How the decision to block bitcoin ETF affects the cryptocurrency

So, last week on Friday the 10^th of March the SEC denied a request by the Winklevoss Brothers to have a bitcoin ETF. You may recognize the Winklevoss brand from their company Winklevoss Capital which has been an investor in various capital market startups.

Their bid to create a bitcoin ETF was made back in July 2013 when the value of one bitcoin was only slightly above $100. The Winklevoss brothers have always been interested in bitcoin, and according to a statement issued back then in 2013, the company apparently owned 1% of all bitcoin in circulation.

About the Winklevoss’ bitcoin ETF

Since an ETF works by tracking the value of another asset, the proposed bitcoin ETF would work the same. Named the Winklevoss Bitcoin trust ETF, data for bitcoin prices would be acquired from Gemini, an exchange for digital currency including bitcoin. If approved, the bitcoin ETF would then have been available for trade at Bats Global Markets.

There are other similar bitcoin ETFs in the works besides this one by the Winklevos brothers, such as those by the NYSE to have the Grayscale Bitcoin Trust and the SolidX Bitcoin Trust ETFs. The deadline for the SEC’s ruling is on the 22^nd of September, and the former seems to be a worthier candidate for the first bitcoin ETF in the US.

Why the SEC rejected the bitcoin ETF

According to the statement issued by the SEC, the regulator’s main concern was the unregulated market the cryptocurrency was traded on. Bitcoin is mainly an over-the-counter product being traded over several exchanges around the world. Furthermore, there is very little regulation over bitcoin in any of those exchanges, which the SEC feared would breed manipulation.

The choice to use Gemini as the bitcoin exchange was also partly responsible for the Winklevoss’ bid’s failure. Gemini currently controls less than 1% of the global cryptocurrency, so they are not really a major exchange. A comparison could be made to Coinbase, which the CEO claims to control 10% of global bitcoins.

Then there is also the argument that most bitcoin are mined and traded in China and Japan rather than the US. As such, it is understandable why the SEC may have been wary of creating such an ETF. It is still possible for Winklevoss Capital to file another application with the SEC to have their bitcoin ETF approved, which would give the SEC 240 days to make a decision.

In response, Tyler Winklevoss, one of the Winklevii as they are sometimes called, said that they are still determined to make the bitcoin ETF happen. In a statement to Market Watch, Tyler indicated that they agreed with the decision by the SEC, but that they were still determined. The SEC also showed some sign of flexibility after stating that bitcoin-related markets may develop in the future.

Market reaction

Before the SEC report came out with the deadline on the 11^th of March, bitcoin value soared above $1,300 as market sentiment believed such an ETF would make the value of the cryptocurrency jump. Instead, there was a massive drop in the value of more than 15% with the value reaching $1,060.

Still, this was not enough to get bitcoin down, and there was a massive rally that followed thereafter. The value of bitcoin is currently at $1,238 at the time of this posting.