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SEC Reviews Bitcoin ETF: The Skyrocketing Cryptocurrency Explained

Neena Mishra
Updated

There has been a lot of interest in bitcoin of late, mainly due to its astronomical rise. The cryptocurrency is up more than 135% year to date. Looking at the longer-term performance, $100 invested in bitcoin 7 years ago would be worth about $75 million now, per CNBC.

Bitcoin was also in focus because the hackers responsible for the massive WannaCry cyber-attack wanted ransom to be paid in bitcoin and they were able to get some payments.

Investors have been hoping that the SEC would approve a bitcoin ETF, which would add legitimacy to the digital currency and also provide investors a convenient way of investing in the digital currency.

What is Bitcoin?

Unlike traditional currencies, which are issued by central banks, bitcoin is a decentralized digital currency not issued by a central bank. It is more like a peer-to-peer digital payment network.

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Creation and transactions in bitcoin are controlled through cryptography. And, while users remain anonymous, the record of these transactions is available on the bitcoin network.

Why is Bitcoin Surging?

Bitcoin is up almost 400% over the past one year.The main reason behind the surge is its limited supply, According to the Economist, there are about 16.3 million bitcoins, with only 1,800 new ones minted every day.

On the other hand, demand has been rising due to geopolitical uncertainty. Many consider bitcoin a safe have asset. Due to its low correlation with other asset classes, it also acts as a portfolio diversifier.

In April, Japanese regulators announced rules for bitcoin, establishing it as a legitimate method of payment in the country.

It is difficult to arrive at a fair value for the bitcoin. I read about a model in FTthat is based on the presumption that bitcoin’s core utility value is serving as a currency for the dark economy. The model found the cryptocurrency to be grossly overvalued.

What Are the Risks?

Bitcoin and other cryptocurrencies are not regulated or backed by a central bank.

The cryptocurrency is very volatile and usually goes through boom-bust cycles. Just last Thursday, it dropped by almost 19% from its all time high level.

Due to users’ anonymity, it is used by criminals and in dark economy for illegal payment transfers and for purchase of illegal drugs. There have also been many instances of hackers stealing bitcoins

Bitcoin ETFs

In March, the SEC had rejected the ETF proposed by Winklevoss twins but they are now reviewing the decision again. This was not the only bitcoin ETF; there were two more going through the regulatory approval process.

Another bitcoin ETF, proposed by SolidX Management, was also rejected in March. The third one proposed by Grayscale’s Bitcoin Investment Trust (GBTC) is being reviewed and a decision is due by Sep 22.

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