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February 9, 2017 Reading Time: 2 minutes

Ownership of equities was not widespread in the U.S. until the middle of the 20th century. Public enthusiasm for the stock market was tepid for decades following the Great Depression. By the middle of the 20th century confidence in the stock market returned. Mutual funds made ownership of financial assets easy for ordinary Americans.

The first retail index fund was created by John Bogle of Vanguard Funds in 1976. The decline in defined benefit pension plans in the 1980s led to a large inflow into mutual funds. Exchange-traded funds were created in the early 1990s and offered a low-cost alternative to mutual funds. Today, there is an ETF for everything from industries and commodities to currencies. Investors are currently proposing bitcoin ETFs. Bitcoin is an alternative currency. Individual investors create a bitcoin wallet and purchase bitcoins with dollars (or other sovereign currencies). Ownership of bitcoins are kept on a blockchain. The blockchain is a shared public ledger that verifies bitcoin transactions. The blockchain is secured by cryptography. The supply of bitcoins is controlled by miners. Miners create new bitcoins in exchange for servicing bitcoin transactions. Bitcoin is attractive because its value is not linked to a central bank’s monetary policy.

Some people use bitcoin as an alternative currency others use bitcoin as an investment. The price of a bitcoin has risen dramatically over the past year, rising from around $371 in February 2016 to over $1,100 this week.

Many individuals would like exposure to bitcoin but do not want to complicate their finances with a bitcoin wallet. Institutional investors are prevented from owning bitcoins because their portfolios must be registered with authorities. The bitcoin ETF has appeared on the scene to satisfy both needs.

After a four-year wait, the Securities and Exchange Commission is set to decide on Marcy 11 whether the Winklevoss Bitcoin ETF Trust can be publicly traded. The long wait has been a result of SEC questions. The SEC has tested to see if bitcoins could be counterfeited and if the bitcoin system could be hacked. Hacking is a top concern after a large bitcoin heist in Hong Kong over the summer. Another major problem with a bitcoin ETF is the limited quantity of bitcoins outstanding that could support a bitcoin ETF. Initial estimates suggest that a bitcoin ETF would quickly bring in $300 million. The average volume of daily bitcoin transactions is a tenth of that. The difference could cause the ETF shares to trade at a premium to bitcoins. There is currently a private bitcoin trust run by Grayscale Investments. Shares of the trust typically trade at a 15 percent premium to bitcoins.

Theodore Cangero

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