Bitcoin ETFs may finally make their debut – sort of
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Traders work at the New York Stock Exchange, August 4, 2021.
Andrew Kelly | Reuters
Both cryptocurrency lovers and exchange-traded industry professionals are anxious for Tuesday’s debut of the ProShares Bitcoin Strategy ETF at the NYSE.
Only one thing: The ETF is not active if the Securities and Exchange Commission objects. This could happen up to midnight Monday.
Many believe that the ETF will trade as planned, despite the uncertainties.
Dave Nadig chief investment officer and director for research at ETF Trends told me, “I would give the approval a 75% chance.”
A bitcoin futures ETF: a disappointment, or step in the right direction?
ETF’s base is bitcoin futures, which trade on CME. This is disappointing for many people in bitcoin, who prefer an ETF with pure play and physical bitcoin backing it. The high costs of rolling into futures contracts won’t accurately track spot prices of cryptocurrency. They believe that approval by the SEC for a pure-play Bitcoin ETF should be granted.
Grayscale Investments’ CEO Michael Sonnenshein stated that a futures contract is a derivative from the spot currency market. Therefore, if futures are your preferred option, then why not the spot? Grayscale Bitcoin TrustI was informed. Grayscale stated that they intend to convert GBTC into a Bitcoin ETF if the regulatory approval is granted.
Regardless, most bitcoin activists – and the ETF community – are cheering it as a small but critical step to open the crypto market to a much wider audience.
Matthew Hougan from Bitwise Asset Management told me, “This market is crawl, walk, and run.” Because it is a regulated industry, the SEC has to take the smallest possible step.
That fact – that futures are a regulated market – is critical to understanding why SEC Chair Gary Gensler is likely to allow a bitcoin futures ETF to begin trading, but not a pure-play bitcoin ETF.
Gensler, the SEC and others have a crypto issue. A bitcoin futures ETF can help.
Gary Gensler suffers from a crypto problem. Although he wants to support financial innovation such as crypto, he doesn’t have the regulatory authority necessary for areas like crypto-exchanges.
Hougan explained to me, “Gensler wants innovation and balance.” He doesn’t want financial innovation to be killed. [around crypto]He said. He would like to clamp down on fraud, the nefarious elements, and criminal activity. It is his desire to create a regulatory structure.
He doesn’t yet have any regulatory framework. Although it is likely that Congress will be required to provide broad regulations for all crypto spaces, the likelihood of this happening in the near future are very slim.
Gensler feels under immense pressure because the crypto market is expanding so quickly that he has to act. Without affecting the regulatory authority of other agencies, the SEC cannot go far.
A temporary solution is to allow a bitcoin futures ETF trading.
ETFs that trade bitcoin futures allow the public to become involved in the currency without the hassles of ownership. You don’t need to worry about custody. Nobody will ever complain they forgot their crypto exchange password. Someone who has their cryptocurrency stolen by hackers but owes bitcoin to an unregulated exchange is not in trouble.
Is it possible to manipulate a futures exchange?
Market manipulation is one of the main reasons why a bitcoin ETF was not approved. Concerns about bitcoin futures ETFs have been similar: the possibility that spot markets could manipulate the futures market.
According to a recently released paperHougan claims this concern is unfounded by Bitwise Asset Management’s associates, Bitwise Asset Management.
Hougan said that “we have shown that the CME Bitcoin Futures Market is the leading source for price discovery in bitcoin market worldwide.” CME prices move ahead of Coinbase Kraken, Coinbase, and other offshore exchanges. CME is the biggest dog. Spot market doesn’t wag futures’ tail.”
Dave Nadig also agreed. He noted that pricing in commodities has been long controlled by futures. “The futures, where is the liquidity?”
Hougan took this logic one step further. Bitwise, which filed yesterday for bitcoin ETF, requested that it hold actual virtual currencies and not futures. They argued that there is enough maturity in the market.
Hougan explained to me that this is not the bitcoin of your grandmother. It is mature.
Start with baby steps
It is not likely that the SEC will approve an ETF for pure bitcoin play, at least right now. They’ll likely demand more regulation of the spot market, and further evidence that it is regulated. [futures]is performing a great job, and has not been manipulated by bitcoin spot markets.
If the ProShares ETF begins trading on Tuesday, other ETFs will probably soon follow suit, such as the Invesco Bitcoin Strategy ETF and VanEck Bitcoin Strategy ETF.
Hougan believes Tuesday is a significant day for crypto investors.
Hougan stated to me that this was a positive move. People should be proud of it. This kind of regulatory courage is rare.”
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