SEC Rejects VanEck’s Spot Bitcoin ETF

November 22, 2021 By admin 0

Bitcoin has had an impressive rally since the announcement of the US Securities and Exchange Commission (SEC) approval of ProShares’ Bitcoin futures exchange-traded fund (ETF) in early October and reached an all-time high (ATH) of over $69,000 on November 10.

However, sentiment turned sour when regulators rejected VanEck’s Bitcoin spot ETF (spot) proposal on Nov. 12. This pushed Bitcoin’s price down to a 30-day low of 55,705. dollars on Nov. 19. It is currently trading in a range of $58,966 at the time of writing.

Bitcoin Price Chart | Source: Tradingview

An ETF is an asset-tracking security or basket of assets, in this case Bitcoin, and can be traded on a stock exchange like any other stock. Proshares Bitcoin ETF is the first fund approved by the SEC out of more than 20 applications.

The difference between the currently approved Bitcoin ETF trading on various US stock exchanges like Nasdaq or CBOE and the rejected Bitcoin ETF is that VanEck’s proposal is geared towards the spot market while ETFs are not. approved are ETFs based on futures contracts.

Futures are usually a higher risk product

However, it is possible that financial regulators in the United States, in rejecting VanEck’s spot ETF, have launched a riskier product for investors they want to protect, as it allows money Wall Street institutions take advantage of Bitcoin’s price movements.

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

Combined with options, these financial instruments are often used to hedge other positions in an investor’s portfolio or to profit from pure speculation without purchasing the underlying asset. . These markets are often dominated by institutional investors with ample resources to cushion any losses in their portfolios.

While futures contracts can only be used to reduce the risk on an investor’s profile, what exposes them to greater risk is the use of leverage in this market. Leverage is the ability to use debt or debt as capital to trade in the market to increase profits from a position. It is basically used by investors to increase their purchasing power many times over in the market.

While leverage also exists in the spot market, its impact is significantly smaller. With futures, however, leverage can be as high as 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 movement in the price of the underlying asset will have a large impact on the contract, leading to margin calls for investors due to forced liquidation of the futures contract.

Margin call is a situation in which the value of an investor’s profit falls below the required amount of the exchange or broker. The call requires the investor to deposit an amount known as the ‘maintenance margin’ into the account to fill the minimum allowable value. This can also result in investors having to sell other assets in their portfolio to offset this amount.

It is important to note that the risks inherent to futures have nothing to do with the nature of the underlying products, but rather from the methodology – the way futures are traded on the markets. finance school.

Du Jun believes that regulators have yet to figure out a process to set prices on BTC’s spot market, thus leading them to think that prices are susceptible to manipulation. So, futures-based ETFs that are directly de-linked to BTC will provide better protection for investors.

Furthermore, futures-based ETFs offer investors the opportunity to both Long and Short BTC, thus protecting their BTC assets instead of holding physically backed BTC units.

Canada Supports Bitcoin ETF Spot

While the launch of the Bitcoin futures ETF in the United States is celebrated by the community as an important turning point for the market, it is not the first country to allow crypto-related ETFs. The friendly neighbor of the United States, Canada, has been trading Bitcoin ETFs on various exchanges since the beginning of this year.

Canada licensed the first Bitcoin ETF in North America, the Purpose Bitcoin ETF, in February. It is a physically backed spot Bitcoin ETF that has been a hit since its launch. Evolve Investments also launched the Evolve Bitcoin ETF shortly after, which is also a spot ETF. The Purpose Bitcoin ETF and Evolve Bitcoin ETF currently manage $1.4 billion and $203 million in assets, respectively. The companies behind these ETFs have also continued to launch Ether-based ETFs following the success of the Bitcoin ETF.

ETF supports the development of BTC

Will the ETF support the growth of BTC as an asset over the long term in the way it was originally intended? There is no denying that the development of crypto ETFs has a major impact on market sentiment and therefore, ultimately, Bitcoin price remains the focus of the entire discussion.