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The Securities and Exchange Commission (SEC) in a statement warned investors to consider the risks of investing in Bitcoin futures. Although the document does not give a thumbs up to cryptocurrency-based futures, the market has interpreted the statement as a step towards the legalization of Bitcoin-derived assets.
Futures are financial derivative contracts that bind parties to transact in an asset at a predetermined date and price. The buyer —or seller— must purchase the underlying asset at the set price, regardless of the current market price on the expiration date.
The SEC previously rejected the issuance of ETF’s based on Bitcoin, a type of security that tracks an index, sector, commodity or other asset, but can be bought or sold on an exchange in the same manner as a regular stock. An ETF can be structured to track anything from the price of an individual commodity to a large and diverse collection of securities. Futures represent an agreement to buy or sell shares of an underlying ETF at an agreed-upon price on or before a specific date in the future.
The SEC release marks a step forward on the adoption of Bitcoin by the traditional financial sector. ProShares and Invesco Ltd. were the firms that petitioned the SEC, which authorized the action, in the words of Commission Chairman Gary Gensler, futures contracts provide “meaningful protection for investors.”
Bitcoin futures and ETFs
Some investors have interpreted the SEC’s statement as a step forward for the approval of Bitcoin ETFs. The first to apply for approval of a Bitcoin ETF with the SEC in 2013 were the Cameron and Tyler Winklevoss twins, who are best known for their legal tussle with Facebook founder Mark Zuckerberg.
In the past, the SEC had said that cryptocurrency investments were fraught with risks for investors. The regulatory body has expressed that the price of Bitcoin can be subject to artificial manipulation and its high volatility can make crypto too risky an asset for investors.
While in 2019 the Bitcoin had a negative return of 74 %, in 2020 and 2021 the annual gains have been 95 % and 305 %. The SEC questions whether investment funds have effective mechanisms to assess the real value of cryptocurrencies. There are also questions about the validation of cryptocurrency owners at crypto brokers and their risk of being hacked.
According to Bloomberg Intelligence, there are at least nine SEC filings pending approval to launch Bitcoin ETFs. At least four of these ETFs could begin trading on the U.S. stock market in October. The SEC has deadlines to approve Bitcoin ETF’s applications from VanEck, Valkyrie, ProShares, and Invesco.
Some cryptocurrency enthusiasts claim that ETF’s could bring more stability to the Bitcoin market and anticipate the public of future variations that the cryptocurrency will have.
Gensler, who taught a course at MIT called “Blockchain and Money”, has gone from being an academic advocating the adoption of cryptocurrencies to referring to the crypto market as “the wild west”, although crypto futures will soon be a reality, more regulations await this market soon.
Economist, writer and liberal. With a focus on finance, the war on drugs, history, and geopolitics // Economista, escritor y liberal. Con enfoque en finanzas, guerra contra las drogas, historia y geopolítica