SEC Cracks The Whip On Bitcoin ETF Listing Requests

This article originally appeared in the Motley Fool.

The past year has brought an incredible run for cryptocurrencies. Whereas the broad-based S&P 500 nearly tripled its historic average and gained 20% in 2017, the aggregate increase in market cap for all virtual currencies made the S&P 500's move look like a flat line. Since the beginning of 2017, the combined market cap of digital currencies has soared by as much as 4,500%, which would have taken the stock market decades to deliver.

Leading that charge is bitcoin, the world's most popular and valuable cryptocurrency by market cap. It also happens to be the virtual token that merchants around the globe are most likely to accept, and it's largely responsible for bringing blockchain technology into the mainstream.

Bitcoin's first-to-market advantages, along with its regular media coverage, make it a popular investment vehicle for those people who fear missing out on big gains. After all, $1,000 invested in bitcoin in March 2010 would be worth around $3.9 billion today.

Trading Platforms Aim To Increase Bitcoin's Exposure To Retail Investors

However, buying bitcoin has often meant opening an account and trading on a decentralized exchange. Sure, there are a number of larger, more reputable exchanges, such as Coinbase. Still, since cryptocurrencies aren't regulated or backed in the traditional sense as, say, the U.S. dollar, these exchanges are off-limits for most institutional investors and perhaps even the average retail investor. That's why a handful of trading platforms have been pushing hard to introduce new bitcoin-based products that'll open the door to institutional and retail investors in a more regulated setting.

For example, both CBOE Global Markets (NASDAQ:CBOE) and CME Group (NASDAQ:CME) began listing bitcoin futures on their trading platforms back in December. A number of major brokerage firms have also expanded their futures trading capacity to allow their customers access to either the CBOE's or CME's platform. Nasdaq (NASDAQ:NDAQ) has also noted that it plans to launch bitcoin futures trading sometime in the second quarter.

But why stop there? While futures trading opened an avenue for institutional investors to get their foot in the door with bitcoin, it's still pretty tough for the average investor to do so. You see, these contracts cover either one or five bitcoins, meaning they can cost anywhere from $11,700 to $58,500 at the moment. Most retail investors aren't going to place such a big bet on a still illiquid market.

Instead, trading platforms like the NYSE and CBOE have been itching to bring a retail-friendly product to market: bitcoin exchange-traded funds (ETFs). A bitcoin ETF wouldn't track the actual price of bitcoin, per se. Instead, it would be tied to the bitcoin futures price and, with the exception of expense fees, largely mimic the movement of futures contracts. More than a dozen bitcoin ETFs have been proposed in recent weeks, including those that would allow for bearish bets against bitcoin, as well as leveraged bitcoin ETFs that would double the daily return (or loss) for investors.

Not So Fast: The SEC Puts Its Foot Down On Bitcoin ETFs

While these would more than likely be high-demand financial products, the Securities and Exchange Commission (SEC) isn't having any of it -- at least not yet.

Two weeks ago, Dalia Blass, the SEC's director of the division of investment management, detailed a multiplicity of concerns about proposed bitcoin funds in a letter to two trade groups who represent fund managers. In particular, the SEC demanded answers to at least 31 questions regarding how mutual funds or ETFs planned to store, safeguard, and price the asset. "There are a number of significant investor protection issues that need to be examined before sponsors begin offering these funds to investors," Blass said.

Remember, even though bitcoin is decentralized, which is supposed to remove the chance that a cyberattack will cripple the network, crypto theft has been somewhat common. Around 850,000 bitcoin tokens (worth close to $10 billion today) were stolen from Mt. Gox a few years ago. Mt. Gox had handled a majority of bitcoin transactions before the alleged hack and went bankrupt from it as a result. More recently, in December 2017, NiceHash fell victim to a $70 million bitcoin theft thanks to hackers. Safeguarding bitcoin is no simple task.

Another issue is that bitcoin futures listing hasn't exactly stabilized the market. Intraday double-digit percentage swings have become commonplace since the beginning of December. The real issue is that institutional investors haven't jumped in as expected. Even though most institutions believe bitcoin is primed to drop, few if any have the nerve to put any sizable amount of money on a bet against bitcoin through futures trading. That means highly emotional retail investors are still predominantly driving the price (and volatility) of bitcoin.

Long story short, don't expect bitcoin ETFs to be hitting the market anytime soon.

Sean Williams has no position in any of the stocks or cryptocurrencies mentioned. The Motley Fool recommends Cboe Global Markets, CME Group, and Nasdaq but has no position in any cryptocurrencies mentioned. The Motley Fool has a disclosure policy.