Right now, crypto bulls are pawing the ground… gathering strength… and getting ready to charge.
If you’ve ever seen a bullfight, you’re familiar with this act. Known as “desafio” in Spanish, it happens right before a bull charges. And in finance, investing during the “desafio” time can be immensely profitable.
When the J pattern appeared in Bitcoin in late 2015, Bitcoin soared 7,247% in the next 18 months. Today, the same J pattern flashed in a tiny crypto one crypto insider calls the “New Bitcoin”.
And – like Bitcoin in 2015 – this tiny crypto could soar hundreds of percent, if not more, in the coming months. Continue reading here.
You see, the bulls have been quiet in the cryptocurrency markets. All the “weak hands” (investors who don’t have the conviction or resources to prepare for the next charge) are leaving the sector.
But it’s all part of the process of gathering strength for the next charge.
The crypto market just needs a catalyst that will make investors pour back into the sector.
And that catalyst could be the approval of the first true bitcoin exchange-traded fund (ETF) in the U.S.
Is a bitcoin ETF imminent?
Right now, investors in the U.S. who don’t know how to buy bitcoin (or are too afraid) don’t have many options to invest in the sector.
The few ETFs that are tradeable are generally baskets of individual stocks, some of which are involved in the cryptocurrency industry (a good example is the WEB X.0 ETF (NYSE; ticker: ARKW)). These ETFs don’t give you exposure to the actual price of bitcoin, though. And ARKW specifically has less than 4 percent of its resources allocated to cryptocurrency stocks. The rest is in cloud computing, e-commerce and tech stocks.
An ETF called the Bitcoin Investment Trust (OTCMKTS; ticker: GBTC) gets us closer to our goal. Unfortunately, it trades on small “over-the-counter” exchanges. That means it’s not subject to the same stringent requirements as the “big board” stocks and ETFs that trade on major exchanges like the New York Stock Exchange. So it’s off-limits for a lot of institutional investors.
And GBTC is a lousy way to invest in bitcoin anyway, because it trades at a massive premium (an average of 44 percent over the past year) to the actual price of bitcoin. That means that to buy a dollar’s worth of bitcoin, you’re actually paying US$1.44 (you’ll find more reasons why you should avoid GBTC here).
In short, there’s currently no bitcoin ETF that trades on a major stock exchange with low management fees that reflects the value of the underlying asset it represents.
And there’s just one hurdle to getting a true bitcoin ETF to market: the U.S. Securities and Exchange Commission (SEC).
So far, the SEC has rejected applications for a bitcoin ETF, citing “bitcoin’s volatility and potential illiquidity.”
Of course, bitcoin is volatile and can lack liquidity. But the market is rapidly maturing.
When the SEC has turned down bitcoin ETFs in the past, it cited the lack of a bitcoin futures market as one of the reasons. (Futures contracts give investors the ability to lock in prices for bitcoin at a specific date in the future. That helps reduce in volatility (since investors can use futures prices as a guide for where bitcoin’s price is heading), and the buying and selling of futures contracts injects liquidity into the market.)
Since then, two Chicago exchanges have launched bitcoin futures contracts.
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The SEC has taken note. In June, it announced it’s seeking public comments as it considers another application for a bitcoin ETF from financial services firm SolidX.
To bolster its case for getting approved, SolidX has partnered with one of the largest ETF management firms in the world, VanEck. The bitcoin ETF they hope to launch specifically targets institutional investors. So they’re setting the price for a single share at US$200,000.
ProShares, which operates more than 100 ETFs, also has two bitcoin ETFs pending with the SEC.
All told, more than a dozen bitcoin ETF applications have been filed. John Hyland, the global head of exchange-traded products for Bitwise Asset Management, which manages a private cryptocurrency index fund, says the SEC could potentially approve one of them in the next few months.
He pegs the odds of that happening at around 20 percent. If the SEC fails to approve an ETF in 2018, he believes there’s a 60 percent chance it will happen in 2019.
And remember the name Bitwise, because with the strong executive team they have assembled, I think it’s a matter of “when” they get their ETF index fund approved, not a matter of “if.”
How big would an ETF be?
The combined value of all cryptocurrencies currently sits at US$250 billion. That might sound like a lot, but it’s not compared to the size of the US$30 trillion U.S. stock market. Meanwhile, tech giant Apple is worth nearly four times the value of cryptocurrencies.
In fact, there are 14 other individual U.S. stocks that are all bigger than the entire crypto market. So the market just isn’t that big yet.
But a bitcoin ETF would push the sector to the next level. Here’s how:
- As investors buy shares in a bitcoin ETF, the ETF’s manager will buy bitcoin to back those shares. Initially, that will put upward pressure on the price of bitcoin. As bitcoin rises, the ETF could look more attractive to more buyers and a virtuous cycle could begin.
- The SEC’s blessing will legitimise the sector in the eyes of more traditional investors and likely encourage them to get involved – further adding upward pressure on the price of bitcoin.
- Retail investors who don’t have the time or inclination to buy bitcoin directly will be able to take a position directly in their brokerage accounts with the click of a button.
- Margin trading (a way for investors to borrow money so they can buy additional shares) will let investors make even larger bets on bitcoin than they might otherwise be able to do.
- Once the SEC approves one bitcoin ETF, they’ll have no reason to reject others. And each new ETF will open the door for more investors. In addition, we could see the SEC approve ETFs that track cryptocurrencies in addition to bitcoin (coins and tokens like Ethereum, Ripple, EOS and Litecoin).
I can’t overemphasise just how big of an impact a bitcoin ETF could have on the crypto sector. Some estimate a bitcoin ETF could quickly add US$420 billion to bitcoin’s market cap. Even if we hit half that number, a single bitcoin would be worth more than US$31,000 – a gain of over 350 percent from today’s prices.
Arthur Hayes, the co-founder and CEO of BitMEX, the world’s largest cryptocurrency exchange by volume, believes that number is conservative. He thinks that bitcoin will reach US$50,000 by the end of 2018. We just need one positive regulatory decision to get us there, and an SEC-approved ETF might be it.
The darkest hour
Cryptocurrency is in a bear market right now. Bitcoin dipped briefly into the US$5,000 range in late June, which put it 70 percent down from its highs of more than US$19,700 in December 2017. It’s currently around US$6,500.
But while a lot of investors are tucking tail and running for cover, now’s the time to be buying.
Things look bleak right now, but cryptocurrency isn’t going away. It’s just gathering strength for the next wave – one that’s so big, it’s going to make bitcoin’s old highs look quaint.
So if you’re not already invested in bitcoin, now is the time to get started.
P.S. If you’ve been thinking about how to get started in cryptos, before they take off again… this is a great way to get started. You’ll learn what you need to know… how to understand cryptos… and the basics of investing. You’ll thank yourself later.