Bitcoin Is Plunging on Wednesday -- Here's Why

Bitcoin (BTC-USD) and most other cryptocurrencies are falling sharply on Wednesday after the Securities and Exchange Commission, or SEC, decided to postpone a much-anticipated decision on a proposed bitcoin exchange-traded fund, or ETF. Aimed squarely at institutional investors, the proposed ETF is seen as not only having a good chance of approval but is also thought to be a catalyst for bringing boatloads of institutional money into the cryptocurrency market.

Here's a rundown of how badly the major cryptocurrencies are performing today, the news out of the SEC, and why a bitcoin ETF could be such a big deal.

Image source: Getty Images.

Today's cryptocurrency prices

Before we dive into why bitcoin (BTC-USD) and other cryptocurrencies are plunging today, here's a look at where the leading cryptocurrencies stand right now so you can get an idea of the carnage. Bitcoin is down by about 15% and it's the best-performing cryptocurrency of the 10 largest by market capitalization (excluding U.S. dollar-based Tether). Others are down by as much as 32%, and you'd have to look all the way down the list to the 151st-largest cryptocurrency before you could find one that's positive for the day.

Data Source: www.investing.com. Prices and daily changes as of Aug. 8, 2018, at approximately 1:30 p.m. EDT, and prices are rounded to the nearest cent where appropriate.

A major regulatory decision has been postponed

Wednesday's major negative catalyst is the SEC's action (or lack thereof) related to a closely watched bitcoin matter.

Specifically, the SEC decided to delay its decision on a proposed bitcoin ETF, known as the VanEck SolidX Bitcoin Trust. The agency was expected to rule on the application this week, but now says it will make its decision on Sept. 30 instead.

This follows the SEC's recent outright rejection of an ETF application filed by the Winklevoss twins, founders of the Gemini cryptocurrency exchange.

However, the VanEck product is generally seen at having a better chance of regulatory approval due to its focus on institutional investors and not on the general public, so it is more disappointing to investors that it isn't yet approved. One share of the proposed ETF would represent 25 bitcoins, which is worth around $157,000 even after the plunge. The idea behind this is that it would effectively limit investment in the ETF to institutional and high-net-worth investors and not individual investors, which the SEC has been generally focused on protecting when it comes to cryptocurrency-related investments.

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.

First, there's no cost-effective way to invest in bitcoin in the current market, unless you buy bitcoin directly. There is a fund-like product called the Bitcoin Investment Trust (NASDAQOTH: GBTC), but it trades at a massive premium to the value of its bitcoin holdings and charges high management fees.

Second, many people simply aren't comfortable holding bitcoin directly. There's a risk of theft via hacking, or simply losing the password to a digital wallet, plus many would-be investors simply don't understand the technology.

Third, it's fair to say that a reasonably priced bitcoin ETF could certainly create new investor interest in the institutional realm, where the VanEck SolidX Bitcoin Trust would be aimed. In fact, Arthur Hayes, CEO and co-founder of the BitMEX cryptocurrency exchange, told CNBC earlier this summer that a positive regulatory decision such as an approved ETF could catapult bitcoin as high as $50,000 by the end of the year.

If investors are betting on an ETF approval as a positive catalyst for bitcoin, it's no wonder that the postponed decision on the ETF that supposedly has the greatest chance for approval is weighing on the cryptocurrency markets today.