Bitcoin (BTC) has been at an impressive rate since the US Securities and Exchange Commission announced the approval of the ProShares Bitcoin Futures Fund (ETFs) in early October, reaching a new all-time high of more than $69,000 on November 10, according to TradingView.
But financial watchers were elated by the rejection of VanEck’s spot ETF offer on November 12, which sent the price of the major cryptocurrency to a 30-day low of $55,705 on November 19. At the time of writing.
An ETF is a security class that tracks an asset or basket of assets, in this case Bitcoin, and can be traded on an exchange like any other stock. The BTC ETF from Proshares was the first ETF approved by the SEC after submitting more than 20 applications to financial regulators in the past.
Jan van Eck, VanEck’s CEO, was unhappy about the company’s abandonment of the ETF.
The difference between approved Bitcoin ETFs currently traded on various exchanges in the US such as Nasdaq or CBOE and VanEcks being rejected as Bitcoin ETFs is that VanEck’s ETF proposal was for spot ETFs, while approved ETFs are all futures ETFs. …
Van Eck said that a spot ETF is the best option and tweeted: “We believe that investors should be able to obtain #BTC through a regulated fund and that a non-forward ETF structure is the best approach.”
SEC Chairman Gary Gensler previously expressed his support for BTC futures ETFs rather than price ETFs. In a formal decision to reject VanEck’s ETF application, the SEC said the product did not meet requirements “that the rules of the national stock exchange are ‘designed to prevent fraudulent and manipulative actions and practices’ and ‘to protect investors and the public’ interest rates.”
Futures contracts are often a high-risk product
However, US financial regulators, who have ditched VanEck ETFs, may have launched a riskier product for the same investors they seek to protect, as it allows institutional funds on Wall Street to benefit from bitcoin’s price movements.
A future contract gives the contract holder or buyer an obligation to buy the underlying asset, and the contract author or seller is obligated to sell and deliver the asset at a specified price on a specified future date, unless the contract holder terminates his position before the expiration date.
When combined with options, these financial instruments are often used to hedge other positions in an investor’s portfolio or to make money purely speculative without having to purchase the underlying asset. These markets are usually dominated by institutional investors who have large pockets to offset any losses in the portfolio.
While futures contracts can only be used to reduce risk in an investor’s profile, they increase the impact in futures markets where they become riskier. Leverage is the ability to use borrowed money and/or debt as trading capital in the market to increase the return on a position. It is mainly used by investors to increase their purchasing power in the markets.
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While the effect is present in the spot markets, the effect is much less. But with futures contracts, the effect can be as high as 95%, which means that an investor can easily buy an option contract with 5% of the required capital and borrow the rest. This means that small fluctuations in the price of the underlying asset will have a significant impact on the contract, leading to a margin call for investors due to the forced liquidation of the futures contract.
Required margin is a scenario in which the investor’s margin falls below the required amount set by the exchange or broker. To do this, investors must deposit an amount known as maintenance margin into the account in order to increase the minimum value allowed. It can also cause investors to sell other assets in their portfolios to offset this amount.
It is important to note that this inherent risk in futures contracts has nothing to do with the nature of the underlying products, but rather to do with the way futures contracts are traded in the financial markets. Du Jun, co-founder of crypto exchange Huobi Global, told Cointelegraph about the SEC’s decision:
“Given the current situation, futures ETFs may be the best option that the SEC has adopted. It is true that futures ETFs are often complex and have higher risks, but futures ETFs have some characteristics that meet the SEC’s demand. .”
June believes that from the outset, regulators have not yet figured out how to determine the spot price of Bitcoin, which leads them to believe that the price is vulnerable to manipulation. Therefore, futures ETFs that are not directly linked to Bitcoin will provide better protection for the investor.
