Bitcoin ETF Futures: The SEC Got It Right

What happens to Bitcoin influences investor sentiment toward all cryptocurrencies. This last week it has been the strong arm of the regulators that has been the culprit.

Much of the time American regulators seem to do everything in their power to kill anything crypto, blockchain and put the kibosh on any new financial idea. This has only served to drive projects offshore to places like Malta, Liechtenstein and certain cantons in Switzerland.

But when you look at the evidence, the SEC’s blanket rejection of the 10 or so applications to create ETFs based on Bitcoin futures was the right call.

Too Soon

Recently in these digital ramblings I have shared a sense of improvement in the regulatory climate.  Apparently this was not a lone opinion given investor anticipation and subsequent reaction to ETF applications earlier this year. Anything that stimulates demand for Bitcoin seemed like a good thing.

There have been about 10 different proposals present thus far.  The focus of each is create an Exchange Traded Fund based on the price of Bitcoin Futures contract traded here in Chicago. 

Initially the concept of a simple way to buy and sell Bitcoin without the need of a complicated exchange to be negotiated or the need of a digital wallet that risk being hacked all sounded appealing.  In addition, if the ETF passed the SEC “sniff test” that just provided lots of added comfort. Finally, with Bitcoin near 2018 lows, the timing seemed perfect.

SEC Says No To Nine

And when the SEC’s blanket rejection of nine ETF proposals was announced, it caught crypto investors by surprise send markets into a sell off.  The first reaction was, well here we go, another piece of disappointing regulatory news at a most inconvenient time. Just when Bitcoin appeared to be breaking through a key technical point of price resistance.

SEC Speak

Understanding the SEC decision requires an advanced degree in foreign language translation.  Here is part of the ruling:

“…the Commission must disapprove a proposed rule change filed by a national securities exchange if it does not find that the proposed rule change is consistent with the applicable requirements of the Exchange Act—including the requirement under Section 6(b)(5) that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices.”

“Thus, even if a proposed rule change would provide certain benefits to investors and the markets, the proposed rule change may still fail to meet other requirements under the Exchange Act. For the reasons discussed above, the Exchange has not met its burden of demonstrating an adequate basis in the record for the Commission to find that the proposal is consistent with Exchange Act Section 6(b)(5), and, accordingly, the Commission must disapprove the proposal,”

Here Is Why The Ruling Makes Sense

One of the things about the SEC is that they never say anything simply or clearly. The quotes above are perfect examples.  However if common sense is applied, it makes sense for the following reasons. The crux of the decision has to do with protecting small investors against market manipulation.  At this stage of the Bitcoin futures market, real protection seems like an impossibility. Bear with me a minute to explain.

Assume for moment that each of the 10 ETFs were approved by the SEC, each attracting investor capital of just $15 million or $150 million overall.  That is chump change by any measure and especially compared to the $700+ billion traded annually on the CBOE. The futures market just for things like corn alone trades almost $200 million on any given day.  

Bitcoin futures (XBT) are a different story.  Trading on the CBOE is less than a year old and volume is so small that each XBT contract is equal to just one Bitcoin.  When you buy a corn futures contract, it equals 5,000 bushels. According to CBOE data, XBT trades $40.8 million per day. So it seems at this stage just about any amount of sizable ETF Bitcoin Futures money could overwhelm pricing.  

At this stage of crypto evolution, ETFs are better for those folks that create them (a.k.a. Wall St. interests) than for investors in general.  If and when trading in crypto futures matures EFTs will make a lot of sense, just not yet. At the heart of the SEC decision, this is what it was all about.

Featured image courtesy of Shutterstock. 

Author:
James Waggoner is a veteran Wall Street analyst and hedge fund manager who has spent the past few years researching the fintech possibilities of cryptocurrencies. He has a special passion for writing about the future of crypto.