When the announcement came last Friday that the Securities & Exchange Commission (SEC) denied the application of the Winklevoss twins to launch a bitcoin ETF the price of bitcoin plunged on the perceived negative news. It would seem the greatest disappointment should have been felt by the two brothers since they had been trying for years to gain approval of their ETF. Indeed, it would have been the first bitcoin ETF to be listed and offer small investors a way to invest in bitcoin.
So why did traders share this ‘disappointment’, consider it negative news and sell the digital currency down so sharply? Well, by now they probably don’t know either and, for sure, wish they hadn’t since the price of bitcoin snapped right back to just about where it was before the decision.
OK, so why is that regulatory “no” a good thing (except for the ‘W boys’ of course) for bitcoin? It was estimated that the ETF would have raised anywhere from $10M to possibly $300M in a very short period of time, but in any event…………a whole lot of fresh cash. Now, putting that much cash to work buying bitcoin in a relatively thin market would have driven the price of bitcoin much higher to, well pick any number you want; $2000; $2500; $3000; more?
This would have created a certain “bubble” and an unsustainable one at that, at least in the near term. That spike would have scared many investors that have just recently come to recognize bitcoin as “legitimate” and an alternative investment, not to mention the lasting scars of those who would have jumped in on the spike and found that bitcoin can go down, too. So, in one sense, not getting approved may have “saved” a new generation from being scared out of one of the newest and most dynamic asset classes in years.
Another “good” that may have been realized with the denial is the very fact that by having the ETF “soak up” so much of the bitcoin supply, and locking it up as an investment, precludes getting bitcoin gaining traction to be used as a currency. To become more viable as an international currency of exchange, the ‘coin’ needs to be accepted by more and more participants (buyers, sellers, etc) to facilitate transaction. The more volatile the currency (bitcoin in this case) the less likely it would be used. With other ETF’s already lined up waiting for regulatory approval, the supply of bitcoins would most certainly have been reduced had the SEC approved resulting in an increased price which would have a negative effect on overall acceptance.
So, was the decision to reject the Winklevoss ETF a good thing? While certainly being no fan of unreasonable regulation, the SEC may have actually inadvertently given a big boost to bitcoin by denying the listing. Besides, they can also revisit their decision at a later date and let the average investor have access to bitcoin investments at a much higher price.
By Bill Taylor-CEO, FintekNews & CIO, TLC Capital Group