Posted inNews

VanEck’s Bitcoin spot ETF shunt solidifies SEC’s outlook on crypto

November 20, 2021No Comments

Bitcoin (BTC) has been on an impressive price run since the announcement of the U.S. Securities and Exchange Commission's approval of the ProShares Bitcoin futures exchange-traded fund (ETF) in early October, reaching a new all-time high. over $ 69,000 on November 10. , according data by TradingView.

However, financial watchdogs embittered the mood by rejecting VanEck's proposal for a spot ETF on November 12, which acted as a trigger for the price of the flagship cryptocurrency to fall to a 30-day low of $ 55,705 on November 19. The token is trading in the $ 56,000 range as of this writing.

An ETF is a security class that tracks an asset or basket of assets, in this case Bitcoin, and can be traded on a stock exchange like any other stock. Proshares BTC ETF was the first ETF to gain SEC approval after more than 20 applications have been submitted to financial regulators. in the past.

Jan van Eck, CEO of VanEck, was unhappy with the rejection of his company's ETF.

The difference between the approved Bitcoin ETFs that are currently traded on various exchanges in the US, such as Nasdaq or CBOE, and the VanEck rejected Bitcoin ETF is that VanEck's ETF proposal was for an ETF at spot, and the approved ETFs are all futures-based ETFs.

Van Eck said that a spot ETF is the best option, tweeting, "We believe investors should be able to gain #BTC exposure through a regulated fund and that a non-futures ETF structure is the superior approach."

SEC Chairman Gary Gensler, formerly voiced its support for futures-based rather than price-based BTC ETFs. In the official decision To reject VanEck's ETF application, the SEC said the product did not meet the requirement "that the rules of a national stock exchange 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 US, by rejecting the VanEck Spot ETF, have unleashed a riskier product on the very investors it purports to protect as it allows institutional Wall Street money to leverage. Bitcoin price movements.

A futures contract gives the holder or buyer of the contract the obligation to buy the underlying asset and the subscriber or seller of the contract the obligation to sell and deliver the asset at a specified price on a specified future date, unless the holder closes its position before. until the expiration date.

Combined with options, these financial instruments are often used to hedge other positions in the investor's portfolio or to profit from pure speculation without the need to buy the underlying asset. These markets are often dominated by institutional investors who have a lot of money to cushion their portfolio losses.

Although futures could only be used to minimize risk to an investor's profile, where they become riskier is the use of leverage in the futures markets. Leverage is the ability to use borrowed funds and / or debt as trading capital in the market to amplify the returns from a position. Essentially, investors use it to multiply their purchasing power in the markets.

Related: Inflationary winds around the world are a sea change for Bitcoin

While leverage exists in spot markets as well, its impact is significantly less. However, with futures contracts, the leverage could be up to 95%, which means that an investor can easily buy an options contract with 5% of the required capital and borrow the rest. This means that any small fluctuation in the price of the underlying asset will have a large impact on the contract, leading to a margin call for investors due to forced liquidations of futures contracts.

A margin call is a scenario where the value of the investor's margins has fallen below the amount required by the exchange or broker. This requires investors to deposit an amount known as maintenance margin into the account to replenish it down to the minimum allowable value. This could also lead to investors having to sell other assets in their portfolios to offset this amount.

It is important to note that these risks inherent in futures contracts have nothing to do with the nature of the underlying products, but with the methodology by which futures contracts are traded in financial markets. Du Jun, co-founder of cryptocurrency exchange Huobi Global, spoke with Cointelegraph about the SEC's decision:

“Given the current situation, futures ETFs may be the best option accepted by the SEC. It's true that futures ETFs tend to be complex with a higher risk profile, but futures ETFs have some features that meet the SEC's demand. "

Jun believes that regulators have yet to figure out the process for setting the spot price of BTC to begin with, leading them to think that the price is vulnerable to manipulation; therefore, future ETFs unlinked directly from BTC would offer investors better protection.

Additionally, futures ETFs give investors the opportunity to go both long and short on BTC, thereby hedging their BTC assets rather than holding units with physically backed BTC.

Antoni Trenchev, co-founder of cryptocurrency trading platform Nexo, told Cointelegraph: “The SEC does not seem ready to allow spot ETFs at the moment. I have a hunch this will happen in the near to mid-future, as soon as US regulators trust their policies and the treatment of Bitcoin and other digital assets. ”He said that ultimately both products are just financial tools, and the SEC will want to have a variety of options available to it.

He noted the SEC's hesitancy in taking risks, stating: "They are just not willing to take any risks, which in itself is commendable considering the high pressure from investors eager to hold spot ETFs in the US. "

However, not all market participants have a positive outlook on the SEC's approach. Marie Tatibouet, director of marketing for cryptocurrency exchange Gate.io, told Cointelegraph: “It took the US SEC around four years to figure out how a BTC futures ETF works. It will probably take them two or three more years to figure out the cash ETFs. "

Tatibouet said that since BTC futures contracts are not tied directly to the price of Bitcoin but to the price of Bitcoin futures, whose prices are "much easier" to manipulate than spot prices, this could be one of the Reasons the SEC Approved Futures ETFs.

Canada supports spot ETFs

While the community celebrated the launch of the Bitcoin futures ETFs in the US as a watershed moment for the cryptocurrency asset class, it was not the first country to allow cryptocurrency-related ETFs. The US's friendly neighbor, Canada, has traded Bitcoin ETFs 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 of this year. This is a physically backed spot Bitcoin ETF that has been successful since its launch. Evolve Investments also launched the Evolve Bitcoin ETF shortly after, which is also a spot ETF. The Purpose Bitcoin ETFs and the Evolve Bitcoin ETF currently have $ 1.4 billion and $ 203 million in assets under management, respectively. The companies behind these ETFs have also launched Ether (ETH) based on ETFs following the success of their Bitcoin ETFs.

Related: Because right now? It took the SEC eight years to authorize a Bitcoin ETF in the US.

Nexos's Trenchev said: “You could think of Canada as the El Salvador of BTC spot ETFs. They have been available there for some time now and things seem to be working. It is always an advantage to have examples to look at, regardless of how successful or unsuccessful they are, and I am sure this will be the case when it comes to spotting ETFs in the US. "

Jun noted the differences in the legal landscape in the US and Canada, stating that “Canada's regulatory environment is more flexible and Canada is more focused on innovation. He often dares to lead financial innovation, like the first modern ETFs in 1990 and the first cannabis ETF launch in 2017. But the regulatory environment in the US market is much more stringent. "

Offering a fresh perspective on the matter, legendary merchant Peter Brandt took Twitter to mention how BTC maximalists should oppose ETFs and fully spot them.

It is debatable whether ETFs will support the growth of BTC as a long-term asset in the manner originally envisioned, and it is undeniable that the developments of crypto ETFs have a major impact on market sentiment and therefore eventually on the price of Bitcoin. , which is central to the entire discussion in question.