Bitcoin (BTC) has been on an impressive price run since the utterance of the United States Securities and Mart Commission’s clearance of ProShares’ Bitcoin futures exchange-traded fund (ETF) early in October, hitting a new all-time upper of over $69,000 on Nov. 10, as per data from TradingView.
However, the financial watchdogs soured the mood by rejecting VanEck’s proposal for a spot ETF on Nov. 12, which make-believe as a trigger for the price of the flagship cryptocurrency to waif to a 30-day low of $55,705 on Nov. 19. The token is trading in the $56,000 range at the time of writing.
An ETF is a security matriculation that tracks an windfall or basket of assets, in this specimen Bitcoin, and can be traded on a stock mart like any other stock. Proshares’ BTC ETF was the first ETF to proceeds clearance from the SEC without over 20 applications had been made to the financial regulators in the past.
Jan van Eck, CEO of VanEck, wasn’t happy well-nigh the rejection of his company’s ETF.
We are disappointed in today’s update from the SEC unthriving clearance of our physical bitcoin ETF. We believe that investors should be worldly-wise to proceeds #BTC exposure through a regulated fund and that a non-futures ETF structure is the superior approach. @tyler @gaborgurbacs
— Jan van Eck (@JanvanEck3) November 12, 2021
The difference between the tried Bitcoin ETFs trading currently wideness various stock exchanges in the U.S. such as the Nasdaq or CBOE and VanEck’s rejected Bitcoin ETF is that VanEck’s ETF proposal was for a spot ETF, and the tried ETFs are all futures-based ETFs.
Van Eck said that a spot ETF is the largest choice, tweeting, “We believe that investors should be worldly-wise to proceeds #BTC exposure through a regulated fund and that a non-futures ETF structure is the superior approach.”
SEC Chair Gary Gensler has previously voiced his support for futures-based BTC ETFs instead of price-based. In the official decision to reject VanEck’s ETF application, the SEC said that the product failed to meet the requirement “that the rules of a national securities mart be ‘designed to prevent fraudulent and manipulative acts and practices’ and ‘to protect investors and the public interest.’”
Futures are often a higher-risk product
However, it could be that financial regulators in the U.S., in rejecting VanEck’s spot ETF, have unleashed a risker product on the same investors it aims to protect, as it allows institutional Wall Street money to leverage Bitcoin’s price movements.
A futures contract gives the holder or proprietrix of the contract the obligation to purchase the underlying windfall and the writer or seller of the contract the obligation to sell and unhook the windfall at a specified price on a specified future stage unless the holder closes their position prior to the expiration date.
Combined with options, these financial instruments are often used to hedge other positions in the investor’s portfolio or make profits from pure speculation without needing to buy the underlying asset. These markets are usually dominated by institutional investors that have deep pockets to buffer any losses in their portfolio.
Although futures could be used solely to minimize risk in an investor’s profile, where they get riskier is the use of leverage in futures markets. Leverage is the worthiness to use borrowed funds and/or debt as trading wanted in the market to overdraw returns from a position. Essentially, it is used by investors to increase their ownership power multifold in the markets.
While leverage moreover exists in the spot markets, its impact is significantly smaller. However, with futures contracts, the leverage could be up to 95%, which entails that an investor can hands purchase an options contract with 5% of the required wanted and infringe the rest. This ways any small fluctuations in the price of the underlying windfall will have a large impact on the contract, leading to a margin undeniability for investors due to forced liquidations of futures contracts.
A margin undeniability is a scenario wherein the value of the investor’s margins has fallen unelevated the mart or broker’s required amount. This calls for investors to petrifaction an value known as maintenance margin to the worth to replenish when to the minimum unliable value. This could moreover lead to investors having to sell other resources in their portfolios to make up for this amount.
It is important to note that these risks inherent for futures contracts have nothing to do with the nature of the underlying products, but from the methodology by which futures contracts are traded wideness financial markets. Du Jun, co-founder of cryptocurrency mart Huobi Global, spoke to Cointelegraph well-nigh the SEC’s decision:
“Given the current situation, futures ETFs may be the weightier nomination wonted by the SEC. It’s true that futures ETFs are often ramified with a higher risk profile, but the futures ETFs have some characteristics that satisfy the SEC’s demand.”
Jun believes that, to uncork with, regulators still haven’t figured out the process to set BTC’s spot price, thus leading them to think that the price is vulnerable to manipulation; so, futures ETFs unlinked to BTC directly would offer investors largest protection.
Furthermore, futures ETFs requite investors the opportunity to go both long and short on BTC, thus hedging their BTC resources instead of holding units with physically backed BTC.
Antoni Trenchev, co-founder of crypto trading platform Nexo, told Cointelegraph, “The SEC doesn’t seem ready to indulge spot ETFs just yet. I have a hunch this will happen in the near-to-mid future, as soon as U.S. regulators are confident in their policies and treatment of Bitcoin and other digital assets.” He said that ultimately, both of these products are just financial tools, and the SEC will want to have a variety of options available.
He noted the SEC’s hesitance to take risks, stating, “They’re simply unwilling to take any risks, which is in itself laudable considering the upper pressure from eager investors to have spot ETFs in the U.S.”
However, not all market participants have a positive outlook well-nigh the SEC’s approach. Marie Tatibouet, senior marketing officer of crypto mart Gate.io, told Cointelegraph, “It took the U.S. SEC virtually four years to icon out how a futures BTC ETF works. It will probably take them two to three years increasingly to icon out spot ETFs.”
Tatibouet said that since BTC futures contracts aren’t linked to the price of Bitcoin directly but to the price of Bitcoin futures, the prices of which are “way easier” to manipulate than spot prices, this could be one of the reasons that the SEC tried futures ETFs.
Canada supports spot ETFs
While the launch of Bitcoin futures ETFs in the U.S. was prestigious by the polity as a watershed moment for the cryptocurrency windfall class, it was not the first country to indulge crypto-related ETFs. The U.S.’ friendly neighbor, Canada, has had Bitcoin ETFs trading on various exchanges for most of this year.
Canada saw the launch of the first Bitcoin ETF in North America, the Purpose Bitcoin ETF, in February this year. This is a physically backed spot Bitcoin ETF that has been successful overly since its launch. Evolve Investments moreover launched the Evolve Bitcoin ETF soon after, which is moreover a spot ETF. The Purpose Bitcoin ETFs and the Evolve Bitcoin ETF currently have $1.4 billion and $203 million in resources under management, respectively. The companies overdue these ETFs have moreover gone on to launch Ether (ETH)-based ETFs pursuit the success of their Bitcoin ETFs.
Nexos’ Trenchev said, “Canada could be thought of as the El Salvador of Spot BTC ETFs. They’ve been misogynist there for some time now, and things seem to be working out. It’s unchangingly an wholesomeness to have examples to squint to — regardless of how successful or unsuccessful they are — and I’m unrepealable this will be the specimen when it comes to spot ETFs in the U.S.”
Jun noted the differences in the legal landscape in the U.S. and Canada, stating, “Canada’s regulatory environment is increasingly flexible, and Canada is increasingly focused on innovation. It often dares to take the lead in financial innovation, like the first modern ETFs in 1990 and the first launch of cannabis ETFs in 2017. But the U.S. market regulatory environment is much stricter.”
Offering a new perspective on the matter, legendary trader Peter Brandt took to Twitter to mention how BTC maximalists should oppose ETFs and spot ETFs completely.
IMO, #Bitcoin maximalists should oppose spot $BTC ETFs in U.S. Bitcoin’s store of value story depends on its scarcity and plane some difficulty to purchase. Let’s not encourage greedy grub-hungry Wall Street to convert BTC into a vending machine asset.
Say NO to ETFs
— Peter Brandt (@PeterLBrandt) November 13, 2021
It is untrusty whether ETFs will support the growth of BTC as an windfall in the long term in the way originally intended, and it is undeniable that the developments of crypto ETFs have a large impact on market sentiments and thus, eventually, the price of Bitcoin, which is inside to the whole discussion at hand.