Most people in the cryptocurrency community expected the SEC to delay their decisions on Bitcoin ETFs (Exchange-Traded Funds) for as long as possible. On Wednesday, the SEC surprised everyone with a number of decisions on Bitcoin ETFs . The surprise wasn’t that the ETFs were denied from trading on exchanges, but that a number of these decisions came early. Some of these rulings were not due for weeks.
We’ve written about these Bitcoin funds/ ETFs before on our blog and in our newsletter. ETFs would allow significantly easier access to institutional investors and capital than the current system of exchanges would. These ETFs could be included in mutual funds, and would be available to private investors with the same ease as buying Apple stock. We’ve highlighted this avenue of capital pouring in as a potential catalyst that could rally the cryptocurrency industry (and inflate currency prices).
The proposals that were denied today came from ProShares, Direxion and GraniteShares.
All of the companies received the same statement from the SEC. It reads:
“…the Commission is disapproving this proposed rule change because, as discussed below, the Exchange has not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with the requirements of the Exchange Act Section 6(b)(5), in particular the requirement that a national securities exchange’s rules be designed to prevent fraudulent and manipulative acts and practices.”
Direxion had 5 ETFs in its proposal, including leveraged ETFs like “Direxion Daily Bitcoin 2X” Bear Shares and Bull Shares. Leveraged ETFs are common with commodities like oil and natural gas, or with currencies (foreign exchange). They are designed to give traders and speculators a little more risk/reward. With Bitcoin however, there’s an argument that the market is already extremely volatile, and people don’t need to be given more leverage – they need less.
The ProShares ETF was almost certain to be denied. Instead of being based on actual bitcoins, the ETF traded on the bitcoins future market – which is unbacked by an actual commodity or stake. Like the leveraged ETFs, this is another layer of abstraction and manipulation on top of an infantile and unstable currency.
It comes as little surprise to analysts in the cryptocurrency space that these ETFs were denied. There’s another reason the SEC may not be so quick to approve a “Bitcoin” ETF, but may soon approve a “Crypto” ETF; Bitcoin Whales.
Whales in Bitcoin Trading
Data from blockchain research firm Chainalysis indicates that a small number of investors account for a very large stake in Bitcoin. The earliest users and traders of Bitcoin have incredibly outsized portions of the currency. These “whales” have the ability to swing prices with their trading moves, and influence the overall market. With such a small group controlling such a large stake, coordinated actions would be relatively easy to undertake.
“Bitcoin wealth is concentrated, but this has decreased with the influx of new speculators. Five million bitcoin – one third of available supply – is controlled by the 1,000 largest long term investors and the 600 largest new speculators. Speculators tend to own less bitcoin, with half of speculative coins in wallets containing at least 200 bitcoin, while half of investment coins are held in wallets of at least 700 bitcoin.”
About 1,600 investors hold the private keys to roughly 5 million bitcoin. Put another way, 1,600 people control $32 billion USD worth of bitcoin.
That’s about 25% of all bitcoin that will ever be created, but it’s even more than that when you factor in all the bitcoin that has been “lost.” Chainalysis indicates that these 1,600 investors and traders actually own closer to ⅓ of all bitcoin.
David Gerard, author of Attack of the 50 Foot Blockchain, has made comments on Bitcoin trading under these conditions before;
“It’s very thinly traded, very badly structured . . . and it’s stupendously manipulated. Anyone who goes in not realising just how manipulated the crypto markets are will get skinned.”
This is exactly what the SEC is trying to protect the general public from; Market manipulation that benefits only the most sophisticated traders or those with large enough stakes.
The SEC expands upon this concern further in their disapproval notice:
“Among other things, the Exchange has offered no record evidence to demonstrate that bitcoin futures markets are ‘markets of significant size.’ That failure is critical because, as explained below, the Exchange has failed to establish that other means to prevent fraudulent and manipulative acts and practices will be sufficient, and therefore surveillance-sharing with a regulated market of significant size related to bitcoin is necessary.”
Basically, the SEC wants to see tight controls in place so that the everyday investor doesn’t lose their hat.
What Does the SEC Ruling Mean for the Future of Bitcoin Funds?
There is some potentially good news, for those hoping that a cryptocurrency ETF soon lands on exchanges. The SEC did not disapprove all proposals that it is currently considering. Still in front of the agency are proposals from Bitwise and the VanEck SolidX Bitcoin Trust.
Bitwise plans to offer a “basket of cryptocurrencies” in their ETF, giving investors exposure to a number of cryptocurrencies and the larger cryptocurrency market. In theory, this should provide a little more protection against market manipulation. Trading multiple currencies makes market manipulation a little more difficult, as there is a wider pool of capital/ cryptocurrencies that whales or investors would need to influence.
The VanEck SolidX Bitcoin Trust is a product of investor management firm VanEck teaming up with blockchain company SolidX (after VanEck’s first two bitcoin ETFs were shot down by the SEC.) The new proposal from this joint venture will have investors trading shares of actual bitcoins, instead of bitcoin futures – a move likely designed to appease the SEC’s concerns over manipulation. Additionally, the Trust is targeting institutional investors over retail investors; Initial pricing for their shares start at $200,000 USD each.
As with previous “nopes” handed out by the SEC, included was an assertion that the agency is not steadfast in its denial, or against cryptocurrencies:
“ emphasizes that its disapproval does not rest on an evaluation of whether bitcoin, or blockchain technology more generally, has utility or value as an innovation or an investment.”
The SEC has announced that their decision on the VanEck ETF would be made by September 30th. It has not made any announcements regarding the Bitwise ETF.
If you’d like to hear the latest news on Bitcoin ETFs, cryptocurrency analyses, news, and price moves, the BitBuy newsletter is a great place to start.