In March this year, the SEC rejected the Bitcoin ETF being proposed by the Winkelvoss twins which would have held bitcoins directly as an asset within a commodity shares trust. In making its judgment, the SEC noted that it did not find the proposed trust was consistent with its regulations.
In particular, the SEC noted that in allowing the listing of commodity-linked exchange traded products (ETPs) back in 1995 on a national securities exchange it had emphasised the importance of surveillance-sharing agreements with each of the futures markets on which an ETP would be based
The proposed surveillance procedures proposed by the Bitcoin ETF trust's promoters were, the Commission found, "not sufficient", adding that it had failed to provide proof that it would able to enter into agreements with "significant, regulated markets for trading either bitcoin itself or derivatives on bitcoin."
Try, try, try againBut the promoters of Bitcoin ETFs or variants on the theme are nothing if not persistent and in the wake of this initial rejection two more bitcoin-based exchange traded products have been put forward in recent weeks.
The first came from Van Eck in early August when it filed with Nasdaq a prospectus for an actively-managed Bitcoin Strategy ETF that would invest in bitcoin derivative strategies and bitcoin instruments.
It was followed by Connecticut-based investment firm Rex which filed later in the month long and short ETF versions which again would be actively-managed and would invest indirectly in bitcoin via financial instruments with an exposure to the value of bitcoin.
If the SEC was nervous about the prospect of bitcoin-based ETFs before these filings came winging in its direction, then there is every reason to suspect that will remain the case when it comes to the risk factors mentioned in both prospectuses.
As the Rex filing says, prospective investors in the fund would need to be aware of a panoply of bitcoin-specific risks, many of which revolve around the distinct possibility of the underlying cryptocurrency being on the wrong end of cybercrime, security breaches and fraudulent activity.
Such worries haven't stopped others stepping into the breach, though. In the US, a bitcoin-based investment trust (GBTC) is also on the market, run by a company called Greyscale Investments and which also tracks the price of bitcoin.
News reports at the end of August pointed out, though, that the trust was the subject of short-selling attack which insists the investment model is "the most dangerous sway to own bitcoin."
Meanwhile, in Europe a Swedish firm called XBT Provider launched an exchange traded note (ETN) called the Bitcoin Tracker One on the Nasdaq OMX Stockholm exchange back in May 2015.
Two years later the fund surpassed the $100m mark in assets under management after doubling in the previous two months.
According to Peter Sleep, senior investment manager at 7IM, though the cost of the fund is a steep 2.5%, it will likely still appeal to investors who don't want to have to open an account on the "dark web" or with an unfamiliar broker.
"The cost is also relatively minor given the volatility of bitcoin and the volatility of the ETN to bitcoin," he adds. "What I mean by this latter statement is that over the last few months the ETN has traded at a premium to its NAV of up to 12% and at a discount to NAV of up to 10%."
Populist ideologyPartisan arguments - not to say ideological disputes - regarding cryptocurrencies and blockchain aside, it is the volatility of bitcoin which most likely is attracting the interest of investors.
UK-based retail financial trader IG recently launched a new market on another cryptocurrency Ether and already offers both spread-betting and CFD trading on bitcoin. Spokesperson Chris Alfred told ETFstream that the markets were "extremely popular" with clients and were now one of the platforms most traded products.
But when it comes to IG's recently-launched investment service which offers a smart portfolio offering, Alfred suggests the company might be more circumspect when it comes to the potential of a bitcoin ETF.
"I think it is fair to say there will be a fair deal of scrutiny around this type of ETF and us, along with many platforms, will want to look at it thoroughly before offering it to investors," he says.
A further option for those seeking exposure to bitcoin without having to get directly involved comes via trading network eToro's which launched a cryptocurrency version of its CopyFunds series in July.
UK managing director Iqbal Gandham says the basket of six cryptocurrencies that make up the fund - including both bitcoin and Ethereum - are regularly analysed by an investment team and automatically rebalanced according to each currency's market cap.
"The CopyFund provides investors comfort to invest in cryptocurrencies without taking on the time commitment of constantly monitoring price swings," he adds.
But although Gandham is a crypto fan and fervently believes that bitcoin "is not a bubble", he accepts that it is "too soon" for the SEC to allow bitcoin-based ETFs.
"As cryptocurrencies become less cryptic and mainstream investors look for ways to access returns from cryptocurrencies, the demand for a crypto ETF will definitely increase," he says. "However, while the case for a crypto ETF is likely to build, there are still a number of considerations the regulator must take, given cryptocurrencies are still somewhat in their infancy. One of these considerations is regulation."
Love affairThe infatuation with cryptocurrencies on the part of some investors has been compared with that of gold bugs where ideas about investment and security becoming mixed up with political and macroeconomic considerations.
Commentators are certainly wiling to view cryptocurrencies as a new asset class, albeit in the case of both bitcoin and Ethereum with the live possibility of a somewhat confusing fork occurring which sees the formation of a separate currency birthed from the original.
It all adds to a volatility which Gandham says is a "great thing" but which leaves others far from convinced and is certainly likely to give the SEC and other global regulators of exchange traded products pause for thought.
Not the least of these is the degree to which the Bitcoin market is dominated by the Chinese. According to the evidence submitted to the SEC, the many Chinese exchanges not only enjoy volumes that dwarf other exchanges - particularly the Gemini platform that the Winkelvoss fund was destined to track - but they are also wholly unregulated and unaudited and engaged in suspect practices such as front-running, wash trades and trading with insufficient funds.
As the SEC relays, it is suspected that the "price of bitcoin is defined entirely by speculation, without any ties to fundamentals."
Such would be the implication from the popularity of bitcoin trading on spread-betting exchanges but it harms the argument that cryptocurrencies can be a serious investment prospect. In the words of Sleep from 7IM, while gold might be viewed as a "hedge against human stupidity," he is inclined to think that "bitcoin is evidence of human stupidity." Buyer beware has never been more apt.