Bitcoin ETF: What it is and not

Anxiety over the outcome of two bitcoin-based exchange traded funds (ETFs) set to be decided by the US Securities and Exchange Commission (SEC) has the entire virtual currency world on high alert. Whatever the decision is could have a deep impact on the direction of the market going forward.

Investors who are anticipating a positive decision are already taking their positions, leading to a 15-day surge in the price of bitcoin on Wednesday.

Back in Nigeria, the confidence in a favourable decision seem not so high as volume of transactions in the second and third of August are yet to hit the highs they did on the first week according to the LocalBitcoin index. The first week saw transaction volume reach N1.6 billion from N1.5 billion the previous week. However, the second and third weeks have hovered around N1.3 billion and N1.44 billion respectively.

The SEC’s decision on ProShares Bitcoin ETF and the ProsShares Short ETF is expected on Thursday, August 23. Coindesk explains that the ProShares ETF proposals – initially submitted to the SEC last December – are underpinned by bitcoin futures contracts, rather than any physical holdings of bitcoin itself. In essence, the ETF’s value will be determined by the bitcoin futures contracts trading on CME or the Cboe Futures Exchange, according to the original filing.

What Bitcoin ETF is

An exchange traded fund (ETF) refers to a marketable security that tracks an index of funds, a commodity, or a basket of assets. An ETF trades like a stock on the Nigerian Stock Exchange (NSE) for example, but not with the same degree of risk.

It is considered the future of virtual currencies like bitcoin. Prior to now, to trade bitcoin you must own a wallet with actual bitcoins deposited in it. But the ETF makes it possible for a people who do not want to own bitcoin to trade in bitcoin and make profit from it. Buying a share of an ETF means you do not actually own the underlying asset (bitcoin), rather you own a piece of the fund, how the fund is structured and where the money is going.

What Bitcoin ETF is not

It is not a regulation on the entire bitcoin market. This could be where the problem lies for the SEC. Approving an ETF means a high level of regulation. In the case of bitcoin ETF, SEC will only be regulating a part of the highly volatile market they have control over but not the entire market which is still unregulated.

“If the bitcoin ETF is approved this week, the bear market will probably end,” Vinny Lingham, CEO of Civic Key said on Twitter. “I think there is a less than 20 per cent chance of the approval happening, but it certainly would be a very bullish signal.”