Yesterday the SEC issued an order delaying the decision to approve or disapprove the CBOE ETF to September 30, 2018. This capped a month’s long of speculation which saw prices rally and a sense of optimism fill the market. The decision came as a surprise to the prevailing sentiment that the new Bitcoin ETF would most certainly be approved in August. The decision to delay, however, caused prices to drop rapidly and significantly, reaching this years’ lowest. Opinions are divided on whether the delay means a rejection or a certain approval, and the answer makes no difference to the damage done to the market. Nevertheless, this pause will allow all to reflect on the true impact of this decision. And the consequences it will bear on the future of the market, the industry, and the world.
A positive response from the SEC on the CBOE’s ETF would trigger a market prepped for expansion. Since the peak prices in mid-January, interest in the market by institutional investment grew exponentially. Currently, institutional investment represents 56% of all the cash inflow, bringing in an average of ten million dollars a week into the market cap. An ETF would at least double or triple that number. And the number of banks, funds, and capital investors who enter the market in anticipation of tradable assets also grows larger every day. For example, last month the largest institutional asset manager Blackrock with $6.3 trillion in managed assets announced their interest in entering the crypto market, tracing the steps of Goldman Sachs.
Therefore, an ETF will likely see prices soar, the volume of transactions will skyrocket, and liquidity swell. In addition, the derivatives of current projects will also extend; custom ETFs of each coin, futures, swaps, etc. Hence, the introduction of a crypto ETF will boost all global financial markets to levels never seen before. However, this expansion will not be without consequences.
A positive decision at this time will expose institutional investment to all the unresolved issues plaguing the crypto market. The earlier decision to deny the Bitcoin ETF by the Winklevos’ brothers was correct in assuming that manipulation remained a problem. The many other problems such as volatility, liquidity, scalability, custody, and tethering remain properly unaddressed in the CBOE’s proposal. The only precaution offered is insurance on the fund. And this instrument would be tested to the limit in the event many claims are filled simultaneously. For example, the OKex exchange recently found itself unable to cover a $420 million liquidation when its insurance only covered a maximum of ten BTC.
Former managing director at Morgan Stanley Caitlin Long highlighted the Bitcoin liquidity problem in derivatives born from the new ETF. In particular, those “financial instruments whose value increases faster than the underlying value which then create a credit derivatives market.” The funds and the exchanges will have to resort to ‘fractional reserve’, or the creation of Bitcoin credit. This credit will serve to bridge the lack of real Bitcoin to cover its use; however, it will have little to no real backing. A failure to properly address all the issues aforementioned will create a domino’s effect which will ripple throughout the entire financial system.
Bitcoin is a global phenomenon. Events in the Asian crypto markets affect the entire market cap as do events in the US, Europe, and the rest of the world. In the event the SEC approves the first crypto-based ETF, other countries will likely follow suit and the markets will likely interconnect. And that would create a problematic, if not dangerous dependency on each other. And the world can’t ill afford another 2008 financial crisis that almost decimated some European economies. Even though some nations are working on national blockchains and cryptocurrency, Bitcoin still rules supreme. In addition, Bitcoin would work best in third world countries where access to banking is unreliable. And market adoption created by the launching of an ETF will establish a valid system for transactions. However, should Bitcoin fail due to the intricacies created through derivatives, those countries’ economies will sustain the most damage.
Bitcoin in its present form is not ready for institutional investment. It is unable to support any major transaction system with only seven transactions per second and high fees. Its blockchain is designed with predetermined parameters in block size and creation times that make it useless without update. Updates which will violate the essence of its creation. Its price volatility will create havoc on trade and purchases as it holds no permanent value.
An uninformed decision, without proper deliberation, weighing these shortcomings would be irresponsible, immoral, and plain unethical. Many examples exist of rushed decisions that led to disaster such as Enron, and the blind investment of toxic securities. The best option is to postpone approval until regulation is enacted that can address the multitude of issues preventing the stability and growth of the market. A number of financial institutions are slowly offering custody of cryptocurrency funds to accredited investors, with some open to the public.
It is a far better choice to let the market grow organically through the evolution of its technologies, than allow the potential for profits dictate the pace of adoption. At this point, there are too many risks, and too many unanswered questions. What if Bitcoin does not work? Or the community loses faith and its value drops? What guarantees are there that ETFs won’t follow the unchecked growth of altcoins ? And the market will suffer as a consequence. In short, there is too much as stake to make a rushed decision. The promise of a world detached from financial binds is fast evaporating and an ETF will only accelerate this demise.