Friday was indeed one crazy day for the crypto currency. Bitcoin proved once again why it is one of the most volatile currencies available to trade on the market. Although admittedly, there were a number of important announcements through the day.
Firstly, there was the Non-Farm Payrolls (NYSE:NFP) which is one of the most important US economic indicators. Secondly, and perhaps more importantly, there was the SEC decision on whether to list the Bitcoin ETF.
During the day, Bitcoin started out at $1,200 and then, post NFP announcement, climbed above the price of gold and reached $1,300. However, when the news of the SEC's rejection came through, the currency fell below $1,000 to reach a monthly low.
This crazy day was indeed a new chapter in the timeline of the currency but it will no doubt not be its last. Adoption rates still seem to be increasing as investors look to Fiat currency replacement.What was the ETF?
An ETF or Exchange Traded Fund is an instrument that is available on the open market and is created in order to track a particular index or asset. There are numerous ETFs that attempt to track Stock Indexes, Commodities, Volatility etc.
However, it was the idea of an ETF that would allow investors to invest in a product that followed the price of a crypto currency that had most people intrigued.
A crypto currency is a digital currency that is created by solving cryptographical hashes (complicated functions). This is created by computer miners who solve these hash functions. Given the open source nature of Bitcoin supply, many viewed it as the alternative to traditional currency.
The brain child of Cameron and Tyler Winklevoss, the ETF was seeking regulatory approval for over three years. The CBOE had applied to have the Winklevoss Bitcoin Trust listed as the approval was pending.
Many Bitcoin advocates also looked to the ETF as a new milestone for the currency as it would have given it a major vote of confidence from a global regulator. It would also allow any individual to include Bitcoin as part of a well-diversified portfolio.Why was it rejected?
The SEC said that it was rejecting the ETF because the markets where Bitcoin operate are mostly unregulated. This lack of regulation raised "concerns about the potential for fraudulent or manipulative acts and practices in this market."
Although there have been attempts to regulate the sale on reputable exchanges such as Coinbase and bitstamp, alot of the trading and mining of Bitcoin takes place outside of the United States and hence beyond the reach of US regulators.
This is indeed true. By some estimates, China accounts for as much as 90% or more of total Bitcoin trading. This is mainly because the Chinese relish the secrecy that comes with owning the crypto currency and the low transaction fees.
Indeed, Bitcoin is the go to currency for individuals in countries where the government keeps a tab on financial flows.
The SEC laid out what it thought needed to be done in order for it to be approved including "surveillance-sharing agreements with significant markets for trading the underlying commodity or derivatives on that commodity. And second, those markets must be regulated."
Although this guidance seems rather general, it is what one would have expected from the agency. Until they see the Bitcoin market come under some sort of general "supervision" they are unlikely to approve an exchange ETF.How will this affect Bitcoin?
Although the immediate result of the decision was a quick and precipitous fall in the price of Bitcoin, this may only be temporary. Indeed, many analysts are seeing it as only a small glitch in Bitcoin's journey.
The mere fact that Bitcoin ended the day only down by 7% and found support shows that there is still a large appetite for the currency. This is because there is still the large lingering concerns over general dollar inflation. Many individuals who trade forex see the value in a currency with limited technical supply.
Moreover, the increasing adoption of the currency by online merchants means that the use of BTC for transactional purposes will also increase. Consumers like the fact that there are no fees and it can be exchanged relatively easily for any currency.
Even Bitcoin's hallmark characteristic, volatility seems to be less impactful than it used to be. Many analysts now say that BTC is about as volatile last year as Oil was.Where to From Here
Although the decision by the SEC is indeed a disappointment for many Bitcoin advocates, it is by no means a serious smack down of Bitcoin. Indeed, the time it took the SEC to consider the rule change is a positive sign.
The SEC took over 4 years and was able to produce a lengthy (38 page) report which clearly shows that they put a lot of thought into their decision. This was clearly seen by the SEC as an important investigation.
Perhaps when more of the trading comes under the oversight of US exchanges will the SEC re consider its decision.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.