28.11.2021

First US Bitcoin ETF May Disappoint Cryptocurrency Investors

In August, the head of the US Securities and Exchange Commission (SEC) Gary Gensler hinted that the financial regulator could open the doors to the first Bitcoin ETF in America.

This gesture would make the cryptocurrency much more accessible to large investors and increase the overall liquidity of BTC. However, there was one catch in Gensler’s words that still confuses how the public should perceive the SEC’s stance on digital assets. Let’s talk about the situation in more detail.

An ETF or Exchange Traded Fund is an index fund whose shares are freely traded on an exchange. ETFs are index based. For example, an ETF SPY includes the stocks of all companies in the S & P500.

The main advantage of Bitcoin ETFs in the United States will be the ability to interact with cryptocurrencies for stock exchange participants. This, in turn, will provide trading volumes as well as growing popularity for digital assets. In addition, traders do not have to interact with the coins themselves and be responsible for their safe storage. And this makes crypto assets less vulnerable to hackers and other ill-wishers.

It is important to note that ETFs for cryptocurrencies in other countries are already working. For example, the first ETF in Canada was approved in February 2021. At the same time, experts suggest that ETFs in the US should be expected approximately in October.

What will be the Bitcoin ETF?

Recall that a few weeks ago at a conference in Aspen, Gensler noted that Bitcoin ETFs “can be approved” with reference to cryptocurrency futures, which are traded on the CME exchange. In other words, the SEC could authorize ETFs that would depend on synthetic contracts pegged to the cryptocurrency price index rather than the cryptocurrency itself.

SEC Гэри Генслер

SEC Chief Gary Gensler

Gensler’s remark misled many crypto enthusiasts: the wait for an ETF on Bitcoin in America has been going on for several years and the words of the head of the SEC do not coincide a bit with what everyone was hoping for. Even Grayscale CEO Michael Sonnenschein, which filed for ETFs back in 2016, criticized Gensler’s line.

In an interview with Decrypt, Sonnenschein noted that the SEC has approved “thousands” of ETFs over the years that are not linked to the futures market. He also noted that even if the Bitcoin ETF is tied specifically to cryptocurrency futures as an index, this will not save the crypto market from manipulation by insiders with large capital. Here is a comment from an expert in which he shares his attitude to what is happening.

Saying that you are satisfied with a Bitcoin derivatives ETF is like saying that derivatives themselves have no problem.

Майкл Зонненшайн Grayscale

Grayscale CEO Michael Sonnenstein

Gensler’s preference for the futures market is likely due to the fact that such a financial product would be subject to the 1940 law, which provides a broader range of investor protection than the similar 1933 securities law governing stock market-linked ETFs. …

Sonnenschein noted that creating a Bitcoin ETF linked to the futures market would be more expensive than creating the same product based on the spot market. Meanwhile, the question arises, how many retail investors would dare to invest in an investment product based on the derivatives market.

Recall that spot trading involves the acquisition of assets at market prices. At the same time, with the help of futures, traders can speculate about the future value of an asset. This opens up various opportunities such as using the exchange’s borrowed funds and maximizing your profits with a significant increase in risk.

Why is everyone so “afraid” of ETF dependence on futures? The fact is that in the futures market, too high leverage is often used in trading by most traders, which sometimes leads to large cascades of liquidations of their positions and, consequently, collapses in the BTC price. In other words, futures ETFs can potentially be more volatile, and this will affect the reputation of cryptoassets, which many people still perceive as something far from an understandable tool to work with.

Finally, the recent threat from the SEC to the largest American cryptocurrency exchange Coinbase raises a lot of questions. Recall that the financial regulator does not rule out litigation with the company because of its new service called Lend, which allows you to earn up to 4 percent per annum on stemcoins, that is, cryptocurrencies pegged to the value of the US dollar.

One way or another, the SEC, led by Gary Gensler, is unlikely to give full freedom to the development of financial innovations in the cryptosphere, which could potentially not become a bright positive phenomenon for the price of Bitcoin.

We believe that the launch of ETFs for cryptocurrencies in the US will definitely take place sooner or later. Yet the current leadership of the Securities and Exchange Commission has a slightly better attitude towards the coin niche, with the popularity of digital assets preparing to set new records. Most likely, it will be more profitable for the regulator to somehow control what is happening in this area with the help of exchange-traded funds than to turn a blind eye to the situation in the niche.

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