With bitcoin (BTC-USD) and the broader crypto segment bull market in full swing, there is growing anticipation that a U.S. exchange-traded fund will soon be approved by the SEC. While several platforms already offer the ability to buy and sell cryptocurrencies a bitcoin ETF listed on a major exchange would represent a milestone for the industry. The attraction of an ETF is the liquidity and effectiveness of the structure to gain direct exposure to the asset class allowing for a broader scope of investors the ability to easily integrate crypto into existing portfolios.
We expect a bitcoin ETF approval this year, potentially as soon as June, which can represent a catalyst for the price of bitcoin to climb higher based on a new wave of capital inflows into the segment. We are bullish on bitcoin which we believe is supported by several tailwinds including growing recognition among institutional investors and the main street that the crypto asset class is here to stay.
Bitcoin 2021 Price Forecast
The price of bitcoin is up nearly 100% in 2021 as a continuation of the big rally from last year. From a low under $4,000 in Q1 of 2020, BTC has climbed over 1,300% as one of the world’s best-performing assets. The current setup here has been a relatively tight trading range over the last three months, with bitcoin testing the $60k level multiple times while also holding the $50k level that appears to be strong technical support to the downside.
We view this overall consolidation as a positive for the market confirming the ability to maintain what is an elevated price level based on strong underlying support. We are bullish on bitcoin with a year-end price target of $75,000.
The reality here is that even if we end 2021 flat from the current level, most investors should be encouraged by the positive long-term outlook. Steps by major corporations to facilitate trading and payments with PayPal Inc (PYPL) and Tesla Inc (TSLA), as notable examples, highlight the ongoing adoption of digital assets in the broader economy. We believe these trends are still in the early stages and can accelerate going forward with bitcoin as the primary beneficiary being the largest and most well-known cryptocurrency.
Some anticipation that the SEC may approve a bitcoin ETF this year could signal the next stage of the bull market. A breakout above the recent high in BTC from April will likely open the door for new buying momentum as investors allocate more towards the crypto segment driving prices higher.
Update on Bitcoin ETF SEC decision
The latest development in a bitcoin ETF is that the SEC has delayed a decision on the VanEck Bitcoin Trust, which is one of several currently pending bitcoin ETFs, into June citing more time needed for review. From the announcement:
“The Commission designates June 17, 2021, as the date by which the Commission shall either approve or disapprove, or institute proceedings to determine whether to disapprove, the proposed rule change.”
Our take is that this development should be viewed as a positive signal which adds to the possibility the SEC will give a green light compared to what would have been a more disappointing outright rejection. The SEC had previously rejected all proposed bitcoin ETFs going back to the first attempt in 2016 based on questions regarding the stability of cryptocurrencies and the potential for fraud and manipulation.
There’s a case to be made that this time is different. The segment has quickly matured in recent years including a string of regulatory changes that formalize crypto-assets within the traditional financial system.
VanEck Bitcoin ETF Proposal
In VanEck’s filing for its bitcoin ETF proposal, the fund manager offers various reasons justifying the market need for an ETF included significant demand and the progress in the development of the ecosystem that strengthens the confidence of crypto as an asset class. In its submission, VanEck cited decisions by the Office of the Comptroller of the Currency “OCC” within the U.S. Department of the Treasury along with other regulatory agencies as largely addressing some of the SEC’s historical concerns on bitcoin.
Notably, in July of 2020, the OCC began allowing federally chartered banks to provide custody services for crypto assets. This is a critical element for the functioning of an exchange-traded fund that requires an independent custodian to safeguard fund assets. In other words, this ambiguity alone now resolves what would have been a deal-breaker for an ETF last year. Crypto has also received positive guidance from The U.S. Treasury Financial Crimes Enforcement Network “FinCEN” regarding the applicability to virtual currency businesses. The ETF application also notes the success of bitcoin futures contracts which already trade on the Chicago Mercantile Exchange regulated by the separate Commodity Futures Trading Commission “CFTC”.
What are the Objections to a Bitcoin ETF
One reason that SEC has not moved forward on a bitcoin ETF earlier may be related to optics. If and when a bitcoin ETF is approved, it will inevitably be seen as a proverbial endorsement by the most authoritative regulatory body which could lead a group of new investors to take a position in the new fund products. While this is certainly part of the bullish case now, we sense that there is some hesitation on the part of the SEC to take this step.
It’s possible the SEC is concerned about potentially leading investors into what remains an objectively volatile asset class and poorly understood by some. Still, our take is that it’s not in the SEC’s scope of regulation to gauge the long-term potential of an asset class or discriminate against emerging technology.
The criticism towards bitcoin volatility considering several large drawdowns of over 40% over the last several years is also flawed in our opinion. The SEC has already approved ETFs that are potentially much more speculative including funds tracking leveraged derivatives like the ProShares Ultra VIX Short-Term Futures ETF (UVXY) ETF which is down over 92% in the past year. By this measure, there is nothing necessarily exceptional about the risk profile of bitcoin and crypto in general compared to several other market segments.
The Case for a Bitcoin ETF
To be clear, while there are still issues to be addressed in a more comprehensive framework for cryptocurrencies within the U.S. financial system, the point here is that the case for a bitcoin ETF is better than ever. With other countries including Canada, Australia, and Brazil already approving bitcoin exchange-traded funds, it begins to appears that the SEC is falling behind the curve of adoption in this emerging market segment.
In many ways, an SEC-approved bitcoin ETF would honor the mission of the group which encompasses investor protection along with efforts to maintain fair, orderly, and efficient markets to facilitate capital formation. A bitcoin ETF would likely help to reduce premium volatility, lower management fees through competition, and reduce risks associated with investing compared to alternative crypto companies that are an imperfect proxy for bitcoin exposure. Regulated custody by U.S banks for ETF assets would further strengthen the security investing confidence for investors.
It’s worth noting that the newest SEC Chairman, Gary Gensler, was just recently confirmed by the Senate and entered the position in mid-April. Gensler is recognized as an expert in cryptocurrencies based on public comments and a background that included a research and teaching position at the Massachusetts Institute of Technology. The thought here is that the new SEC Chairman can provide some leadership in moving this market segment forward.
We believe SEC will ultimately approve several bitcoin ETFs at the same time as to not pick a winner while encouraging competition within the new category of funds. By pushing back the approval deadline of Van Eck’s fund to June, the SEC is potentially buying time for more funds to formally apply with the ability to review and to lead to a launch of different options from day one.
Beyond the VanEck vehicles, the SEC has already acknowledged applications from other notable fund managers including WisdomTree while many others have also submitted applications including Fidelity and Galaxy Digital Holdings Ltd. (OTCPK:OTCPK:BRPHF) already manages a bitcoin ETF in Canada. Smaller shops like Krypton, Valkyrie, and NYDIG are also in the pipeline. It’s worth mentioning that Grayscale Bitcoin Trust (OTC:GBTC), which is the world’s largest bitcoin investment product with over $36 billion in assets under management and currently structured as a closed-end-fund, has announced its intention to eventually convert into an ETF. The takeaway here is that the time for an SEC Bitcoin ETF approval is sooner rather than later.
Bitcoin continues to trade in a strong bull market supported by several underlying fundamental tailwinds. Investors looking for the next major catalyst to send prices higher across crypto should closely monitor developments related to the potential approval of the first bitcoin ETF in the United States. Several fund management firms have already applied and the SEC is set to decide in June. A green light will likely be accompanied by significant press coverage adding to the exposure and legitimacy of cryptocurrencies as an alternative asset class.
Tactically, as long as BTC can maintain a level above ~$40,000, we believe the bullish momentum will be in place. The risk here is any regulatory setback either in the United States beyond the SEC decision on an ETF including the possibility of a crackdown on the use of cryptocurrencies as an alternative form of payment. Globally, other governments taking more restrictive enforcement against crypto would likely also be bearish for sentiment.