2018 has been a lousy year for cryptocurrencies, as bitcoin prices have fallen back below the key $10,000 level that won it so much fanfare coming into the year. That hasn't stopped crypto investors from clamoring for more and better ways to invest in bitcoin and other tokens, and many have wanted to see bitcoin ETFs make it easier for investors to take positions in the cryptocurrency.

For a long time, major players in the bitcoin and financial industries have tried to bring a bitcoin ETF to market. Yet over the past couple of months, the U.S. Securities and Exchange Commission has denied applications for bitcoin ETFs to start trading on major exchanges. For those who really want an exchange-traded fund vehicle for investing in cryptocurrencies, the explanations from the SEC have been far from satisfying, even as they leave at least a little hope for a future change in the regulatory agency's position.

Stock chart with bitcoin symbol.

Image source: Getty Images.

Why the SEC keeps denying bitcoin ETFs

On Aug. 22, the SEC issued an order disapproving a proposed rule change that would have allowed shares of two bitcoin ETFs to trade on the New York Stock Exchange's NYSE Arca exchange. The exchange, in conjunction with ETF provider ProShares, had filed the rule change proposal in December 2017, seeking to allow the ProShares Bitcoin ETF and the ProShares Short Bitcoin ETF to be listed on NYSE Arca.

It took several months just for the SEC to begin its typical process for evaluating rule changes. After a required comment period, the agency gave itself one more two-month extension, which led to the final decision in August.

In its order, the SEC tried to make it clear that the agency hadn't looked at the validity of bitcoin itself. In the words of the commission, the "disapproval does not rest on an evaluation of whether bitcoin, or blockchain technology more generally, has utility or value as an innovation or investment."

Instead, the SEC's concern remained the threat of fraud or manipulation of the bitcoin market. In particular, the agency said that NYSE Arca hadn't offered enough evidence that the bitcoin futures markets were big enough to fulfill an adequate oversight function to avoid the potential for fraudulent or manipulative acts from wrongdoers.

The SEC and the Winklevosses

The Securities and Exchange Commission referred back to its decision the previous month, in which it prevented the Winklevoss Bitcoin Trust from being listed. Essentially, what the SEC said it wanted to see was that some other bitcoin-related market had enough regulation that those watching trading behavior among bitcoin ETFs would necessarily see warning signs in that other bitcoin market before any fraud or manipulation could occur.

In the case of the Winklevoss ETF, the SEC based its rejection on its assessment of the market for actual bitcoin. Because the Winklevoss ETF was to be set up as a grantor trust in a manner similar to what several other ETFs that hold commodities directly use, the SEC pointed to the uncertainties in the existing market infrastructure for bitcoin itself.

Yet the SEC didn't hesitate to use a similar standard in evaluating the bitcoin futures markets, which the ProShares bitcoin ETFs were designed to track. Several comments addressed the vulnerability of markets for bitcoin and bitcoin futures to manipulation, with one citing so-called pump-and-dump schemes among various players in the cryptocurrency arena. Those comments didn't necessarily provide the sole basis for the SEC's decision, but they did seem to support it.

A glimmer of hope?

Just about the only positive from the SEC in the orders themselves was its repeated statement that NYSE Arca hadn't established that bitcoin futures markets were big enough to give the agency the assurances it wanted. That suggests that if bitcoin futures become more popular in the future, then the SEC might be willing to reconsider its decision upon submission of updated trading figures.

Yet some have taken solace in the fact that after the initial order, the SEC issued a stay of its rejection pending further review. The SEC's commissioners will personally review the findings of staff members to ensure that the rulings were proper, and cryptocurrency advocates think the review could lead to a reversal of the adverse decision.

For now, though, regulators seem to be categorically opposed to allowing bitcoin ETFs to start trading on U.S. exchanges. More ETF providers are likely to try, but until something changes with the cryptocurrency markets as a whole, investors shouldn't expect to buy and sell shares of a bitcoin ETF anytime soon.

Dan Caplinger has no position in any of the cryptocurrencies mentioned. The Motley Fool has no position in any of the cryptocurrencies mentioned. The Motley Fool has a disclosure policy.