Is the Bitcoin ETF Headed for Default Approval?

March 7, 2017 9:24 PM UTC

Just three days to go until the two SEC commissioners, Michael Piwowar and Kara Stein, decide on whether to approve or reject the Bitcoin ETF after a nearly four years long process, but is the ETF headed for a default approval instead?

The law defaults on an approval of the ETF if a decision is not made within a certain time period. In this case, the deadline is 11th of March, this Saturday. Some suggest the deadline extends to include Monday as Saturday is a weekend, but, normally, if an ETF is to be rejected, the SEC suggests a withdrawal of the application so that the proposer can re-apply at a future date with modifications. As such, a rejection on the very last day appears to be highly unlikely, especially if it leaves room for arguments on the exact deadline date.

Moreover, if the ETF is to be rejected, it probably would have been done by now. Instead, it appears far more likely the commissioners will simply allow the deadline to pass. That is probably because Piwowar, the acting chairman of the SEC, appears in favor of approving the ETF.

Speaking in a different context, but with his words seemingly directed towards the bitcoin ETF, Piwowar stated on the 24th of February:

“I question the notion that non-accredited investors are truly protected by regulations that prevent them from investing in high-risk, high-return securities available only to the Davos jet-set.”

He was speaking about private offerings, but the same underlying principle can be applied to bitcoin. Piwowar, for example, says “distinguishing investors who can fend for themselves from those who cannot is a line-drawing exercise fraught with peril.”

It is a typically republican or libertarian attitude that prefers giving the market say over the government except for in obvious instances. In bitcoin’s case, if the ETF is rejected it would create an arbitrary line between somewhat technically inclined individuals who can secure their own coins and other less technical but economically sophisticated individuals.

It would further create an even more arbitrary line whereby a technically inclined individual can use a portion of his savings towards bitcoin to try and keep them growing with inflation or more, but cannot use a small amount of his long-term savings, such as pensions or other long-term investment vehicles, even if he happens to be in his late 20s and thus perfectly able – and to some extent even encouraged – to take high risk with a very small portion.

Moreover, when you think further about the matter, a rejection of the ETF makes no sense – if it is based on bitcoin’s underlying qualities – because bitcoin, of course, is not illegal. Anyone can easily buy them through regulated exchanges, with no limit on how much they can invest save for their own rationality.

A SEC rejection wouldn’t be protecting the public because the public is not denied the ability to buy bitcoins. The SEC would instead be restricting the public’s freedom in an arbitrary manner by making it more difficult to purchase this uncorrelated asset, limiting it to cash savings only instead of extending it to stock portfolios. On this point, Piwowar speaks more directly:

“By holding a diversified portfolio of assets, investors reap the benefits of diversification. That is, the risk of the portfolio as a whole is lower than the risk of any individual asset… In fact, if the correlations are low enough, the overall portfolio risk can even decrease. As such, excluding certain investors from diversification options deprives them of important risk mitigation techniques.”

An Uncorrelated Asset

No one can deny bitcoin is a highly risky asset. It remains something very new, much of it is still in development, but the concept itself has now been proven to a large extent. It has problems, but it does work. There may be bugs, but they would be fixed. It can, of course, be hacked, but gold can be stolen too. It is highly volatile, but stock markets also crash, bubble and bust.

As Piwowar, the only trained economist at the SEC, says, the way to deal with risk (all investments have varying levels of risk) is to diversify. An old pensioner might, of course, want to stick to the safest investments. A high-flying late 20s professional will probably want to throw a small portion to a highly risky asset – if it burns then no matter since it’s a small amount, if it gains, it might do so considerably.

I would argue that isn’t even a risk, but a calculated and rational decision with little and limited downside. Real high-risk investments are made by entrepreneurs who pour all their life savings on a venture that fails. Yet we hail the because when they succeed they give us iPhones, cars and much of everything else.

Our economy depends on calculated risk taking. On creative and constructive replacive destruction, on disruption, on doing all things better, on creating new things completely. And, yes, that involves a lot of failure. SpaceX rockets can explode, losing billions. Self-driving cars can have accidents. DAOs can be hacked. Exchanges can go bankrupt. Yet this process has given us the greatest prosperity in history.

Image from Shutterstock.

Last modified: May 21, 2020 10:01 AM UTC

Andrew Quentson @Aquentson

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