Will an ETF ever be approved?

The Winklevoss ETF was not the only bitcoin ETF waiting for SEC approval. Two other ETFs, the SolidX Bitcoin Trust ETF, and Grayscale investments Bitcoin Investment Trust (BIT) are also awaiting approval. Following on from how the Winklevoss ETF was treated, the SEC will likely defer decisions on them, in the hopes something changes.

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So why did the Winklevoss ETF get denied?

ETF's are derivatives, they let you trade an underlying asset without owning the underlying asset, instead you own a share in the ETF.

The SEC was concerned that the price of the underlying asset - bitcoin - was being manipulated. In their statement they said the following:

the Commission believes that the significant markets for bitcoin are unregulated and that, therefore, the Exchange has not entered into, and would currently be unable to enter into, the type of surveillance-sharing agreement that helps address concerns about the potential for fraudulent or manipulative acts and practices in the market for the Shares

In other words, if most of the bitcoin trading was happening in regulated US bitcoin exchanges, the SEC would have granted the ETF.

As it was, a third of the trading was being done in China which had a reputation for fake volume (though the PBOC has stepped in to stop that and start regulating the Chinese exchanges). A significant chunk of the trading is done out of HongKong (Bitfinex).

There are two American regulated exchanges - Coinbase/GDAX, and Gemini, both of which applied for and got an expensive New York State bitcoin licence.

The Winklevoss twins launched Gemini in October 2015 - it's likely they did so because of feedback from the SEC for the need for regulated exchanges.

Unfortunately they struggled to build up a large amount of volume. They made a rookie mistake right at the beginning when they caved when they received a complaint from a high-value customer who had made a fat-finger error and lost money on trades. The rule is, if you make the mistake, you eat the loss - and this applies to trades on the NASDAQ and NYSE as well as bitcoin exchanges. But the nervous Winklevii, anxious to please their customer, rolled back the fat-finger trades - which annoyed all the market-makers on the other side of those trades. They pulled their coins out, and word spread about what happened, and Gemini struggled to build up much volume.

The other issue is with the type of people who trade bitcoin - they have anarchist leanings and hate the word "regulated" - they avoid regulated exchanges on principle, even though they are safer, and even though these self-styled anarchists are the first to complain when they lose money on an unregulated exchange. Both Coinbase and Gemini have suffered abuse for daring to comply with the law and become regulated.

Conclusion

If and when bitcoin traders grow up and regulated exchanges have the most volume, then the two remaining ETFs will get approved. However, if the regulated exchanges struggle with less than 10% of the total bitcoin trading volume, the other two ETFs will also get denied. Which is a pity, because there is some serious money in pension funds and hedge funds that would love to invest in bitcoin, but their trust charters only allow them to invest in products approved by the SEC.