When CME Group launched the first Bitcoin futures contract in 2017, the firm’s Chairman Emeritus, Leo Melamed, famously declared that he would ‘tame’ Bitcoin. Since then, several ETFs have been approved by the SEC. But as exchanges increased the supply of BTC by selling “paper Bitcoin,” questions of market manipulation have started to emerge.
Melamed told Reuters at the time, “We will regulate, make Bitcoin not wild, nor wilder. We’ll tame it into a regular type instrument of trade with rules.”
The exchange-traded fund, or ETF, allows investors to buy into an asset that tracks the price of Bitcoin. But without actually owning the underlying asset directly themselves. In the US, such funds fall under the purview of the Securities and Exchange Commission (SEC).
Structured similarly to an IOU, an informal document admitting debt, the ETF takes the form of a paper which can be exchanged during the trade process. Observers are concerned whether the goal of paper Bitcoin is to manipulate the underlying asset with the help of the SEC as a regulator.
Bitcoin manipulation: Banks want control
“It’s banks trying to take control but it’s also just the normal system they use,” James Crypto Guru, founder and CEO of crypto platform MagicCraft, told BeInCrypto.
“In a way it does control and manipulate. But the people understand they want Bitcoin from the blockchain and over time their [banks’ BTC holding] size will be much smaller than the overall market,” said the trader and YouTube influencer.
James Crypto Guru expects that issues of market manipulation will result in a decline in the price of Bitcoin in the short term. In the long-term, however, “[this will be] very good for adoption,” he added.
The SEC approved the first Bitcoin ETF that invests in futures contracts in October 2021. The Proshares Bitcoin Strategy exchange-traded fund launched on the New York Stock Exchange on Oct 19, becoming the first-ever Bitcoin ETF in the United States.
Nearly $1 billion worth of shares changed hands during its first day of trade. Following the ETF approval, the price of Bitcoin soared to $64,124, a record at the time. But Bitcoin has slumped 75% since then, to $16,500 as of writing.
Crypto analyst Willy Woo commented that the Bitcoin futures ETF would be bad for retail investors as it placed institutional investors such as hedge funds at an advantage.
“In my opinion, it will be an expensive way to hold BTC,” Woo tweeted then. “The exchange-traded-fund effectively outsources the holding of Bitcoin to hedge funds through a chain of profit incentives,” he opined.
Woo argued that a Bitcoin futures ETF has the “potential for price suppression and more volatility due to futures dominance.” That’s because he expects BTC futures to get more expensive compared to spot price due to large, long positions opened by hedge funds.
The gold standard
In gold markets, it is common practice that ETFs are now leading prices. They are also used for price discovery, according to experts. This same practice appears to have been adapted for Bitcoin markets as well.
CME Group claims that its Bitcoin futures contract will help investors “benefit from efficient price discovery in transparent futures markets.”
Serhii Zhdanov, CEO of crypto exchange EXMO, told BeInCrypto that the introduction of paper Bitcoin should be examined. “Financial market manipulation is a serious problem not only for crypto but also for other publicly traded assets,” he said.
“When it comes to CME, the SEC acts as a watchdog, which guarantees asset security. The creation and regulation of such assets should be transparent and understandable for investors. This gives them confidence that their investment is secure.”
BeInCrypto reached out to SEC Commissioner Hester Peirce, but she was not available to comment “due to press of business.”
Chris Esparza, CEO of Vault Finance, said the goal of Bitcoin futures contracts was never to manipulate the underlying asset, even though that could happen. He went on to warn against potential scammers.
“The goal is to open trading to more investors without having to physically handle the underlying asset. Unfortunately that also allows people to trade things not in their possession,” Esparza told BeInCrypto.
“The impact is great. When people can trade futures and Bitcoin without holding the physical asset. ‘Paper Bitcoin’ can have a major influence on price as it’s bought and sold.”
Not all gloom and doom
Bitcoin’s primary value comes from two things. Firstly, unlike other crypto assets, BTC is truly decentralized. Secondly, its scarcity, with a maximum supply of 21 million coins.
However, Bitcoin ETFs raise the supply of Bitcoin by selling paper Bitcoin. Investors do not have to hold any BTC directly. Increased supply dilutes the value of the coin.
“So regardless of whether the goal is to manipulate the underlying asset, that certainly happens to some extent,” according to Ben Sharon, the founder and CEO of tokenized gold platform Illumishare.
It is not all gloom and doom with Bitcoin futures contracts. Andrew Weiner, vice president of the Asian crypto exchange MEXC, explained that the so-called paper Bitcoin manages the skepticism held by people who know little about cryptocurrencies.
“The emergence of more and more paper Bitcoin shows that the compliance and maturity of BTC has been highly recognized by the market,” Weiner told BeInCrypto by email.
“This not only accelerates the entry of traditional institutional investors and other traditional traders, but also increases the confidence of crypto users. Paper Bitcoin will introduce funds from the traditional financial world, which is expected to boost BTC to a new height.”
Serhii Zhdanov, the EXMO exchange CEO, shares Weiner’s view. Zhdanov made a list of benefits that are supposedly derived from Bitcoin ETFs. It includes diversification, “flexible risk management, an opportunity to hedge positions, and institutional capital inflows.”
“The idea behind paper Bitcoin can hardly be called manipulative since it rather serves the development of the sector as a full-fledged financial industry participant,” Zhdanov detailed.
“The pros of such an asset outweigh the cons. But it’s necessary to fundamentally evaluate the fund or exchange that issues such kinds of assets as nobody wants to lose money.”
Zhdanov said if managed well, paper Bitcoin can function in the same way as paper gold, oil, silver, and copper, among other commodities. He said Bitcoin ETFs would have a positive effect on BTC pricing due to increased participation by institutions.
A Bitcoin futures ETF may be good for mainstream adoption. However, it might go “against the decentralized ethos which BTC stands for.”
There’s concern about BTC being ‘captured’ by hedge funds and big banks, who may end up manipulating the price.
“BTC as a decentralized bearer instrument is key. Imagine if all the Bitcoin was held as an ETF custodied with one provider,” said Willy Woo last year.
“That provider can now change the convertibility ratio, later decouple it as a new fiat. This happened to gold when we were on the monetary gold standard.”
SEC chairman Gary Gensler has previously shown support for Bitcoin futures exchange-traded funds that “provide significant investor protections,” as stated under the Investments Company Act of 1940.
However, the full utility of the idea will be seen when there is better stability in the market. Experts say that this is especially true regarding political events that influence the market and economic dynamics.