For years, dozens of companies have applied to have an ETF approved by the SEC. Delayed once again, now is a good time to explore what would happen if either Bitcoin ETF or futures-based Bitcoin ETF were to launch.
Bitcoin Starts October with Sharp Rally
As we were leaving a historically underperforming September, Bitcoin rapidly recovered. Rising from $41k on September 28th, to $47k on October 1st, Bitcoin saw a 14.6% increase in just three days. It appears that $47k is Bitcoin’s current resistance level, with $45k a possible dip down the line.
Interestingly, when Michael Saylor bought 3,907 BTC at that price range, on August 24, we had speculated that $45k could be the new BTC bottom. Moving forward, BTC price would have to overcome the previously hard resistance of $50k to regain lost ground prior to the Musk/China FUD combo.
The question is, which piece of news could break through the resistance? Social media speculation usually gathers around these possible factors.
We are now more than one year out from Bitcoin’s third halving in May 2020. Following the same period after previous halvings in Q4 2013 and Q4 2017, Bitcoin rallied by at least 300%. This time around, this doesn’t seem likely given Bitcoin’s drastically larger market cap; it would take quite a lot of money to shift the price so high in such a short time span.
Could Bitcoin ETFs be the catalyst the market is waiting for? Or could they have the opposite effect in the short term?
Bitcoin ETFs Rescheduled…Again
When we last touched on the possible launch of Bitcoin ETFs at the end of August, we explored the possible first-mover advantage held by the top 5 Canadian BTC ETFs. At the time, it was clear that Gary Gensler, the Securities and Exchange Commission (SEC) Chair, favored futures-based ETFs. Because they are derivatives-based, such exchange-traded funds, futures would avoid direct Bitcoin custody, making them easier to regulate by the Chicago Mercantile Exchange (CME).
Although some analysts had speculated we could see a Bitcoin futures ETF by the end of October, Gensler recently moved the timetable to at least December. Nonetheless, whether it is approved sooner rather than later is of less importance than its impact on Bitcoin’s price.
Why Are Bitcoin ETFs a Big Deal?
For stock market investors, the point of investing in ETFs is to gain passive exposure to a basket of equities at low fees and have better tax efficiency. More importantly, these ETFs can be traded just like stock shares – futures, options, long and short positions – which is not the case with mutual funds.
However, Bitcoin is not the same as stocks, as it doesn’t represent a company. Correspondingly, it is more volatile and more easily accessible. Any individual could go to PayPal, Cash App, Robinhood, or any number of crypto exchanges to buy Bitcoin. What would be the point of an intermediary as ETF then?
The operative words are individual vs. corporate. Because of its relative novelty and volatility, company shareholders are likely to object to large acquisitions of Bitcoin, outside of exceptions like MicroStrategy. ETFs solve this issue by having professional security, custodial service, and insurance in place, all of which would be approved and regulated by the SEC.
Moreover, the familiarity with ETFs as popular investment vehicles could go a long way to soften psychological resistance. In short, a Bitcoin ETF would open a funnel of institutional money into the crypto space. Yet, this funnel could slam Bitcoin’s price in the short term.
How Could a Bitcoin ETF Suppress Price?
In January, JP Morgan analysts issued a warning to their clients, noting that a Bitcoin ETF approval by the SEC could cause a BTC price slump.
“A cascade of GBTC outflows and a collapse of its premium would likely have negative near-term implications for Bitcoin given the flow and signaling importance of GBTC,”
The Grayscale Bitcoin Trust (GBTC) works in a similar way to an ETF: Investors give Greyscale cash to buy BTC. The fund is then listed on stock exchanges where its shares can be bought and sold, with its price action mirroring Bitcoin’s. This way, GBTC gives investors exposure to Bitcoin trading without having to trade with it themselves.
If the BTC price goes up, investors can sell their GBTC shares to cut a profit. As you can see, GBTC shares closely follow BTC.
Because Greyscale is considered a crypto whale (holding 654,885 Bitcoin as of April 2021) and an ETF would be a cheaper investment vehicle, JP Morgan projected that an approved Bitcoin ETF could collapse Bitcoin’s support price. In the meantime, there is the matter of futures-based Bitcoin ETFs and how they could negatively impact Bitcoin’s price.
The Potential Effect of Futures-Based Bitcoin ETF
Courtesy of MarketWatch, Grayscale CEO, Michael Sonnenshein, expressed his apprehension at Gensler favoring futures-based Bitcoin ETF, calling it shortsighted.
“It is perhaps shortsighted of the SEC to really lean into futures based products and not spot,”
In a spot market, assets such as stocks, currencies, or commodities are traded immediately based on order books. Futures contracts on the other hand have a set delivery date. This gives traders leeway to cash out before the contract matures if the contracted price is lower than the sell-date price.
It would then logically follow that Bitcoin’s price could be more easily manipulated. That is, to suppress the BTC price because derivatives contracts don’t infer ownership. Instead, they infer market signaling. We have a historical example of this when CME Group, the world’s largest futures exchange, launched Bitcoin futures on December 17, 2017.
In other words, futures-based Bitcoin ETFs could create a market situation in which speculative whales dominate the space without holding crypto assets. If they push the price down, HODLers would almost certainly buy the dip – real BTC – instead of a derivative.
In turn, this would eventually mitigate the derivatives speculation pressure.
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Who Controls BTC Price Right Now?
We have already noted Michael Saylor and GBTC as major crypto whales, the latter holding 6x more BTC than Saylor. Of course, above them are miners who make it their business to accumulate BTC and sell it at the most opportune moment. For instance, in March 2020, there was a reasonable case made that miners crashed BTC price 51 days before the halving.
This would make perfect sense because halvings elevate Bitcoin scarcity, resulting in its price going up after each one. The miners would then accumulate BTC at a discount, only to sell it at a premium a couple of months later.
Presently, Bitcoin wealth is highly concentrated. According to BitInfoCharts, 2.12% of Bitcoin addresses hold 94.73% of all bitcoins. Cryptocurrency exchanges hold much of that BTC in cold storage, which represents another vector for price manipulation. BitMEX was accused of such shenanigans, however, the lawsuit has recently been dismissed due to being “too lengthy and copy pasted from a similar lawsuit“.
In the end, if futures Bitcoin ETFs do come to fruition, one should expect a brief price slump. Institutional investors are likely to take advantage of these phantom derivatives bitcoins, but their hold would only last so long until the market corrects itself. In the long run, non-futures BTC ETFs should strengthen the price further.
How long are you willing to wait to cut profit from your BTC investment? More or less than one year? Let us know in the comments below.