Bitcoin (BTC), which has experienced a remarkable price rise since the U.S Securities and Exchange Commission’s approval for ProShares’ Bitcoin futures exchange traded fund (ETF), early October. It hit a new record high of more than $69,000 on November 10, according to TradingView data.
The financial watchdogs sour the mood and reject VanEck’s proposal for a spot-ETF on Nov. 12. This triggered a drop in the price of the flagship cryptocurrency, which fell to a low of $55,705 for 30 days on Nov. 19. At the time of writing, the token was trading in the $56,000 to $56,000 range.
An ETF (electronic transfer fund) is a security type that tracks an asset, or a group of assets. It can be traded on any stock exchange just like any other stock. After more than 20 applications to financial regulators, Proshares’ BTC ETF won approval by the SEC.
Jan van Eck, VanEck’s CEO, was not happy with the rejection of VanEck’s ETF.
Today’s SEC update denying approval for our physical bitcoin ETF disappointed us. We believe investors should have the opportunity to access #BTC through a regulated fund. A non-futures ETF structure would be better. @tyler @gaborgurbacs
— Jan van Eck (@JanvanEck3) November 12, 2021
There is a difference in the Bitcoin ETFs currently trading across different stock exchanges in the U.S., such as the Nasdaq and CBOE. VanEck’s rejected Bitcoin ETF was for a spot ETF. The approved ETFs are all futures-based ETFs.
Van Eck stated that a spot ETF was the best choice. He tweeted, “We believe investors should be able #BTC exposure via a regulated fund, and that a nonfutures ETF structure would be the superior approach.”
Gary Gensler, the Chair of the SEC, has expressed his support for futures-based BTC-ETFs rather than price-based. The official rejection of VanEck’s ETF application by the SEC was based on the fact that the product did not meet the requirements “to prevent fraudulent and manipulative acts or practices and to protect investors’ interests.”
Futures can be a high-risk product.
It is possible that the U.S. financial regulators have created a riskier product by rejecting VanEck’s spot ETF. This allows institutional Wall Street money leverage Bitcoin’s price movements.
A futures contract gives both the buyer or holder of the contract the right to purchase the asset. The writer or seller of contract has the obligation to sell the asset at a specific price at a future date, unless the holder closes the position before the expiration date.
These financial instruments can be combined with options to help hedge other portfolio positions or to make pure speculation profits without the need to purchase the underlying asset. These markets are dominated by institutional investors who have the deep pockets to offset any losses in their portfolio.
Futures can be used to reduce risk for investors, but leverage in futures markets is where they become more risky. To increase returns on a position, leverage is when you can use borrowed funds or debt to trade capital. It is used by investors to multiply their buying power in the markets.
Related: Bitcoin is undergoing a major change due to inflationary winds around the globe
Although leverage is also available in spot markets, it has a much smaller impact. Futures contracts have leverage up to 95%. This means that investors can purchase options contracts with as little as 5% capital and then borrow the rest. Any small fluctuation in the price or underlying asset could have a significant impact on the contract. This can lead to investors being forced to liquidate futures contracts and a margin call.
Margin calls are situations in which the investor’s margins have fallen below the broker’s or exchange’s minimum amount. Investors will need to deposit a maintenance margin amount to their account in order to bring the account back to its minimum value. Investors may have to sell assets to make up the difference.
Important to remember that futures contract risks have nothing to do the nature of the products but rather the way futures contracts are traded across financial market. Cointelegraph spoke with Du Jun, the co-founder and chief executive of Huobi Global’s cryptocurrency exchange.
The SEC may accept futures ETFs as the best option given the current market. While futures ETFs can be more complex and have a higher risk profile than traditional ETFs, there are some features that meet the SEC’s requirements.
Jun believes that regulators have not yet figured out how to set BTC’s spot prices. This leads them to believe that the price is susceptible to manipulation. Futures ETFs that aren’t directly linked to BTC would provide better protection for investors.
Futures ETFs allow investors to trade both long and short on BTC. This allows them to hedge their BTC assets rather than holding physical backed units.
Cointelegraph was told by Antoni Trenchev (co-founder) of the crypto trading platform Nexo that “the SEC doesn’t seem ready for spot ETFs yet.” “I have a feeling that this will happen in near-to-mid-term, once U.S. regulators feel confident in their policies and treatment Bitcoin and other digital assets.” Trenchev said that both products are financial tools and that the SEC will want to offer a range of options.
He pointed out the SEC’s unwillingness to take risks and stated, “They’re just unwilling to take any risk which is in itself admirable considering the high level of pressure from eager investors in order to have seen ETFs in America.”
Not all market participants are positive about the SEC’s approach. Marie Tatibouet is the chief marketing officer at crypto exchange Gate.io. She told Cointelegraph that it took four years for the U.S. SEC to understand how a futures BTC ETF worked. They will likely need to spend two to three more years to create spot ETFs.
Tatibouet stated that futures contracts for Bitcoin don’t directly link to Bitcoin’s price, but are linked to Bitcoin futures prices. These prices are much easier to manipulate than spot prices. This could explain why the SEC approved futures-eTFs.
Canada supports spot ETFs
Although the U.S. launch of Bitcoin futures ETFs was widely hailed by the community as a landmark moment in cryptocurrency, it wasn’t the first country that allowed crypto-related ETFs. Canada, the U.S. friendly neighbor, has been offering Bitcoin ETFs trading on different exchanges for most this year.
In February 2018, Canada witnessed the launch of the Purpose Bitcoin ETF. It is a physical backed spot Bitcoin ETF and has been a huge success since its inception. Evolve Investments launched the Evolve Bitcoin ETF shortly after. This is also a spot ETF. Both the Evolve and Purpose Bitcoin ETFs currently manage $1.4 billion and $203 millions in assets, respectively. Following the success of their Bitcoin ETFs, these companies have launched Ether (ETH-based) ETFs.
Related: Why now? It took the SEC eight years to approve a Bitcoin ETF in America
Trenchev, Nexos’s chief executive officer, said that Canada could be compared to El Salvador of Spot Bitcoin ETFs. They have been there for some time, and it seems like things are going well. It is always a good idea to have other examples to look at, regardless of their success or failure. This will certainly be true when it comes time to spot ETFs here in the U.S.
Jun pointed out the differences between the U.S. legal system and Canada’s. He stated that “Canada’s regulatory framework is more flexible and Canada is more focused upon innovation.” It is often willing to lead financial innovation. This includes the launch of the first ETFs in 2017 and the creation of the first modern ETFs. The U.S. regulatory environment for the market is stricter.
Peter Brandt, a legendary trader, offered a fresh perspective and suggested that BTC maximalists should not support ETFs. He also recommended that ETFs be completely avoided.
#Bitcoin maximalists need to oppose spot $BTC-ETFs in the U.S. Bitcoin’s store of value story is dependent on its scarcity, and some difficulty purchasing it. We shouldn’t encourage Wall Street greedy and hungry to turn Bitcoin into a vending machine asset. ETFs: Say NO!
— Peter Brandt (@PeterLBrandt) November 13, 2021
It is possible to argue whether ETFs will help BTC grow as an asset over the long-term in the manner originally intended. However, it is undisputed that crypto ETFs have a significant impact on market sentiments, and eventually the price of Bitcoin. This is the central point of the entire discussion.
Eileen Wilson –Technology and Energy
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