Several applications for spot Bitcoin ETFs are up for decisions in the first days of September 2023. Will the SEC allow spot Bitcoin ETFs? If not, what would be their reasons? The Securities and Exchange Commission recently declined to rule on the Bitwise Bitcoin ETP Trust which upset folks in the crypto world. However, they are obliged to come to a decision as of September 1 and a host of applications including a Blackrock Bitcoin ETF and ones by Inesco, Wisdom Tree, and VanEck are due the following day. Will the SEC allow spot Bitcoin ETFs this time around or will they make the crypto world wait longer for an efficient way to trade Bitcoin for those who are not interested in owning a Bitcoin wallet.
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What Is a Spot Bitcoin ETF?
The idea of an ETF is to let people invest in things like a group of stock in the stock market by purchasing only one stock. You do not have to buy shares of all of the stocks in the S&P 500 stock index. You only have to buy shares of an ETF that tracks the S&P 500 stock index. ETF stands for exchange traded fund while the SP 500 tracks the five hundred biggest companies in America. Because this approach works pretty well for things like stock indices, folks like Blackrock, Inesco, and VanEck thought it would be good to try it for Bitcoin. Besides folks who do not want to bother buying shares of hundreds of companies, there are folks who are not interested in going to all of the fuss and bother of buying, holding, and selling cryptocurrencies. However, they have seen that Bitcoin has investment potential. Thus, a spot Bitcoin ETF whose share prices track the value of Bitcoin seems like a good idea. Unfortunately, the SEC is not necessarily of the same mind on this.
What Does the SEC Have Against Spot Bitcoin ETFs?
The SEC does not have a problem with ETFs. There were 123 of them back in 2003 and as of 2022 there were 2702 ETFs in the U.S. The problems with the SEC and spot Bitcoin ETFs lies with the underlying asset, Bitcoin. In fact, the SEC’s problems have to do with problems in the crypto world. Specifically, fraud and market manipulation are their concerns. The SEC sees Bitcoin as a commodity which the Commodity and Exchange Commission will regulate. Thus the SEC would have an ETF under its regulatory umbrella but the underlying asset would not be under their jurisdiction.
Bitcoin Market Manipulation
We have written about the huge amount of Bitcoin wash trading that goes on. Wash trading is when someone simultaneously sells and buys something like a stock or Bitcoin. There are two reasons for doing this. One is to get a tax break by selling at a loss. This is legal. The illegal part is to immediately buy it back and still try to get the tax break. The IRS frowns on this and will generally disallow taking a tax loss in these cases. What the SEC is more worried about is when people repeatedly engage in wash trades. This is done to manipulate the market.
Why Is Wash Trading Manipulative?
People who trade Bitcoin rely heavily on technical indicators when trading Bitcoin. Technical indicators like moving averages, trading volume measures, and indicators of liquidity help traders understand where prices are likely to go next. When trading volume is high it typically indicates that people are interested in a stock and often precedes a market rally. A Bitcoin trader who is following trading volume may choose to buy with the usually valid expectation that the price of Bitcoin will go up. Unfortunately, in some Bitcoin markets as much as 70% of the trading is wash trading. Thus the signal that the trader is following is bogus and they are just as likely to lose money in their trade as to gain. The individuals who are behind the wash trading will stand ready to sell as the market goes up because they can then manipulate trading again and send the price back down. This is at the root of why the SEC is concerned about having spot Bitcoin ETFs when they have no regulatory control over Bitcoin itself.
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