HodlBot Founder predicts the first Bitcoin ETF that the SEC will approve will be physically supported
Several applications for a Exchange-Traded-Fund (ETF) of Bitcoin (BTC) have been sent to US Securities and Exchange Commission (SEC) for review and approval but the SEC has denied many of these proposals, including those of the twins Winklevoss, Proshares, Direxion and GraniteShares.
The SEC referred to the liquidity and valuation issues associated with the ETF crypto proposals as a reason for the denials. However, observers seem optimistic that the first SEC-approved Bitcoin ETF will hit the market in 2019.
Anthony Xie, Founder of HodlBot he says it is quite positive that any Bitcoin-based Bitcoin ETFs will be rejected, adding that the first Bitcoin ETF that the SEC will approve will be physically supported.
According to him the reasons are not far-fetched. The ETFs that physically hold bitcoins have the advantage of a low transaction cost compared to the high exchange rates applied to exchanges between Fiat and Bitcoin. In addition, they track the bitcoin's performance and offer a huge liquid market.
However, Anthony said The ETFs that physically hold bitcoins are not without risks and concerns, being the main counterparty risk, a high expense ratio and may have markets closed for ETFs but open for bitcoins.
On the other hand, ETFs that buy bitcoin derivatives do not have to worry about the security risks associated with owning Bitcoin since they do not take any Bitcoins into custody. However, Anthony says that this type of ETF is less likely to be approved because it has management risk and management costs, margin call risk, rollover risk, leverage and trading risk and approximates bitcoin performance.
The biggest concern for the ETFs that hold Bitcoin is the risk of custody. But Anthony said he believes mitigating credit risk is easier than mitigating the risks of improper tracing of Bitcoin through derivatives trading.
Legitimate custody services are popping up: Coinbase Commerce, Xapo, it Bit, Bitgo. In the future, it is very likely that even the big financial institutions will enter the game. The secure storage of BTC is difficult, but not impossible.
On the other hand, the risks associated with Bitcoin futures trading are not so easy to mitigate. Investors must put a lot of trust in the active manager to approximate Bitcoin's performance by using derivatives. It will be less transparent, cost more and a small price change can have a strong impact on performance due to leveraged trading.