Is the US SEC trying to manipulate the supply of Bitcoin?

When CME Group launched the first Bitcoin futures contract in 2017, the firm’s president emeritus, Leo Melamed, famously said he would “tame” Bitcoin. Since then, several ETFs have been approved by the SEC. But as exchanges have 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, we will make Bitcoin not wild, nor wilder. We will domesticate it into a normal type of exchange instrument with rules.”

The exchange-traded fund, or ETF, allows investors to buy an asset that tracks the price of Bitcoin. But without directly owning the underlying asset. In the United States, such funds are regulated by the Securities and Exchange Commission (SEC).

Structured similar to an IOU, an informal document that admits debt, the ETF takes the form of a document that can be exchanged during the trading process. Observers are concerned whether the goal of paper Bitcoin is to manipulate the underlying asset with the help of the SEC as regulator.

Bitcoin Manipulation: Banks Want Control

“It’s the banks trying to take over, but it’s also just the normal system they use,” James Crypto Guru, founder and CEO of crypto platform MagicCraft, told BeInCrypto.

“In a sense, it controls and manipulates. But people understand that they want Bitcoin from the blockchain and in their own time [banks’ BTC holding] the size will be much smaller than the overall market,” said the trader and YouTube influencer.

James Crypto Guru predicts that market manipulation issues will result in a decline in the price of Bitcoin in the near term. In the long run, 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 October 19, becoming the first Bitcoin ETF in the United States.

Nearly $1 billion worth of stock changed hands on its first day of trading. Following the ETF’s approval, the price of Bitcoin soared to $64,124, a record at the time. But Bitcoin has plunged 75% since then, to $16,500 at the time of writing.

Crypto analyst Willy Woo commented that the Bitcoin futures ETF would be harmful to retail investors as it benefits institutional investors such as hedge funds.

“In my opinion, it will be an expensive way to hold BTC,” Woo tweeted then. “The exchange-traded fund effectively outsources holding of Bitcoin to hedge funds through a chain of profit incentives,” she said.

Woo argued that a Bitcoin futures ETF has the “potential for price suppression and increased volatility due to futures dominance.” This is because he expects BTC futures to become more expensive than the spot price due to the large long positions opened by hedge funds.

The gold standard

In gold markets, it is common practice that ETFs are now driving prices. They are also used for price discovery, according to experts. This same practice appears to have been adapted to the Bitcoin markets as well.

CME Group says its Bitcoin futures contract will help investors “benefit from efficient price discovery in transparent futures markets.”

Serhii Zhdanov, CEO of cryptocurrency exchange EXMO, told BeInCrypto that the introduction of paper Bitcoin should be looked into. “Financial market manipulation is a serious problem not only for cryptocurrencies but also for other publicly traded assets,” he said.

“When it comes to CME, the SEC acts as a watchdog, which ensures the safety of the assets. The creation and regulation of such assets should be transparent and understandable to investors. This gives them the certainty that their investment is safe.”

BeInCrypto reached out to SEC Commissioner Hester Peirce, but she was unavailable to comment “due to business pressure.”

Vault Finance CEO Chris Esparza said the goal of Bitcoin futures contracts has never been to manipulate the underlying asset, although that could happen. He continued to warn of potential scammers.

“The goal is to open trading to more investors without having to physically handle the underlying asset. Unfortunately this also allows people to trade things they don’t own,” Esparza told BeInCrypto.

“The impact is fantastic. When people can trade futures and Bitcoin without holding the physical asset. “Paper Bitcoin” can have a big influence on the price when it is bought and sold.”

Not all dark and doom

Bitcoin’s primary value comes from two things. Firstly, unlike other cryptocurrencies, BTC is truly decentralized. Secondly, its scarcity, with a maximum supply of 21 million coins.

However, Bitcoin ETFs increase the supply of Bitcoin by selling paper Bitcoins. Investors do not have to hold any BTC directly. The increase in supply dilutes the value of the coin.

“So whether or not the goal is to manipulate the underlying asset, that definitely happens to some extent,” according to Ben Sharon, founder and CEO of tokenized gold platform Illumishare.

It is not all doom and gloom with Bitcoin futures contracts. Andrew Weiner, vice president of Asian cryptocurrency exchange MEXC, explained that so-called paper Bitcoin handles the skepticism of those who know little about cryptocurrencies.

“The emergence of more and more paper Bitcoin demonstrates that the compliance and maturity of BTC has been widely recognized by the market,” Weiner told BeInCrypto via email.

“This not only accelerates the entry of traditional institutional investors and other traditional traders, but also increases the trust of cryptocurrency users. Paper Bitcoin will bring in funds from the traditional financial world, which should take BTC to a new level.

Serhii Zhdanov, CEO of the EXMO exchange, shares Weiner’s point of view. Zhdanov has compiled a list of benefits that allegedly come with 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 as it rather serves the development of the sector as a full participant of the financial industry,” Zhdanov explained.

“The pros of such an asset outweigh the cons. But you need to fundamentally value the fund or exchange that issues such types of assets as nobody wants to lose money.”

Zhdanov said that if managed well, paper Bitcoin can perform the same way as paper gold, oil, silver and copper, among other commodities. He said that Bitcoin ETFs would have a positive effect on BTC prices due to higher institutional participation.

Bitcoin BTC Domain BTCD

Threat of decentralization

A Bitcoin futures ETF can be beneficial for mainstream adoption. However, it may go “against the decentralized ethic that BTC represents.”

There is concern that BTC will be “captured” by hedge funds and large banks, who could end up manipulating the price.

“BTC as a decentralized bearer instrument is critical. Imagine if all of Bitcoin was held as an ETF custodial with a single vendor,” Willy Woo said last year.

“That supplier can now change the convertibility ratio, later decouple it like a new fiat. This happened to gold when we were on the monetary gold standard.”

SEC Chairman Gary Gensler has previously shown support for exchange-traded Bitcoin futures funds that “provide significant protection for investors,” as stated in the Investment Company Act of 1940.

However, the full usefulness of the idea will be seen when there is better stability in the market. Experts say this is especially true of political events that affect market and economic dynamics.

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