When CME Group launched the first bitcoin futures contracts in 2017, the firm’s chairman emeritus, Leo Melamed, famously declared that he would ‘tame’ bitcoin. Since then, several ETFs have been approved by the SEC. But as exchanges increased the supply of BTC by selling “paper bitcoin,” questions of market manipulation began to emerge.
Melamed told Reuters at the time, “We will regulate bitcoin to make it neither wild nor wild. We will turn it into a regular kind of instrument of trade with rules.”
Exchange-traded funds, or ETFs, allow investors to buy an asset that tracks the price of bitcoin. But without actually owning the underlying asset directly. In the US, such funds come under the purview of the Securities and Exchange Commission (SEC).
Structured similarly to an IOU, an informal document acknowledging debt, ETFs take a paper form that can be exchanged during the trading process. Observers are concerned whether PaperBitcoin aims to manipulate the underlying asset with the help of the SEC as a regulator.
Bitcoin Manipulation: Banks Want Control
“Banks are trying to take control, but this is also the normal system they use,” James crypto guru, founder and CEO of crypto platform MagicCraft, told BeInCrypto.
“In a way it controls and manipulates. But people understand they want bitcoin from the blockchain and over time they [banks’ BTC holding] The size will be very small compared to the overall market,” said the trader and YouTube influencer.
James crypto guru expects the price of bitcoin to decline in the near term due to market manipulation. However, in the long term, “[this will be] Great for adoption,” he said.
The SEC approved the first bitcoin ETF to invest in futures contracts in October 2021. The ProShares Bitcoin Strategy Exchange-Traded Fund launched on the New York Stock Exchange on October 19, becoming the first ever Bitcoin ETF in the United States.
Nearly $1 billion worth of shares changed hands during its first day of trading. Following the ETF approval, the price of bitcoin soared to $64,124, a record at the time. But since then bitcoin has fallen 75% to $16,500.
Crypto analyst Willy Woo commented that the Bitcoin Futures ETF would be bad for retail investors because it puts institutional investors such as hedge funds at an advantage.
“In my opinion, this would be an expensive way to hold BTC,” Wu Tweeted Then. “The exchange-traded-fund effectively outsources holdings of bitcoin to hedge funds through a range of profit incentives,” he said.
Wu argued that a bitcoin futures ETF has “the potential for price suppression and greater volatility due to futures dominance.” This is because they expect BTC futures to become more expensive than the spot price due to the large, long positions opened by hedge funds.
In the gold markets, it is common that ETFs are now dominant prices. According to experts, they are also used for price discovery. The same practice seems to have been adapted for the bitcoin markets.
CME Group claims that its bitcoin futures contract will help investors “benefit from efficient price discovery in a transparent futures market”.
Serhiy Zhdanov, CEO of cryptocurrency exchange EXMO, told BeInCrypto that the introduction of paper bitcoin should be investigated. “Financial market manipulation is a serious problem not only for crypto but also for other publicly traded assets,” he said.
“When it comes to the CME, the SEC acts as a watchdog, guaranteeing the safety of assets. The creation and regulation of such assets must be transparent and understandable to investors. This gives them confidence that Their investment is safe.
BeInCrypto contacted SEC Commissioner Hester Peirce, but she was unavailable to comment “due to press business.”
Vault Finance CEO Chris Esparza said that the goal of bitcoin futures contracts was never to manipulate the underlying asset, although that can happen. He warned against potential scammers.
“The goal is to open up trading to more investors without having to physically handle the underlying asset. Unfortunately it also allows people to trade things they don’t own.” Esparza told BeInCrypto.
“The implications are great. When people can trade futures and bitcoin without holding the physical asset. ‘Paper bitcoin’ can have a huge impact on price as it is bought and sold.”
not all gloom and doom
The primary value of bitcoin comes from two things. Firstly, unlike other crypto assets, BTC is truly decentralized. Secondly, its scarcity, with a maximum supply of 21 million coins.
However, bitcoin ETFs increase the supply of bitcoin by selling paper bitcoin. Investors do not need to hold any BTC directly. The increased supply lowers the value of the coin.
“Regardless of whether the goal is to manipulate the underlying asset, it definitely happens to some degree,” according to Ben Sharon, founder and CEO of tokenized gold platform IlumiShares.
It’s not all gloom and doom with bitcoin futures contracts. Andrew Weiner, vice president of Asian crypto exchange MEXC, explained that the so-called paper bitcoin manages the skepticism held by those who know little about cryptocurrencies.
“The emergence of more and more paper bitcoins shows that the compliance and maturity of BTC has been highly recognized by the market,” Weiner told BeInCrypto by email.
“This not only accelerates the entry of traditional institutional investors and other traditional traders, but also increases confidence among crypto users. Paper bitcoin will introduce wealth from the traditional financial world, which is expected to propel BTC to a new high.” .
Serhii Zhdanov, CEO of EXMO exchange, shares Weiner’s views. Zhdanov made a list of benefits he is allegedly going to get from the bitcoin ETF. This includes diversification, “flexible risk management, the opportunity to hedge positions, and institutional capital flows.”
“The idea behind paper bitcoin can hardly be called manipulative as it serves the development of the region as a full-fledged financial industry partner,” Zhdanov elaborated.
“The pros of such assets outweigh the cons. But it is essential to fundamentally evaluate the fund or exchange that issues such assets as no one wants to lose money.
Zhdanov said that if managed well, paper bitcoin could function in the same way as paper gold, oil, silver and copper, among other commodities. He added that Bitcoin ETFs will have a positive impact on BTC pricing due to increased participation from institutions.
risk of decentralization
Bitcoin futures ETFs could be good for mainstream adoption. However, this may go “against the decentralized ethos for BTC”.
There are concerns of BTC being ‘captured’ by hedge funds and big banks, who can manipulate the price.
“BTC is important as a decentralized bearer instrument. Imagine if all bitcoin was held as an ETF with a single provider,” Willy Woo said last year.
“That provider can change the convertibility ratio now, separating it into a new fiat later. This happened with gold when we were on the monetary gold standard.”
SEC Chairman Gary Gensler has previously shown support for bitcoin futures exchange-traded funds that “provide significant investor protections,” as stated under the Investment Company Act of 1940.
However, the full utility of this idea will be seen when there is better stability in the market. Experts say this is especially true in relation to political events affecting markets and economic dynamics.
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