ProShares Bitcoin ETF denied! But is that really bad news?
Exchange Traded Funds. Few understand what they are, but many in the crypto world believe an ETF approval by the SEC will signal a resurgence in Bitcoin and subsequently in the cryptocurrency market as a whole.
After a disappointing but widely expected SEC delay of a previous ETF application, brought forward by the CBOE in cooperation with VanEck and SolidX, the market has remained hesitant and somewhat fragile in anticipation of other SEC rejections or delays. Many were hoping for approval of the ProShares ETF today, although the likeliness of this was dubious, at best.
A key difference regarding the now-denied ProShares ETF should be considered. Whereas the previously delayed CBOE ETF was to be underpinned by actual Bitcoin, the proposed ProShares ETF, along with a number of other rejected ETFs from lesser-known Direxion and GraniteShares, was not. Instead, it was to be based on Bitcoin futures. This is an important distinction.
Consider that an ETF as designed by the CBOE would require the backing entities to hold an equivalent amount of Bitcoin as is doled out in the form of shares to ETF investors. This would cause a potentially considerable amount of market pressure on the supply of Bitcoin in the market and would likely cause an increase in price due to demand. In the case of the ProShares and other rejected ETFs, since they were based on futures resolved in USD, not in Bitcoin, they would hold no direct influence over the supply and demand elements of the cryptocurrency markets.
Due to the rather small scale of the Bitcoin market, its lack of liquidity, and its susceptibility to manipulative trading behavior, it could be some time before we see any ETF being approved, but particularly one that is based on futures. One need only consider the effect that the downtime of a single exchange that allows for futures in the form of “shorts” and “longs” had on the market the other day (a short is essentially a bet against Bitcoin rising in price by borrowing at a higher Bitcoin value, immediately selling the asset, and then buying it back at a lower value, netting the difference as profit). During a brief period following the BitMEX exchange undergoing maintenance, Bitcoin prices spiked dramatically. This could be observed as a vertical green candle in market charts due to the near instantaneous jump of around 7% in Bitcoin’s price. Since Bitcoin could not be shorted on BitMEX during this period, the price surged. The disproportionately large impact of a single exchange in a scenario like this would be reason enough for the SEC to decide against a futures ETF.
While the SEC does not explicitly have any issues with Bitcoin itself as the basis of an ETF, it is concerned — and has cited the concern consistently as a reason for all previous Bitcoin ETF rejections and delays — that the market is still too vulnerable to fraudulent behavior and manipulative trading practices on exchanges.
While it is disappointing that yet another Bitcoin ETF has met its demise, there is light on the horizon. The CBOE ETF was merely delayed — and can be delayed again, repeatedly, until early 2019. Other ETF’s are also soon to be reviewed by the SEC. As the market matures over time and gains liquidity, the likeliness of an ETF approval continues to gradually increase.
This whole approval process also begs the question: would it really be good for Bitcoin’s value if an ETF based on futures existed? If institutional investors can bet, on a large scale, against Bitcoin, would it actually have a positive effect on market value? Please share your thoughts on the issue in our comments section!