The US Securities and Exchange Commission (SEC) has stayed the decision on the five Bitcoin ETFs from Direxion pending further review from higher-ups in the SEC.
The SEC rejected nine Bitcoin exchange-traded funds (ETFs) at once on 22 August 2018, including the five from Direxion, two from Proshares and two from GraniteShares. This is the first time a Bitcoin ETF decision has been stayed after a rejection and could be an indication that the SEC might approve the Direxion Bitcoin ETFs, which would be huge news for the crypto space.
Yesterday's staff orders disapproving SRO rules related to a number of bitcoin ETFs are stayed pending Commission review. See, for example: https://t.co/Ky9Z8t1E4q
— Hester Peirce (@HesterPeirce) August 23, 2018
The SEC rejected all nine applications on the grounds that the Bitcoin markets themselves are prone to fraud and manipulation, and not properly regulated. Essentially, the SEC is saying it would not approve any Bitcoin ETF since the Bitcoin market is too risky and new in their view. Perhaps this is not surprising since the last ETF class the SEC approved was copper, a commodity that is thousands of years old. Bitcoin is shy of ten years old.
The Winklevoss Bitcoin Trust ETF and the VanEck SolidX Bitcoin ETF were rejected and stalled respectively in the past month prior to the most recent decision, crushing the spirit of the crypto markets. This was because those two ETFs would have been based on actual Bitcoins and would have provide a way for institutional investors to easily buy Bitcoin on all the stock trading platforms. All the ETFs rejected on 22 August do not use actual Bitcoins and could be considered paper Bitcoins.
Paper Bitcoins could be bad for the Bitcoin market, since it diverts investment from the actual Bitcoin market into a paper derivatives market. Someone could buy USD 1 trillion of paper Bitcoins and technically, the global Bitcoin market would see no increase in demand and price would be unaffected. Further, if a paper Bitcoin ETF is approved, then institutional investors who ask to buy Bitcoin from their brokers will get paper instead of the real thing. This is the same situation with gold: if an investor asks to buy gold they get paper gold from COMEX usually, which is only 0.1% backed by physical gold.
The Direxion Bitcoin ETFs will be based on the future markets in Chicago, which are cash-settled and, therefore, paper Bitcoins. Thus, Direxion Bitcoin ETFs are paper Bitcoins based on paper Bitcoins, rather than an investment tool that is actually based on holding actual Bitcoins like the Winklevoss Bitcoin Trust ETF.
Furthermore, the Direxion Bitcoin ETFs are both short and long. This means investors would be able to buy Direxion Bitcoin ETFs to bet against Bitcoin’s price. This is conducive for large-scale manipulation to force the Bitcoin price in the direction of bets.
Finally, if the Direxion Bitcoin ETFs are approved, not only will it divert investment that would go into actual Bitcoins, investors might decide to sell their actual Bitcoins to buy the ETF since they might think it is a better option. This could cause the Bitcoin market to go down significantly and be far lower long term than it would be without paper Bitcoins.
As such, the approval of the Direxion Bitcoin ETFs may not be a good thing after all.
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