The SEC said it has disapproved the proposal because bitcoin and its underlying blockchain technology does not meet the regulator’s requirements for preventing fraudulent and manipulative acts.
Another issue highlighted was how the price of bitcoin is still easily manipulated. The manipulation of asset prices can occur through trading activity that creates a false impression of supply and demand.
Despite the hopeful issuer presenting to the SEC back in September reasons why the crypto market is efficient enough for an ETF, there are still a number of problems.
Bitwise revealed that 95% of reported trading of bitcoin is fake or fabricated and therefore the early bitcoin market may have been subject to market manipulation.
The commission also argued against Bitwise’s claim that transporting and storage of bitcoin have zero costs as bitcoin mining and recording transactions to the blockchain come with fees.
Matt Hougan, global head of research at Bitwise Asset Management, commented: "We look forward to continuing to productively engage with the SEC to resolve their remaining concerns, and intend to re-file as soon as appropriate."
In the lead up to the SEC’s announcement on the bitcoin ETF, market participants were not confident the product would be given the green light in 2019.
“I don’t believe the SEC will approve a bitcoin ETF,” said Tuffy. “The SEC just finalised its ETF authorisation process which allows it to focus on more exotic ETFs.
“I think we will see the SEC will look more on bringing semi-transparent ETFs to the market and I think we will comfortably be sitting here this time next year still questioning a bitcoin ETF.”
Tuffy believes the crypto market participants are hopeful for a bitcoin ETF because it will increase institutional adoption of the digital asset. However, VanEck recently launched bitcoin 144A shares for institutional investors only and is yet to receive significant inflows.