investors.
"If a Bitcoin ETF were approved and something went very wrong it would likely reflect poorly on the SEC," Bogart wrote.
Former General Counsel David Brill of Gemini, the New York Bitcoin exchange run by the Winklevoss twins, told CoinDesk last month that he believed March approval of the first Bitcoin ETF is "unlikely" given that so much of the trading occurs in China.
"The overwhelming majority of trading is not being done in the U.S., and being done in an area where the rules and regulations are not consistent with the rules here," Brill said.
And then there's Money Morning Capital Wave Strategist Shah Gilani, who considers Bitcoin a sort of "derivative of fiat money," which itself is backed only by faith in the government that issues it.
The lack of any physical asset will trouble the SEC, Gilani said. "In my opinion, approval isn't likely."
But despite the negative outlook, no one categorically ruled out the possibility of SEC approval of the first Bitcoin ETF.
Here's why the SEC might surprise everyone come March...
Three Reasons the SEC Could Approve a Bitcoin ETF
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The best argument for approval of a Bitcoin ETF in the United States is that someone else did it first - and it's worked.
Both are ETNs (exchange-traded notes) run by Sweden's XBT Provider AB that trade on Nasdaq's Stockholm-based market: the Bitcoin Tracker One, which is priced in Swedish krona but tracks the Bitcoin price in U.S. dollars, and the Bitcoin Tracker Euro, which is priced in euros.
As ETNs, they're structured somewhat differently than an ETF, but all are exchange-traded products ultimately backed by Bitcoin. Within six months of launch in May 2015, both ETNs were among the most heavily traded on the Nasdaq Nordic exchange.
Trading was suspended for about two weeks in mid-2016 as the ETNs switched guarantors, but otherwise have operated smoothly.
The successful operation of two Bitcoin ETNs on a major world exchange should ease some of the biggest concerns the SEC would have, such as the impact of Chinese trading and how a Bitcoin ETF would react to volatility.
The SEC can also look at the Bitcoin Investment Trust's track record, although its limited market makes it less indicative of how an openly traded Bitcoin ETF will fare.
The SEC should also be encouraged by the People's Bank of China's moves last month to rein in risky trading practices on the Chinese Bitcoin exchanges.
China's three main Bitcoin exchanges all slapped curbs on margin trading in mid-January. A week later, the Chinese exchanges added fees to trades to cut down on the high-frequency trading that had inflated trading volume numbers and encouraged speculation.
Finally, the widely accepted assumption that the SEC will take the safest course by denying a Bitcoin ETF doesn't give the agency enough credit...
Don't Forget the Lessons of the First Gold ETF
People forget that when the SEC approved the first gold ETF in 2003, it took a risk. Basing an ETF on a commodity like gold was a new and untested idea at the time - like basing an ETF on a digital currency is now.
Katie Trkla, a partner at law firm Foley & Lardner LLP, worked on the team that got the StreetTracks Gold ETF approved by the SEC in 2003 (now known as the SPDR Gold Trust ETF [NYSE Arca: GLD]).
Trkla said the GLD ETF was stalled for a time - much like the Winklevoss Bitcoin ETF - as the SEC worked through its concerns.
"They were looking at how it would work compared to securities," Trkla told Money Morning. "They wanted to be sure investors would know how to value it as an investment."
She said the SEC also wanted to make sure that market pricing the GLD ETF used to set its price would be reliable, transparent, and not subject to manipulation. "The primary mission at the SEC is investor protection," Trkla said.
Because GLD broke new ground as the first commodity-based ETF, the SEC also had to take the unusual step of reaching an agreement with another agency, the Commodity Futures Trading Commission (CFTC).
Given these complications, the SEC could easily have just denied the GLD proposal - but it made the extra effort to approve it.
It also may have helped that other ETFs based on gold were already operating elsewhere (Australia and the UK) - another similarity with the Bitcoin ETF proposal.
So the odds of the SEC approving a Bitcoin ETF next month might be higher than most imagine.
And if the SEC is really on the fence, it has the option of taking no action. Then the rule is approved automatically. It's rarely done, but in this case it could make sense.
Marco Santori, a blockchain and digital currency lawyer - and a former chairman of the Bitcoin Foundation regulatory affairs committee - thinks it's a good possibility.
"If that happens, the SEC will be spared the consequences of having approved a fund based on a risky asset and the public will benefit from additional access to a burgeoning asset class," Santori told Money Morning.
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About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.