The SEC recently rejected a proposal for the launch of an ETF based solely on the price of bitcoins. Does this mean bitcoins investing in bitcoin not suitable for investing? Helping the world invest better since 1993. Will Social Security be there for me?
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The decision from the SEC came nearly four years after they filed for regulatory approval. The SEC determined that the proposed bitcoin ETF failed to meet these standards because the markets for bitcoins were unregulated. It was surprising then, when just a couple of months later on April 24th, the SEC agreed to review its decision on the creation of a bitcoin ETF. Satoshi Nakamoto, and released as open-source software in 2009. Treasury has categorized it as a decentralized virtual currency though some believe it is best described as a “cryptocurrency. Essentially, the blockchain is a publicly distributed ledger for certain financial transactions.
It is currently mostly used for bitcoin, but many believe it could be used in a wide variety of financial applications in the future. As used in bitcoin, blockchain is a public ledger of all bitcoin transactions that have ever been made. When a transaction is completed, it is recorded on a new “block. When the block is full of such transactions, it is added to the end of the “chain” in sequential order, and a new block is created. Full blocks are a part of the blockchain’s permanent database. Each node — a computer connected to the bitcoin network for the purpose of verifying transactions — automatically gets a downloaded copy of the blockchain upon joining the network. The blockchain records information like the time and amount of each transaction, but it does not store any personal information on the parties involved.
Even industry experts who believe that bitcoin is not a sustainable monetary unit think blockchain technology could radically change the way financial transactions are facilitated in the future. The benefits of this system are that it is transparent, secure, and streamlined, so that there are less parties involved in facilitating each and every transaction. Even as the existing payments system in developed countries becomes ever more convenient and secure, the space is still littered with middle parties taking a small amount from each transaction. These players include payment processors, payment networks, issuing banks, and acquiring banks.
The dream of bitcoin and other monetary systems based on blockchain technology is for payers to be free of these inherent costs of exchanging currency for goods. There are a few primary concerns surrounding bitcoin that potential investors should be aware of. First, it is not backed or regulated by the good faith of a government or other entity. This stands in stark contrast to the dollar, yuan, pound, and other forms of currency used around the globe. In other words, a bitcoin is worth exactly what people perceive its worth to be.
While, in a sense, this is true of any currency, the value of a bitcoin is much more fickle than other forms of currency because of its unregulated nature. Second, bitcoins are not traded on Wall Street. They cannot be bought or sold through a brokerage. Once this account is set up, its holder can link to a traditional banking account and use those funds in local currency to buy and sell bitcoins. If this process sounds a bit cumbersome, it is.
This means bitcoin is much less liquid than traditional equities, creating more volatility and wild swings. Those are incredibly volatile swings within one month — something virtually unheard of with any other type of currency! Finally, the unique way of buying and selling bitcoins not only contributes to its illiquid nature, but has also contributed to higher rates of fraud and theft through uninsured bitcoin exchanges. While these problems were far more prevalent in years past, it should still be mentioned that none of the bitcoin exchanges have yet established a long business track record. This brings us back to the SEC’s review of the Winklevoss twins’ proposal to launch a bitcoin-based ETF. Such an ETF would have solved at least some of these problems.