What Is a Spot Bitcoin ETF?

ETF stands for exchange traded fund. There are thousands of ETFs. A common type of ETF is one that allows a person to invest in or trade a market index instead of buying hundreds of stocks. Alternatively, an ETF lets a person trade something that cannot be traded directly via a stock exchange. This would be the case in the USA with a spot Bitcoin ETF. The exchange would buy and sell Bitcoin. It would offer shares of the ETF whose value was based on the current market (spot) price of Bitcoin. Just recently a Euronext Bitcoin ETF opened for business in the EU. Meanwhile, several spot Bitcoin ETF proposals are languishing with the Securities and Exchange Commission. One of them is with BlackRock which operates 424 ETFs. The assumption of many in crypto is that when these ETFs become operational, it will provide a huge boost to Bitcoin trading. The assumption, or hope, is that this would drive the price of Bitcoin back up toward levels not seen since before crypto winter. It would do this partly by bringing in investors interested in making money with Bitcoin but not in having a crypto wallet or working though the blockchain. They would simply buy and sell shares like they do with stocks.

Liar, Liar, Pants on Fire Crypto News

Crypto trading is notorious for market manipulation, pump and dump schemes. This time around a “tweet” on X (formerly Twitter) said that the BlackRock spot Bitcoin ETF had been OKed by the SEC. This caused the price of Bitcoin to go up 10% which hurt traders who had been betting on the price sagging some more. The Bitcoin price fell again when a follow-up tweet said that the first tweet was incorrect. Coin Telegraph sent both tweets and apologized in the second tweet.

Perils of Shorting Any Market

Markets go up. Markets go down. Markets trade sideways. Investors, like folks who buy and hold Microsoft, Apple, or Amazon stocks, simply buy. They generally make money over time when they buy good stocks because the stocks go up. However, even solid companies see their stock prices fall in a bad market. Those who seek to profit when prices fall use a couple of approaches. One used in the stock market is to borrow stocks from a brokerage, sell the stocks, and then buy later when the stock has fallen in value. This is called shorting. Another approach is to buy and sell futures contracts. In the case of Bitcoin these trade on the CBOE (Chicago Board Options Exchange). Someone expecting the price of Bitcoin to fall would sell a futures contract for a lower Bitcoin price. They would be obligated to purchase at the expected (lower) market price. They would lose money if the price went up like it did after the fake news tweet! The problem for a trader who has “shorted” an investment in some way is that it might go up instead of down. These traders are often leveraging their investments because they do not expect big movements in the market. When that happens and the movement is opposite from what they expected, the results can be devastating just like when traders lost $85 million in just twenty-four hours trading Bitcoin.

How to Lose $85 Million in Bitcoin in a Day – DOC

How to Lose $85 Million in Bitcoin in a Day – PDF

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.

SlideShare Version – Will the SEC Allow Spot Bitcoin ETFs?

Will the SEC Allow Spot Bitcoin ETFs? – DOC

Will the SEC Allow Spot Bitcoin ETFs? – PDF