• The SEC hasn’t publicized its reasons for a delay in approving a bitcoin ETF, but it’s assumed that reasoning includes concerns over ability to scale and the impact of price volatility on the product
  • Speakers on an ETF-themed panel at CoinDesk’s Consensus aren’t convinced scalability or price volatility will be an issue

For digital assets to hit the US mainstream there has to be a “frictionless” way for investors to put in capital.

Sure, there’s Coinbase, but that involves many steps and the possibility of lost keys. There’s also closed-end funds like Grayscale’s Bitcoin Trust (GBTC), but those are also frictioned transfers in their own ways. 

The bridge between the two worlds is an ETF, as panelists argued on a recent panel at the Consensus virtual event, but there are still regulatory and scalability blockers in the way.

A Canadian success

According to the event panelists, though, these blockers are misguided. In fact, the launch of bitcoin ETFs in Toronto earlier this year could easily be considered a success. 

Investor interest in the products pushed Purpose Investments BTCC’s AUM to over $1 billion (before the recent crash), and in the weeks following the first listings, Canada’s ETF sector saw its highest-ever monthly capital inflow. While these ETFs are able to handle Canadian demand, questions remain about their ability to scale to meet demand from the world’s largest and most mature market.

In fact, one panelist, Som Seif, Purpose Investment’s founder and CEO, said parallels can be drawn between bitcoin EFTs and gold ETFs. 

“There’s always a supply and demand function issue with any asset category and ETFs work  really well when an asset can absorb the demand,” Seif said. “You’re not creating new liquidity through an ETF structure. You’re ultimately going to have to find the liquidity of the underlying asset within the structure. The reality is that you’ve seen it in gold.”

GLD, State Street Global Advisors’ Gold ETF, at one time the second-largest exchange-traded fund in the world, wasn’t an overnight success. It took time to build up its assets and liquidity at a pace the market could absorb.

Ultimately, it did have a price impact on gold because of the new demand for the asset through easy access — no vaults or buying of physical gold required. 

“The most important principle here is that the pipes, the infrastructure support that kind of demand,” Seif said. 

Retail demand for bitcoin is there, and people are going to “find a way to own this thing any way they want.” Grayscale, for all its flaws, is a $30 billion dollar plus vehicle and its success, as well as that of other closed end funds means the market infrastructure is in place. 

The volatility issue

Aside from the question of infrastructure, the SEC is also likely concerned about price volatility. In theory, rapid declines in the price of an asset as well as significant fast-paced recoveries has the potential to break a few circuits and blow some fuses. However, looking back and the most recent crash and subsequent price recovery, it’s not entirely clear that’s the case. 

Dave Nadig, the director of research at ETF Trends, said that there’s something particularly unique — and potentially comforting to regulators — that there wasn’t really any rubble left over from last week’s crash. 

“Nothing broke. Nobody had to step in. The Fed didn’t have to jump in. Nobody was too big to fail,” he said. “We didn’t hear that JPMorgan’s [crypto] desk blew up. We didn’t hear that some Fidelity customer blew up. We didn’t hear about some US hedge fund that was way over their skis blowing up.”

Overall this means the core structures are working and the market is ready for an ETF. “The price just went down and it was extraordinarily orderly. And now the price is coming back up and it’s extraordinarily ordinary,” he added. 

  • Blockworks
    Sam Reynolds is a Taipei-based reporter, covering digital assets and regulation throughout Asia. Before joining Blockworks he was an editor at Forkast News and an analyst with IDC.