Bitcoin has seen an impressive rally since the US Securities and Exchange Commission (SEC) announced the approval of ProShares’ Bitcoin Futures Exchange Traded Fund (ETF) in early October, hitting an all-time high (ATH) of over $ 69,000 in November 10.

Sentiment turned sour when regulators rejected VanEck’s Spot ETF (Spot) proposal on November 12. This pushed the price of Bitcoin to a 30-day low of 55,705 on November 19. Dollar. It is currently in a range of $ 58,966 at the time of writing.

Bitcoin price chart | Source: Tradingview

An ETF is an asset tracking security or basket of assets, in this case Bitcoin, and can be traded on an exchange like any other stock. Proshares Bitcoin ETF is the first fund to be approved by the SEC from more than 20 filings.

Jan van Eck, CEO of VanEck unsatisfied about denial, say:

“We are disappointed that the SEC refused to approve our physical Bitcoin ETF.”

The difference between the currently approved Bitcoin ETF trading on various US exchanges such as Nasdaq or CBOE and the rejected Bitcoin ETF is that VanEck’s proposal is aimed at the spot market, while ETFs are not approved for ETFs based on futures contracts.

Van Eck claims that an ETF on the spot market is the better choice:

“We believe that investors can access BTC through a managed fund and that an ETF structure without futures is the superior approach.”

SEC chairman Gary Gensler previously expressed support for Bitcoin ETFs, which are based on futures contracts rather than spot prices. In its final decision to reject VanEck’s ETF application, the SEC stated that the product did not meet the requirements of “the rules of a national exchange to prevent fraudulent practices, fraud and manipulation” and “protect investors and the public interest” . .

Futures are usually a higher risk product

However, it is possible that by rejecting VanEck’s spot ETF, financial regulators in the United States may have launched a riskier product for investors who want to protect them as Wall Street financial institutions can take advantage of Bitcoin’s price movements.

A futures contract obliges the holder or buyer of the contract to buy the underlying asset, or the seller of the contract obliges the seller to sell and deliver the asset at a specified price on a specified date in the future, unless the holder closes its position before the expiration date.

In combination with options, these financial instruments are often used to hedge other positions in an investor’s portfolio or to benefit from pure speculation without buying the underlying asset. These markets are often dominated by institutional investors who have sufficient resources to absorb losses in their portfolios.

While futures contracts can only be used to reduce the risk on an investor’s profile, they are at greater risk when they use leverage in this market. Leverage is the ability to use debt or debt as capital to trade in the market in order to increase profits from a position. It is mainly used by investors to increase their purchasing power in the market many times over.

There is also leverage in the spot market, but its influence is significantly less. With futures, however, leverage can be as high as 95%, which means that an investor can easily buy an options contract with 5% of the required capital and borrow the rest. This means that any small movement in the price of the underlying asset will have a major impact on the contract, resulting in margin calls for investors due to the forced liquidation of the futures contract.

Margin call is a situation when the value of an investor’s profit falls below the required amount of the exchange or broker. The call requires the investor to deposit an amount called “Maintenance Margin” into the account in order to meet the minimum allowable amount. It can also result in investors having to sell other assets in their portfolio to offset that amount.

It is important to note that the risks of futures have nothing to do with the nature of the underlying products, but rather with the methodology – the way futures are traded in the markets. Du Jun, co-founder of the Huobi Exchange, said of the SEC’s decision:

“Given the current situation, a futures-based ETF could be the best SEC-approved option. It’s true that futures-based ETFs tend to be more complex and more risky, but they have some features that are in line with SEC requirements. “

Jun believes that regulators have not yet developed a process for fixing the prices of BTC’s spot market, leading them to believe that the prices are prone to being tampered with. Futures-based ETFs that are directly decoupled from BTC therefore offer better protection for investors.

In addition, futures-based ETFs offer investors the option of using both long and short BTC, protecting their BTC assets instead of holding physically deposited BTC shares.

Antoni Trenchev, co-founder of the crypto trading platform Nexo, said:

“The SEC doesn’t seem ready to approve spot ETFs yet. I have an inkling that this will happen in the near to medium term once US regulators are convinced of their policies and how they handle Bitcoin and other digital assets.

However, not all market participants are positive about the SEC’s approach. Marie Tatibouet, Marketing Director of the Gate.io exchange, said:

“It took the US SEC about four years to figure out how a Bitcoin futures ETF works. You will probably need another two to three years to figure out how to run a spot ETF. “

Tatibouet says this could be one of the reasons the SEC approved ETFs since BTC futures are not linked directly to Bitcoin price, but rather to Bitcoin futures contract price – which is “easier to manipulate” than that Spot market price futures contracts.

Canada supports spot bitcoin ETFs

While the launch of the Bitcoin futures ETF in the US is hailed by the community as a major turning point for the market, it is not the first country to allow crypto-related ETFs. The friendly neighbor of the USA, Canada, has been trading Bitcoin ETFs on various exchanges since the beginning of this year.

Canada licensed the first Bitcoin ETF in North America in February, Purpose Bitcoin ETF, a physically deposited Bitcoin ETF that has been a hit since its inception. Shortly thereafter, Evolve Investments also launched the Evolve Bitcoin ETF, which is also a spot ETF. The Purpose Bitcoin ETF and Evolve Bitcoin ETF currently manage assets of $ 1.4 billion and $ 203 million, respectively. The companies behind these ETFs continued to launch ether-based ETFs after the success of the Bitcoin ETF.

Jun points out the differences in the legal landscape in the US and Canada:

“Canada’s regulatory environment is more flexible and Canada is more focused on innovation. The country is often a leader in financial innovation, such as the first modern ETF in 1990 and the first launch of the cannabis ETF in 2017. But the regulatory environment for the US market is much stricter. “

Legendary trader Peter Brandt offers a new perspective on the matter mention that Bitcoin maximalists should reject ETFs on the US spot market.

“In my opinion, Bitcoin maximalists should reject US spot ETFs. The history of Bitcoin’s store of value depends on its being scarce and not even easy to buy. Let’s not encourage greedy Wall Street to convert BTC into vending machines. Say no to ETFs. “

Will the ETF support the growth of BTC as an asset over the long term in the manner originally intended? It cannot be denied that the development of crypto ETFs has had a huge impact on market sentiment and therefore, ultimately, Bitcoin price remains the focus of the entire discussion.

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According to Cointelegraph

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