January 14, 2019

Bitcoin is 10 years old. What's next?

Bitcoin, the world's most famous cryptocurrency, just celebrated its tenth anniversary.

The digital currency has made plenty of strides toward legitimacy since it first launched, but it won't become a mainstream investment without the embrace of the Securities and Exchange Commission.

The SEC has yet to give the green light to any bitcoin projects. The agency has already rejected bitcoin ETF plans from Direxion, ProShares and Tyler and Cameron Winklevoss, the twins who became known for their legal battle with Mark Zuckerberg over the origins of the idea for Facebook.

Bitwise Asset Management filed last week with the SEC for an exchange-traded fund that would track bitcoin's performance. Another company, Wilshire Phoenix Funds, filed to sell shares of a fund that would own a mix of bitcoin, short-term Treasury bills and US dollars.

A decision about another proposed bitcoin ETF from mutual fund firm VanEck has been delayed. Because the shutdown is forcing the SEC to run with limited staff, that issue is not likely to be resolved until the government reopens.

The SEC did not respond to a request for comment.

Matt Hougan, global head of research for Bitwise Asset Management, said he thinks the SEC is just being prudent and won't rush to give the thumbs up to ETFs for an asset class that's still evolving.

He noted the SEC took a similarly cautious approach to gold ETFs several years ago before approving many of them. The Winklevoss twins said in an interview this week that they agree with the SEC's cautious approach and will wait years for it to approve their ETF.

Cryptocurrencies like bitcoin present a lot of reason for caution.

Although the price of a single bitcoin (XBT) was once worth nearly $20,000 in December 2017, the value has fallen more than 80% since then to about $3,650. The currency is often compared unfavorably to the greatest financial panics in history.

"Bitcoin is a speculative asset that's still in its infancy," said John Ryding, an economist and adviser at Moeda, which uses blockchain technology to help small businesses get loans. "It can take quite a while for the market to shake out some of the excess. The good news is that bitcoin's been beaten up but it's still in the game."

Bitcoin optimists like Hougan think the worst is over. And there's evidence of mainstream acceptance.

In 2017, bitcoin futures launched on both the Chicago Board Options Exchange and the Chicago Mercantile Exchange and the mutual fund giant Fidelity also established a trading platform for bitcoin and other cryptocurrencies late last year.

Noted bitcoin bear Jeff Gundlach of DoubleLine Capital sounds positive, too. He recently told investors he thinks bitcoin prices could rally later this year and get back to about $5,000. That's nowhere near the currency's high, but it still is about a 35% gain from current levels. Stable trading could help convince the SEC that the time is right to change its tune.

Others aren't so sure that bitcoin's on the rebound.

"We have not seen the bottom in bitcoin," wrote Marin Katusa, head of Katusa Research in a recent report. "The dot-com bubble of the late '90s played out exactly the same way. Hundreds of companies rode the soaring wave of investor sentiment in order to cash in on the hysteria. Hysteria can only support valuations for so long, and eventually fundamentals take over."

Hysteria often gives way to fear as well. The dramatic drop might have scared off some investors forever.

Hougan conceded that there needs to be a big shakeout in the cryptocurrency market for bitcoin to rebound. There are simply too many digital coins out there, and bitcoin still has the dominant market share.

"Most cryptocurrencies are garbage and will be discarded into the dustbin of history," Hougan said. "The sooner the better."

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