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Bitcoin flying as ETF gets second shot

Cameron (L) and Tyler (R) Winklevoss.
Adam Jeffery | CNBC
Cameron (L) and Tyler (R) Winklevoss.

Would-be bitcoin ETF investors are in wait-and-see mode as the Securities and Exchange Commission reconsiders whether to allow the first bitcoin exchange-traded fund to come to fruition. To the dismay of many, the SEC rejected the Winklevoss Bitcoin ETF (COIN) in a March 10 decision, citing a lack of regulation and surveillance-sharing agreements between exchanges.

Bats Global Markets, operator of the exchange on which the ETF would trade and which is owned by the same parent company — CBOE — as ETF.com, responded to the SEC's verdict by filing a "petition for review" of the disapproval on March 24.

Bats argued that the commission's initial conclusion "is clearly erroneous," "inconsistent with prior ETP [exchange-traded products] approval orders" and that "the manipulation concerns ... are overstated and largely theoretical."

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Bats urged the SEC to approve its proposed rule change, which would open the door to the listing of the ETF and "provide investors access to bitcoin through a regulated and transparent investment vehicle."

On April 24 the SEC agreed to consider Bats' petition for review and asked for public comments on the original disapproval order. The last of those comments was submitted on May 15, setting the stage for a new round of deliberations by the commission.

High bar for approval

Though hopes are high that the bitcoin ETF will eventually be approved — public comments on the fund have been largely positive — analysts aren't confident the SEC will turn around so soon after its previous negative ruling and suddenly give it the green light.

Spencer Bogart, managing director and head of research for Blockchain Capital, is skeptical that the SEC will change its tune on the bitcoin ETF.

"Their reason for disapproval was the underlying markets for bitcoin, which haven't changed in the weeks since they made their decision," he said. "One of the issues was that Bats hadn't set up surveillance-sharing agreements with the major exchanges on which bitcoin is traded, with the purpose of identifying and stomping out market manipulation. Even if they did, a lot of those exchanges reside in jurisdictions that don't have much of a regulatory body that can go and take action against people that are doing something bad to the market."

However, Bogart did leave open the possibility that the SEC's thinking could change on the ETF if a new set of people look into the matter.

"It is possible that, in the short time period from when the SEC disapproved to when the petition was granted, there was a significant regime change at the SEC," explained Bogart. "You could have a different group of people who want to review the matter because they aren't sure the decision to disapprove was a good choice. I've heard whisperings that there are many people within this administration who are friendly or at least amicable to digital currencies like bitcoin."

Bitcoin surging even without ETF

Regardless of what the future holds for bitcoin ETFs, the digital currency itself isn't fazed. Since March 10 — the day the SEC originally rejected the Winklevoss Bitcoin ETF — the price of bitcoin is up an incredible 91 percent, last hitting an all-time high of more than $2,200 on Monday. Year-to-date, bitcoin is up 130 percent.

If anything, the price only accelerated on the upside after the SEC's disapproval, though most analysts attribute the surge to other factors.

"The big driver of the rally seems to be what's going on in Japan and Korea," noted Bogart. "In Japan, recently there's been a change to acknowledge bitcoin as a legal payment method. That in and of itself wasn't significant as, generally, people don't like to spend bitcoin; they like to hold it."

"But Japan's move provides some regulatory clarity, and now there are major tech companies that want to open up bitcoin exchanges in Japan," Bogart said. "So what you saw was volume in existing bitcoin exchanges in Japan went through the roof and pushed the prices up. Koreans look closely at Japan and tend to imitate a lot of activity there, so there's been a lot of demand from that area of the world also."

"That's been the story of bitcoin," added Bogart. "A lot of times it's just sitting there doing nothing, and then either something falls apart in a particular corner of the world or in some corner of the world, some regulatory agency decides to be favorable to bitcoin, and then you see these random rallies. Then as you begin to rally, speculators pile in and it becomes a self-perpetuating cycle."

Sumit Roy, ETF.com