Bitcoin (BTC) has been on an impressive course since the US Securities and Exchange Commission announced the -proval of ProShares’ Bitcoin Futures Exchange Traded Fund (ETF) in early October, hitting a new all-time high of over $ 69,000 November 10th, according to data from TradingView.
However, financial regulators clouded sentiment by rejecting VanEck’s proposal for a spot ETF on November 12, which acted as a trigger for the flagship cryptocurrency’s price to hit a 30-day low of $ 55,705 on November 19. Dollar fell is trading in the $ 56,000 range at the time of writing.
An ETF is a class of security that tracks an asset or basket of assets, in this case Bitcoin, that can be traded on an exchange like any other stock. Proshares’ BTC ETF was the first ETF to be -proved by the SEC after filing over 20 filings with financial regulators in the past.
Jan van Eck, CEO of VanEck, was not h -py about the rejection of his company’s ETF.
We’re dis -pointed with today’s update from the SEC declining -proval of our physical Bitcoin ETF. We believe that investors should be able to gain exposure to #BTC through a regulated fund and that an ETF structure without futures is the superior -proach. @tyler @gaborgurbacs
– Jan van Eck (van JanvanEck3) November 12, 2021
The difference between the -proved Bitcoin ETFs currently traded on various US exchanges such as the Nasdaq or CBOE and VanEck’s rejected Bitcoin ETF is that VanEck’s ETF proposal was a spot ETF and the -proved ETFs are all futures-based ETFs.
Van Eck said a spot ETF would be a better choice and tweeted, “We believe that investors should be able to get exposure to #BTC through a regulated fund and that a non-futures ETF structure is the superior one -proach is. “
SEC chairman Gary Gensler previously expressed support for futures-based BTC ETFs instead of price-based ones. In the official decision to reject VanEck’s ETF -plication, the SEC stated that the product failed to meet the requirement “that the rules of a national stock exchange” are designed to prevent fraudulent and manipulative acts and practices “and” for protection. ” the investor and the public ‘interest.’ “
Futures are often a higher risk product
However, it could be that by rejecting VanEck’s spot ETF, US financial regulators unlocked a riskier product for the same investors they want to protect, as institutional Wall Street money can take advantage of Bitcoin’s price movements.
A futures contract obliges the holder or buyer of the contract to buy the underlying asset and the writer or seller of the contract an obligation to sell and deliver the asset at a specified price on a specified future date, unless the holder closes its position before the expiration date.
In combination with options, these financial instruments are often used to hedge other positions in the investor’s portfolio or to generate profits from pure speculation without having to buy the underlying asset. These markets are usually dominated by institutional investors who have deep pockets to cushion losses in their portfolio.
Although futures could be used solely to minimize risk in an investor’s profile, the use of leverage in the futures markets becomes riskier. Leverage is the ability to use leverage and / or leverage as trading c -ital in the market to increase the return on a position. Essentially, it is used by investors to increase their purchasing power in the markets many times over.
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There is a leverage effect on the spot markets as well, but its effect is significantly less. However, on futures contracts, leverage could be up to 95%, which means that an investor can easily buy an options contract with 5% of the required c -ital and borrow the rest. This means that small fluctuations in the price of the underlying have a major impact on the contract and, due to the forced liquidation of futures contracts, result in a demand for additional funds for investors.
A margin call is a scenario in which the value of the investor’s margins has fallen below the required amount of the exchange or broker. This requires investors to deposit an amount known as the maintenance margin into the account to replenish it to the minimum allowable. It could also result in investors having to sell other assets in their portfolios to offset that amount.
It is important to note that these inherent risks in futures contracts have nothing to do with the nature of the underlying products, but rather with the methodology by which futures contracts are traded in financial markets. Du Jun, co-founder of the Huobi Global cryptocurrency exchange, spoke to Cointelegr -h about the SEC’s decision:
“Given the current situation, futures ETFs could be the best choice that the SEC accepts. It is true that futures ETFs are often complex and have a higher risk profile, but futures ETFs have some properties that meet SEC demand. “
Jun believes regulators have not yet figured out the process of setting the spot price of BTC, leading them to believe the price is vulnerable to tampering; Futures ETFs that are not directly linked to BTC would therefore offer investors better protection.
In addition, futures ETFs offer investors the opportunity to take both long and short positions in BTC and thus secure their BTC assets instead of holding shares with physically secured BTC.
Antoni Trenchev, co-founder of the crypto trading platform Nexo, told Cointelegr -h: “The SEC doesn’t seem ready to -prove spot ETFs yet. I have an inkling that this will h -pen in the near to medium future once US regulators are convinced of their policies and how to deal with Bitcoin and other digital assets. ”He said that both products are ultimately just financial instruments and the SEC is one Variety of options available to you.
Noting the SEC’s reluctance to take risks, he stated, “They are simply unwilling to take any risk, which in itself is laudable considering the pressure from avid investors to sell spot ETFs in the US to have.”
However, not all market participants have a positive outlook on the SEC’s -proach. Marie Tatibouet, Chief Marketing Officer of the Gate.io crypto exchange, told Cointelegr -h: “It took the US SEC about four years to figure out how a futures BTC ETF works. You will probably need another two to three years to find spot ETFs. “
Tatibouet said that could be one of the reasons the SEC -proved futures ETFs.
Canada supports spot ETFs
While the introduction of Bitcoin futures ETFs in the US was hailed by the community as a turning point for the cryptocurrency asset class, it wasn’t the first country to allow crypto-related ETFs. The US’s friendly neighbor, Canada, has been trading Bitcoin ETFs on various exchanges for most of this year.
In Canada, the first Bitcoin ETF in North America, the Purpose Bitcoin ETF, was launched in February of this year. This is a physically backed up Bitcoin ETF that has been successful since its inception. Shortly thereafter, Evolve Investments also launched the Evolve Bitcoin ETF, which is also a spot ETF. The Purpose Bitcoin ETFs and Evolve Bitcoin ETF currently have $ 1.4 billion and $ 203 million of assets under management, respectively. The companies behind these ETFs have also launched Ether (ETH) -based ETFs following the success of their Bitcoin ETFs.
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Nexos’ Trenchev said, “Canada could be thought of as the El Salvador of spot BTC ETFs. They’ve been available there for a while and things seem to be working. It is always beneficial to have examples – regardless of how successful or unsuccessful they are – and I am sure that this will be the case with spot ETFs in the US. “
Pointing out the differences in the legal landsc -e in the US and Canada, Jun said, “Canada’s regulatory environment is more flexible and Canada is more focused on innovation. It often dares to take the lead in financial innovations, like the first modern ETFs in 1990 and the first cannabis ETFs in 2017. But the regulatory environment for the US market is much stricter. “
Legendary trader Peter Brandt offers a fresh perspective on the matter, mentioning on Twitter how BTC maximalists should reject ETFs and fully recognize ETFs.
IMO, # Bitcoin maximalists should oppose spot $ BTC ETFs in US Bitcoin’s store of value history, depends on their scarcity and even some difficulty in buying them. Let’s not encourage greedy Wall Street to turn BTC into a vending machine asset.
Say NO to ETFs
– Peter Brandt (@PeterLBrandt) November 13, 2021
It is questionable whether ETFs will support the growth of BTC as an asset over the long term in the manner originally intended, and it cannot be denied that the developments of crypto ETFs are having a huge impact on market sentiment and, ultimately, the price of Bitcoin which is at the center of the entire discussion.