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Bitcoin-backed fund takes off at launch, likely faces regulatory scrutiny

Bitcoin bulls had a good day Tuesday on Wall Street as the first exchange-traded fund based on the cryptocurrency’s futures pulled out of the gate with definitive gains.

MANHATTAN (CN) — The first-ever exchange-traded fund linked to Bitcoin debuted with a rousing success on Tuesday, though heightened scrutiny by regulators is sure to come.

The ProShares Bitcoin Strategy ETF, which is based on futures contracts of the cryptocurrency, gained 1.89% to hit $41.89 by the closing bell. The ETF began the day trading at $40 a share and at one point rose more than 3%.

As for Bitcoin itself, the controversial cryptocurrency gained about 4.5% to hit $64,221. It reached its previous high point of $64,000 back in the spring, and over the last year it has increased well over 400% in value.

After ProShares’ success, digital currency asset manager Grayscale announced it was filing an application with the Securities and Exchange Commission to convert its Bitcoin trust, which was launched in 2013, into an ETF. The trust is currently the largest Bitcoin investment vehicle in the world, holding 3.5% of all the digital currency in circulation, Grayscale claims.  

“This move was triggered by the SEC’s clearance of a Bitcoin Futures ETF—which we believe is an indication of the agency’s comfort in Bitcoin as an underlying asset,” the company stated.

Until recently, though, the SEC had been skeptical at best regarding allowing Bitcoin-backed investment funds. Last May, the agency’s Division of Investment Management warned investors about investing in mutual funds that included Bitcoin futures.

“Among other things, investors should understand that Bitcoin, including gaining exposure through the Bitcoin futures market, is a highly speculative investment,” the staff said in the May 11 statement. “As such, investors should consider the volatility of Bitcoin and the Bitcoin futures market, as well as the lack of regulation and potential for fraud or manipulation in the underlying Bitcoin market.”

Investment advisors may back their funds using cryptocurrency without seeking approval from the SEC because such vehicles are already covered under the Investment Company Act of 1940. Bitcoin futures themselves began trading in late 2017.

SEC staff said in their May 11 statement that the agency would monitor the liquidity and depth of the Bitcoin futures market, mutual funds’ ability to quickly liquidate Bitcoin futures positions, and scrutinize whether the Bitcoin futures market could accommodate Bitcoin-backed ETFs even if they become loaded with other investor assets or if the liquidity of those markets begins to wane.

In remarks three months later, SEC Chair Gary Gensler said he expected new filings for Bitcoin-backed ETFs. A number of other investment firms already have applied with the SEC to launch similar ETFs, though one firm, Invesco, on Monday announced it would be backing out of its plans to launch such a vehicle.

Former SEC Chair Jay Clayton said earlier this year that the SEC historically has had “indirect” jurisdiction over cryptocurrencies but predicted that “regulation will come in this area both directly and indirectly.” He said bank regulators could look at crypto in accounts, tax regulators will scrutinize the currency and the SEC would also be involved.

“We will see this regulatory environment evolve,” Clayton said.

Wall Street analysts and investors have a mixed opinion on Bitcoin and other cryptocurrencies. Earlier in the week, Scott Minerd, chief investment officer at Guggenheim Partners, said during an interview with Bloomberg Television most digital currencies would fail.

“I think 70% of the coins out there today are garbage and will go away,” Minerd said. “The question is, just like the Internet bubble, which of the companies will survive.”

When asked about Bitcoin exchange-traded funds, he said “Bitcoin, it and of itself, is very difficult” but called such investment vehicles an “interesting development” because they are much safer than investing in the cryptocurrency itself.

JPMorgan Chase CEO Jamie Dimon slammed the digital currency earlier this month, calling it “worthless” and likened the currency to a bad habit.

“I don’t think people should smoke cigarettes either,” he said.

Dimon also predicted the SEC and other regulators would “regulate the hell out of it.”

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