Late Friday afternoon the Securities and Exchange Commission released their ruling on the proposed Winklevoss Bitcoin Trust, what would have been the first Bitcoin ETF. Bitcoin's had traded as high as $1,300 per coin on Friday prior to the announcement from the SEC, but following the ruling, the price had fallen more than 20% at one point, leveling off down 10%.
The Security and Exchange Commission released their ruling denying the proposed Bitcoin ETF and within the ruling, the SEC's reasoning for denying the application follows below.
"As discussed further below, the Commission is disapproving this proposed rule change because it does not find the proposal to be consistent with Section 6(b)(5) of the Exchange Act, which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest. The Commission believes that, in order to meet this standard, an exchange that lists and trades shares of commodity-trust exchange-traded products (“ETPs”) must, in addition to other applicable requirements, satisfy two requirements that are dispositive in this matter. First, the exchange must have surveillance-sharing agreements with significant markets for trading the underlying commodity or derivatives on that commodity. And second, those markets must be regulated."
In plain English the SEC is saying the Bitcoin ETF was rejected because the underlying commodity, in this case Bitcoin, needs to be regulated, which that’s the whole purpose of Bitcoin, it's not regulated. Bitcoin was designed to be unregulated, with no ties to banking institutions or governments. With relationships with either of those entities, the currency therefore is an unregulated form of investment. The reason this matters is because at the end of the day, the SEC is required to do its best at protecting the general investing public from fraudulent and easily manipulated investments. And because Bitcoin is unregulated in some terms, the SEC can't allow the ETF.
While the Winklevoss Bitcoin ETF was not the only one, due to the reason why it was denied, investors can assume the other two proposed Bitcoin ETF's will also likely be denied. The value of Bitcoin's has been on a roller-coaster ride lately. Back in January the price of one Bitcoin had fallen to around $800, only to slowly rise above the $1,200 mark as investors anticipated the possible ETF. The demand for Bitcoin's would have rocketed higher if the ETF was approved. Investors pushing the price of Bitcoin's higher the last few weeks were speculating that the ETF would be allowed and they would have made big returns in the wake.
Now that the SEC has ruled against, Bitcoin's price will likely be affected by low demand and high supply as ETF speculator investors sell their coins. In the short term, Bitcoins price could fall back around the $800 mark due to both the lack of an ETF and the tougher scrutiny China's government is placing on the currency.
On Thursday two of China's largest Bitcoin exchanges, Huobi and OKCoin disabled withdraws for Bitcoins and another digital currency. The reason was given was that the exchanges were asked, by the Chinese Government, to upgraded their Anti-Money Laundering systems. The two exchanges controlled about 25% of the global Bitcoin exchange market.
The price of Bitcoin fell to $959 on Thursday after this news was announced, but with the pending SEC ETF ruling, Bitcoins bounced back quickly. Investors should take note of these massive price swings based on news that wasn't material to Bitcoin itself, but news pertaining to the legal and legitimate nature of the currency.
Investors also point out the fact that Bitcoin's were trading at a higher price than an ounce of gold earlier in the week. While I personally am not a fan of investing in gold, at least with gold you are investing in an actual asset, a bar of metal that you can actually hold. While all commodities are priced based on supply and demand, oil, gas, wheat, and metals are all used commodities which cause fluctuations in supply and demand. But since Bitcoin's is digital, it is not actually used for anything, other than currency. And with supply being capped at 21 million Bitcoins, the only thing that will cause the price to move in the future is either real or artificial demand. Otherwise known as "highly speculator investing".
My advice again, is to stay away from Bitcoin's.
Disclosure: This contributor held long positions in Facebook at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.