Will Bitcoin crash if ETF fails? Let discover the potential impacts of a rejected Bitcoin ETF on the cryptocurrency market. Explore short-term price decline, increased volatility, investor psychology and more.

Introduction – Recent updates of Bitcoin ETFs

Several US companies have made last revisions to their applications for spot Bitcoin exchange-traded funds (ETFs) and are now optimistic about receiving approval from the Securities and Exchange Commission (SEC).

As of the deadline set by the regulator, at least eight applicants, including BlackRock, VanEck, and Fidelity, have made amendments to their filings. The Ark 21Shares Bitcoin Trust is approaching the deadline for the regulatory decision, which is set for January 10th.

In their updated filings, the joint venture has provided clarifications on the price index, process, and disclosures. Many potential providers of spot Bitcoin ETFs have chosen Coinbase as their service provider, although concerns about concentration risks still remain.

Concerns Raised Over Approval of Spot Bitcoin ETFs

There is a possibility that the SEC will reject spot Bitcoin ETFs on January 10th. Better Markets, a financial watchdog group, has urged the securities regulator to reject these ETFs, cautioning that their approval could result in “financial carnage” and significant harm to investors.

Matrixport analyst Markus Thielen has recently anticipated that the Securities and Exchange Commission will decline all bitcoin spot ETF proposals in January.

Readmore: MicroStrategy Buys More Bitcoin, Surpasses $8 Billion Holdings

The Potential Impacts of Bitcoin Spot ETF Rejections on the Market

The potential approval or rejection of Bitcoin spot ETFs by the SEC has always been a topic of interest in the cryptocurrency industry. A Bitcoin spot ETF would provide regulated and accessible investment in Bitcoin, potentially opening the market to more participants. However, previous rejections and delays have caused market reactions and volatility.

In this article, CoinCu will explore the implications of a potential rejection of Bitcoin spot ETFs by the SEC. We will discuss the short-term effects on the market, including price decline and increased volatility.

Additionally, CoinCu will examine the psychological impact on investor sentiment and the shift towards alternative investment tools. CoinCu will also provide the historical context of previous ETF rejections and their impact on the market.

1. Short-term Price Decline

News of ETF rejections can cause short-term instability and lead to investors selling their holdings due to concerns about the future of the market.

Matrixport’s most recent analysis shows that the SEC may not approve Bitcoin Spot ETFs, which is a challenge to the optimistic expectations of the cryptocurrency community.

If the ETF is not approved, there will be significant selling pressure, especially among the $5.1 billion worth of perpetual long Bitcoin futures. This selling pressure could cause a 20% decline in Bitcoin prices, dropping them back to the $36,000-$38,000 range.

The Historical Impact of Bitcoin Spot ETF Rejections on the Market

Looking at the history, the SEC officially rejected the proposal in March 2017, citing concerns about market surveillance and regulation. The news caused the Bitcoin price to drop by around 30%, declining from a high of approximately $1,400 to just over $900.

As early as July 2017, Grayscale filed to convert the GBTC to an ETF. Despite being the largest and most popular Bitcoin fund, GBTC remains unlisted on major U.S. exchanges.

In recent years, discounts on GBTC have reached as steep as 40%, amidst turmoil at its parent company.

2. Increased Volatility

The market may become more volatile due to investor worries and concerns, which can increase price volatility by adding uncertainty to the market. In September 2017, ProShares applied for two Bitcoin ETFs. However, in August 2018, these applications, along with seven other proposed Bitcoin ETFs, were rejected.

Similarly, in December 2017, Direxion and GraniteShares applied for their respective Bitcoin ETFs, but these applications were also rejected in August 2018. During the 2017 bull market, many other hopefuls emerged, attempting to launch a spot Bitcoin ETF.

3. Psychological Impact

Rejections of ETFs can negatively impact investors’ psychology, leading some to lose faith in the growth potential of Bitcoin.

Impact on Investor Psychology

The speculation surrounding Bitcoin trading shares similarities with other high-risk behaviors like gambling and excessive use of social media.

What sets it apart is its accessibility 24/7, its volatility, and the influence of sentiment and social factors. Novice investors influenced by media coverage and FOMO attitudes contribute to market volatility.

Unique Risks and Regulatory Actions

The unique risks of crypto trading, compared to activities like day trading and online sports betting, can be explored through social and cognitive psychology. Research initiatives on these aspects are expected to shape debates on consumer safeguards and regulatory actions in cryptocurrency trading.

In January 2019, Bitwise proposed the Bitwise Bitcoin ETF Trust, but the SEC rejected it about nine months later. This rejection was part of a series of rejections for new applicants seeking approval in January.

Around the same time, Wilshire Phoenix proposed a unique approach with the United States Bitcoin and Treasury Investment Trust, aiming to combine Bitcoin and U.S. Treasury securities. However, the SEC rejected this proposal in February 2020.

4. Investors May Seek For Alternative Solutions

In 2019, Realty Shares ETF Trusts proposed a Bitcoin fund that would invest in Bitcoin futures contracts. The SEC forced the withdrawal of this proposal just two days later.

In 2020, WisdomTree applied for a commodity fund that planned to invest up to 5% of its assets in Bitcoin futures. Since then, traders have relied on stocks like MicroStrategy and Block to gain exposure to Bitcoin. These companies offer Bitcoin services and provide buyers with exposure to the cryptocurrency.

In the short term, investors may divert their attention to alternative investment tools as they wait for market conditions to improve.Investors may take part in traditional methods like stocks, mutual funds, and exchange-traded funds (ETFs), thereby gaining exposure to cryptocurrency.

5. ETF Fail Will Foster The Development of The OTC Market

Investors may redirect their attention to the Over-the-Counter (OTC) market to buy and sell Bitcoin without going through ETFs. This can increase interest and liquidity in OTC platforms.

Over-the-counter (OTC) trading refers to the trading of securities through a broker-dealer network rather than a centralized exchange like the New York Stock Exchange. This type of trading can involve various financial instruments such as stocks, bonds, and derivatives, which derive their value from an underlying asset like a commodity.

When companies fail to meet the listing requirements of a standard market exchange, such as the NYSE, their securities can still be traded OTC. However, OTC trading may still be subject to certain regulations imposed by the Securities and Exchange Commission.

Types of OTC tiers

• OTCQX: Highest tier. Eligibility based on regulatory compliance, audited financials, and no bankruptcy.
• OTCQB: Early-stage or growth companies. Minimum bid price of $0.01, regulatory reporting, audited financials, no bankruptcy.
• Pink Market: No minimum standards. Includes foreign companies, penny stocks, shell companies, and firms without financial disclosure.
• Grey Market: All other OTC securities. Not quoted due to lack of interest, financial information, or regulatory compliance.

Readmore: US Regulators Warming Idea Of Spot Bitcoin ETFs Approval: Report

Will SEC Reject Spot Bitcoin ETF Applications?

The crypto community is concerned about the possibility of the U.S. Securities and Exchange Commission (SEC) rejecting spot bitcoin exchange-traded funds (ETFs).

Better Markets, a financial watchdog group, has urged the SEC to reject these applications, citing potential financial harm and investor damage if spot bitcoin ETFs are approved. The group’s CEO is reportedly close to SEC Chairman Gary Gensler, and Senator Elizabeth Warren (D-MA) is featured as a top testimonial on their website.

Analysis on the SEC’s Decision

Bloomberg analyst Eric Balchunas provided analysis on the situation, explaining why a “rug pull” is unlikely. He noted that the SEC has never voted on bitcoin ETFs, and approval or rejection has typically been decided through “Delegated Authority.”

Re the "but the SEC hasn't voted" and how that's some kind of poss rug pull. Few things, the SEC has never voted on bitcoin ETFs (spot denials or the futures approvals), they were denied or approved via "Delegated Authority" (see below from commish Peirce speech) which would make… pic.twitter.com/X8pzQchexj

— Eric Balchunas (@EricBalchunas) January 6, 2024

Balchunas also mentioned that the SEC would need to schedule a public meeting if a vote were to take place, but the next meeting on the 11th would be too late for a January 11th launch, making it irrelevant.

The SEC has a deadline of January 10th to make a decision on a spot bitcoin ETF proposal from Cathie Wood’s Ark Invest and 21shares.

Balchunas believes that SEC Chairman Gary Gensler is unlikely to vote against the approval, considering his involvement in directing SEC staff to work extensively with bitcoin ETF issuers and expressing the desire for a January 11th launch. However, Balchunas emphasizes that the approval is not certain until the SEC officially announces it.

Conclusion

In conclusion, the potential approval or rejection of Bitcoin spot ETFs by the SEC has significant implications for the cryptocurrency industry.

A rejection can lead to short-term price decline, increased volatility, and a negative psychological impact on investor sentiment. However, investors may seek alternative solutions such as investing in crypto-related stocks, participating in closed-end funds or trusts, or exploring the OTC market.

It remains to be seen how the market will react to the SEC’s decision and how investors will adapt to the changing landscape of Bitcoin investments.

DISCLAIMER: The information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.