Yesterday the SEC rejected approval of the Proshares and Direxion Futures ETF. These ETFs were not based on the exchange of Bitcoin actual but on the Bitcoin Futures market. This rejection came as a shock for traders and investors as most thought an approval was virtually guaranteed. This is because most believed that a Futures market ETF would complement the existing Futures market managed by large trusted firms. However the SEC strongly maintains its position guarding institutional investors against manipulation and fraud. This is respectable but difficult for the SEC who has to very carefully balance diminishing U.S. influence in the crypto market against exposing the public to an unregulated market.
The ongoing rejections of multiple ETFs proposals have had major effects on the market. The price of Bitcoin has fluctuated wildly due to these decisions. In early July, prices rose from $6,200 to $8,200 with the expectation that a CBOE ETF would be approved. But then, the market dropped back down, when the decision was delayed. Speculation and fear are the main factor driving the value of the market down. In addition, the low trading volume combined with the dropped in prices throughout the year caused mining to suffer. At least two major companies (NVidia and Hashflare) called it quits and are preparing to exit the chip manufacturing and cloud mining sector of the market. Furthermore, the rejections also drew a cloud of uncertainty for the remaining ETFs on table. The CBOE in particular is prime target; a rejection here would surely drive prices further down.
The SEC once again cited manipulation, fraud, and the small size of the market as the main reasons for the rejection. This is consistent with all previous decisions. And it defines the position of the agency that is not convinced that the market has achieved sufficient maturity. The Futures market started in December 2017 and it had an immediate impact on the price if Bitcoin. However, for the most part, this type of trading, the shorting of Bitcoin, is only a marginal portion of the entire Bitcoin Market. It lacks diversity, custody, and is also vulnerable to manipulation. There’s circumstantial evidence showing a correlation between the Bitcoin Futures expiration date and Bitcoin price change. There is also a lot of evidence to support the SEC’s belief that the whole Bitcoin market is manipulated and lacks security.
In 2017 approximately $1.3 billion dollars’ worth of cryptocurrency was lost in hacks and fraudulent exchange practices. In 2018, at least $100 million have been lost so far; $68 million account for exit scams alone. This month the Shenzen Puyin Group raised $60 million in three separate ICOs (ACC, Puyin, and BioLifeChain), all which never materialized. In addition, the number of hacking attacks and tactics grow and transform. Due to the allure of great payoffs hacking has become an industry of its own. Hacker methods have evolved from phishing, and hacker API exchange, to cryptojacking and phone cards SIM swaps. Even the dreaded, theoretical 51% Ddos (distributed denial-of-service attacks) have become a reality in small market coins.
The rumored existance of whales or other influential forces manipulating the market is always present when asymmetric trading occurs. Such was the case yesterday following the SEC rejection. It was reported that the price of Bitcoin jumped $300 in one minute immediately following the scheduled maintenance shutdown of the Bitmex exchange. But before traders in other exchanges (GDAX) could process the rise, they began purchasing Bitcoin for $100 more, just to see the price drop once Bitmex came back online.
This is a classic example of a pump and dump; a fraudulent, coordinated, practice that plagues the Bitcoin economy. And then there are the more sustained price manipulation using Tether. In August alone Tether USD printed $415 million worth in additional coins, apparently out of thin air. This process is an ongoing controversy involving Tether and its sole market Bitfinex. Every time new Tether is created, the Bitcoin price pumps up, only to drop a short time later when the pump runs out of steam.
The market is looking for a direction and an event that will move the crypto economy forward. With delays and failures of major projects to deliver dramatic change, investors pinned their hopes on ETFs. However, without regulation stemming manipulation and fraud, there is an enormous risk to the entire ecosystem and subsequent investment. And without detailed risk assessment, it is unlikely that the SEC will approve any further ETFs at least within the foreseeable future. Therefore, the instability and doubt are likely to prevail until an organic breakout can occur.