After a significant rally earlier this week, Bitcoin (BTC-USD) and other leading cryptocurrencies are taking a dive on Friday after the Securities and Exchange Commission, or SEC, rejected the listing of a bitcoin ETF. This is the second time the SEC has denied an application from Cameron and Tyler Winklevoss and is a significant setback for investors who thought bitcoin ETF approval could finally happen.

To be clear, this isn't the only current application to list a bitcoin ETF, and it isn't even the ETF application that most investors have been speculating would be approved. Here's a rundown of how this latest development is dragging on the cryptocurrency markets and why a listed bitcoin ETF could be such a big positive catalyst for the industry.

Gold token with bitcoin markings.

Image source: Getty Images.

Today's cryptocurrency prices

Before we dive into today's news, here's a look at where the leading cryptocurrencies stand. Most major cryptocurrencies are well in the red following the announcement that the wait for a listed bitcoin ETF will continue, although it's important to note that due to its recent rally, bitcoin (BTC-USD) is still higher over the past week.

Cryptocurrency Name (Code)

Price in U.S. Dollars

Day's Change

1-Week Change

Bitcoin (BTC-USD)

$7,874.60

(4.1%)

5.8%

Ethereum (ETH-USD)

$460.03

(3.3%)

(0.1%)

Ripple (XRP-USD)

$0.45

(2.6%)

(1.9%)

Bitcoin Cash (BCH-USD)

$789.07

(5.6%)

(0.1%)

EOS (EOS-USD)

$8.10

(5.9%)

(1.2%)

Data Source: www.investing.com. Prices and daily changes as of July 27, 2018 at approximately 10:45 a.m. EDT, and prices are rounded to the nearest cent where appropriate.

Why was the Winklevoss twins' application rejected?

Cameron and Tyler Winklevoss are the founders of the Gemini cryptocurrency exchange and have been attempting to bring a bitcoin (BTC-USD) ETF to a major exchange for some time now. Unfortunately, the SEC rejected the twins' second proposal on Thursday after previously rejecting the creation of the Winklevoss Bitcoin Trust last year.

Reasons for the rejection included concerns over potential market manipulation, fraud, and investor protection. And it makes sense -- after all, a June research report suggested that bitcoin's price may have been manipulated when making its late-2017 run to nearly $20,000. Plus, fraud has been a big problem since bitcoin came into existence.

After the ruling, Cameron Winklevoss said that Gemini will continue to work on bringing a bitcoin ETF to market.

Why is it so important for a bitcoin ETF (or several) to be listed?

There are a few reasons why a bitcoin ETF could be a major positive catalyst for cryptocurrencies.

There is currently no cost-effective way to invest in bitcoin without buying it directly. There are options such as the Bitcoin Investment Trust (NASDAQOTH:GBTC), but it often trades at an exorbitant premium to the value of the underlying bitcoin holdings and then charges excessive fees on top of it. Many people simply aren't comfortable holding bitcoin directly, so an ETF could create an influx of new investor interest.

An ETF could be the catalyst needed to bring institutional money in large volumes into the cryptocurrency space. While most of bitcoin's surge over the past couple of years has been due to individual investors putting money in, massive amounts of institutional money coming into the market could drive bitcoin higher.

Finally, the creation of a cryptocurrency ETF would go a long way toward adding legitimacy to cryptocurrencies as an investable asset class.

The bottom line is that the approval of a bitcoin ETF would be a huge milestone in bitcoin's evolution. Unfortunately, investors will have to wait a little longer. That said, there's another bitcoin ETF application that's yet to be decided on (the VanEck SolidX Bitcoin trust, which is specifically aimed at institutional investors), and SEC action is expected on this application within the next few weeks.

Matthew Frankel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.