To be clear, the CBOE is an exchange. The ETF is offered by VanEck (NY-based investment manager) and SolidX (crypto-focused financial services company). The CBOE wants to list the ETF on its gigantic exchange ($1.3 billion daily volume on average over the last five days). What’s an ETF?
Although they are not the first to do so, they may very well be the first to get approved and if so, the price of bitcoin (BTC) may skyrocket. Having the CBOE’s stamp of approval and backing in front of the SEC is an accomplishment in and of itself for Bitcoin.
CBOE and bitcoin (BTC) have a history of success
Earlier this year, the U.S. Securities Exchange Commission (SEC) rejected dozens of ETF applications due to volatility, liquidity and market manipulation concerns. The most memorable application was that of the Winklevoss Bitcoin Trust, which was widely anticipated but unfortunately rejected.
In CBOE’s case, however, the SEC is seeking public opinion, which suggests it is considering approving the Bitcoin ETF listing request. Further, the CBOE was the first to be approved by the SEC to offer Bitcoin Futures, which leaves the community cautiously optimistic.
As for bitcoin (BTC) itself, top crypto has struggled to recover its value over recent months but appears to be gaining momentum. Bitcoin currently continues to hold above $6,500k. However, should the SEC approve the Bitcoin ETF application, we expect a positive market reaction followed by an inflow of capital into bitcoin (BTC) specifically.
High chances of getting approved
When analyzing the application, the case for the CBOE looks strong. To name a few, here are some of the most important factors that can earn the SEC’s approval:
- History of success with SEC (well-established, recognized and regulated exchange, first be approved for BTC futures)
- Targeting high net worth individuals/funds (each share will equal 25 bitcoins ~ $165,000 USD @ $6,500/BTC)
- The digital assets are insured for up to $125 million (or more as needed) by various insurance companies
- VanEck is an award-winning and widely recognized investment and money manager
- Security and technical expertise in blockchain and cryptocurrencies from SolidX
CBOE believes that offering ETF products would be beneficial for the industry and markets stating:
“This approach will allow investors to gain exposure to more mature cryptocurrencies through ETPs without the additional complications and risks of the spot market and help to ensure that American capital markets remain fertile ground for capital formation and financial innovation”
Further, CBOE urged the SEC to allow the launch of ETFs back in March. In the letter addressing some of the concerns the agency had, the company said:
“CBOE encourages the Commission to approach Cryptocurrency ETPs [exchange traded product] holistically and from the same perspective that it has historically approached commodity-related ETPs”
The letter signed by Chris Concannon, President and COO went on to state that such products were one way of providing transparency, accessibility, and exposure.
Why bitcoin (BTC) can sore if the ETF is approved
As explained earlier, the fund will only invest and hold bitcoin (BTC). Simply based on the minimum investment (25 bitcoin) and the size of the insurance policy on the fund ($125M), there is evidence suggesting strong demand from the big boys.
If approved, the timing would coincide perfectly with the release of several institutional custody solutions like Coinbase Custody. This has been an area of concern for regulators around the world for small and bigger players alike.
With volumes picking up sharply in recent days, bitcoin (BTC) has gained some momentum. A ruling by the SEC in the favor of the CBOE would be a major catalyst to a bull run and improve the short-term outlook of Bitcoin.
It’s also important to be mindful of the fact VanEck has an extraordinary reach, mountains of money to invest and a keen interest in emerging technologies and alternative investments.
In fact, they were the first to offer similar products for gold when the precious metal was gaining popularity during the gold rush. The parallel with Bitcoin, gold, and VanEck is uncanny.
What is the CBOE Bitcoin ETF?
About SolidX Bitcoin Shares ETF
The fund will track the price of bitcoin using the MVIS Bitcoin OTC Index (MVBTCO) less operational/management fees, which should be no more than 0.5% of assets under management (AUM).
By investing in this fund you would be indirectly buying Bitcoin without any hassles for a tiny fee if you can afford it. The ETF will target high net worth individuals, with individual shares of the fund representing 25 BTC a piece.
MVIS Bitcoin OTC Index (MVBTCO) tracks the price of bitcoin (BTC) on over-the-counter (OTC) exchanges. Traditional crypto price indices track the price of traditional exchanges.
The fund will buy and hold bitcoin (BTC)
According to the application submitted to the SEC, VanEck and SolidX’s fund will invest directly in bitcoin (BTC) unlike the CBOE Futures, which are settled in cash.
“[…] under normal market conditions, will use available offering proceeds to purchase bitcoin primarily in the OTC markets, without being leveraged or exceeding relevant position limits.”
Managing liquidity through OTC markets
The fund explains in its application that it will almost exclusively buy and sell coins through peer-to-peer OTC markets as opposed to traditional exchanges like CoinbasePro (previously GDAX), Bitfinex, Bitstamp, etc.
The primary reason for this, per the filing:
“The Sponsor currently expects that often it will be more cost efficient for the Trust to effect large trades (e.g., $500,000 or greater) in the OTC market rather than on a bitcoin exchange.”
SolidX Bitcoin Shares ETF custody and security
The SEC filing specifies that SolidX will be responsible for safeguarding the fund’s digital assets (bitcoin). The security protocol was explained as follows:
- [T]he Trust will secure bitcoin using multi-signature ‘cold storage wallets’
- The Trust will utilize bitcoin private keys that are generated and stored on air-gapped computers.
- The movement of bitcoin will require physical access to the air-gapped computers and use of multiple authorized signers
- For backup and disaster recovery purposes, the Trust will maintain cold storage wallet backups in locations geographically distributed throughout the United States, including in the Northeast and Midwest
The fund will be insured
The ETF proposed by the CBOE will be insured to shield investors from a loss or hack of the coins by the fund. This aspect can very well be the deciding factor for the SEC. The fund is currently insured for up to $125 million when considering ‘excess coverage’.
CBOE Bitcoin ETFs target high profile investors
The product will be offered exclusively to high net worth and wealthy investors.
This is in response to earlier concerns by the SEC that such products may pose significant risks to retail investors. The ETF in question ostensibly locks out a typical retail investor. For one, these products will too expensive for an ordinary investor.
Each share to be offered by the firm will constitute 25 bitcoins. This means it would cost about $150,000 (going by current Bitcoin prices) to acquire a single share, something the average retail investor can’t afford.
According to the filing:
The Sponsor expects that the Shares will be purchased primarily by institutional and other substantial investors (such as hedge funds, family offices, private wealth managers and high-net-worth individuals), which will provide additional liquidity and transparency to the bitcoin market in a regulated vehicle such as the Trust.
Status of the CBOE Bitcoin ETF listing proposal
At the moment, the SEC is expected to sieve public comments on the matter as it involves having the shares traded on a regulated exchange.
Individuals who wish to contribute in one way or the other have been asked to send comments by filling an online form. They can also do so by emailing the commission directly. Make sure to include SR-CboeBZX-2018-040 as the email subject.
Bonus: What’s an ETF? back to top
For those who never heard of ETFs, this investment product is a ‘baskets’ of various stocks/funds/bonds but trades on a stock market like a normal stock.
Imagine you had a bit of spare cash and wanted to invest in the U.S. tech sector (as opposed to one individual stock).
Instead of buying each stock individually (time-consuming, technical and expensive), you can invest your money in one FANG ETF that holds companies like Facebook (F), Amazon (A), Netflix (N), and Google (G) all at once. It’s quick, smart and convenient.
This type of investment has grown by leaps and bounds recently for various reasons. ETFs are cheaper, faster and perform better than traditional investment vehicles like mutual funds.
Mutual funds can take up to 3 business days to settle a buy or sell request, which is both inconvenient and quite honestly archaic in this day and age. It is important to note that mutual funds are actively managed, while ETFs are passively managed.