With the growing popularity of cryptocurrencies, there has also been a rise in the number of institutions and traditional investors who want to begin investing in the digital assets. Currently, there is no way for them to do so through an ETF, but there are multiple ETFs pending approval from United States regulatory commissions. Even though these may be positive for Bitcoin in the short term, the markets are still too immature, and it would ultimately turn many investors away from crypto too quickly.
The United States Stock Market. For many, these five words are intertwined with the ideas of capitalism, the American Dream, and “making it.” However, the most important association that most investors subconsciously make is that with the safety and regulation provided by the U.S. Securities and Exchange Commission, which ensures equal market opportunity for all. Without this guarantee of safety, the investors pouring trillions of dollars into the markets every year, along with the $50 trillion in retirement funds, would not feel comfortable leaving their money in such a risky environment. However, manipulation and a lack of regulation is exactly what could happen if the SEC chooses to approve a Bitcoin ETF in the near future.
Right now, there are multiple Bitcoin exchange traded funds, or ETFs, waiting to be discussed and decided upon by the SEC. Some come from some of the biggest names in finance, including Fidelity, while others are more unknown, such as Anthony Scaramucci’s SkyBridge. Regardless of where they come from, their goal is to offer an investment vehicle into Bitcoin for the trillions of dollars that are currently unable to buy, whether due to regulatory reasons or a lack of custody solutions.
Though there are currently trusts, such as the Grayscale Bitcoin Trust, that allow institutions to buy Bitcoin for their clients, they typically trade at a high price premium on the open market, and as a result are relatively inefficient for the average investor. A Bitcoin ETF would have its holdings backed 1:1 with the digital asset, and thus would not trade at much of a price premium, if at all. It would offer a way for massive amounts of new money to flow into the asset, and would cause an increase in interest and investment never before seen in Bitcoin’s 13-year history.
Though this sounds like a no-brainer, an ETF being approved today would cause more harm than good in the cryptocurrency market over the long-term.
Right now, the cryptocurrency markets are completely unregulated. This means that anyone, including Elon Musk, can buy, sell, lie, and manipulate the prices as much as they want in order to make a profit. This is partially why the markets are so volatile. Due to the decentralized nature of the currency and lack of a figurehead to pursue, governments are having trouble figuring out how to regulate this new asset class. If the United States decides to enforce traditional securities law to prevent manipulation, and investors in other parts of the world are not subject to these regulations, there will be no difference in the level of manipulation, and the U.S. investors will be left out of the unethical gains that the rest of the world’s Bitcoin whales are making. The only way to truly regulate cryptocurrency would require cooperation from almost every major world government, which is practically impossible.
Thus, a Bitcoin ETF would be subject to the whims and desires of a few Bitcoin whales. Those individuals with tens of billions could easily manipulate and steal from institutional investors and retirement funds by shifting the price in their favor over long periods of time. Not only would this cause massive losses to retail and institutional investors, but also would create an atmosphere of distrust around Bitcoin, and could turn off some investors completely. The idea of putting 5% of a pension fund into Bitcoin, then watching it disappear due to manipulation, is enough to make any investor cautious of the asset, and they may decide to ignore it altogether.
Some may argue that anyone investing into a Bitcoin ETF should know the risks and that any losses are their fault. Though this is a valid argument, it completely defeats the purpose of the SEC, and begs the question as to why we don’t allow manipulation of all forms in the stock market. Any manipulation will cause prices to move in a way not indicative of an asset’s true value, which makes profitably investing in it incredibly difficult, even for the most risk-averse.
The United States will be ready for a Bitcoin ETF once the cryptocurrency market matures more. These manipulators will lose their power as soon as there is enough money in Bitcoin to dilute their holdings to be small enough that they cannot influence the prices, or their holdings increase in value to the point where they can no longer risk losing their large capital. Once this happens, only then will an ETF and the subsequent flood of institutional money into the asset make sense. Until then, retail investors and eager institutions can use the currently-available vehicles to join the cryptocurrency revolution, wait for the ecosystem to become more developed, stomach the massive price volatility, and then reap the benefits of being early adopters.
By Lincoln Murr