Is US SEC Trying to Manipulate Bitcoin Supply?

When CME Group launched the first Bitcoin futures contract in 2017, the firm’s chairman emeritus, Leo Melamed, famously declared that he wanted to “tame” Bitcoin. Since then, several ETFs have been approved by the SEC. However, as exchanges increased the supply of BTC by selling “paper Bitcoin”, questions of market manipulation have begun to emerge.

Melamed told Reuters at the time, “We want to regulate, not make Bitcoin wild or wilder. We want to tame it into a normal kind of trading instrument 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 yourself. In the US, such funds fall under the Securities and Exchange Commission (SEC).

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

Bitcoin manipulation: Banks want control

“There are 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 sense, controlling and manipulating it. But people understand that they want Bitcoin from the blockchain and over time their [banks’ BTC holding] the size will be much smaller than the overall market,” said the trader and YouTube influencer.

James Crypto Guru expects market manipulation issues to result in a short-term decline in the price of Bitcoin. But in the long run”[this will be] very good for adoption,” he added.

The SEC approved the first Bitcoin ETF to invest in futures contracts in October 2021. Proshare’s Bitcoin Strategy exchange-traded fund launched on the New York Stock Exchange on October 19, becoming the first-ever Bitcoin ETF in the United States.

Almost $1 billion in shares changed hands during the first day of trading. After the ETF approval, the price of Bitcoin rose to $64,124, a record at the time. But Bitcoin has fallen 75% since then, to $16,500 at the time of writing.

Crypto analyst Willy Woo commented that the Bitcoin futures ETF would be bad for retail investors as it put institutional investors such as hedge funds at an advantage.

“In my opinion, it will be an expensive way to hold BTC,” Woo tweeted thereafter. “The exchange-traded fund effectively outsources its holdings 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 be more expensive compared to the spot price due to large, long positions opened by hedge funds.

The gold standard

In gold markets, it is common practice for ETFs to now lead prices. They are also used for price discovery, according to experts. The same practice seems to have been adapted for Bitcoin markets as well.

CME Group claims that its Bitcoin futures contract will help investors “take advantage of efficient price discovery in transparent futures markets.”

Serhii Zhdanov, CEO of crypto exchange EXMO, told BeInCrypto that the introduction of paper Bitcoin should be investigated. “Financial market manipulation is a serious problem not only for crypto, but also for other listed assets,” he said.

“In the case of CME, the SEC acts as a watchdog, guaranteeing the safety of assets. The creation and regulation of such assets should be transparent and understandable to investors. This gives them confidence that their investment is safe.”

BeInCrypto reached out to SEC Commissioner Hester Peirce, but she was not available to comment “due to the pressure”.

Chris Esparza, CEO of Vault Finance, said the goal of Bitcoin futures contracts was never to manipulate the underlying asset, although 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, it also allows people to trade things that are not in their possession,” Esparza told BeInCrypto.

– The impact is great. When people can trade futures and Bitcoin without having the physical asset. “Paper Bitcoin can have a big influence on price as it is bought and sold.”

Not all gloom and doom

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

However, Bitcoin ETFs increase the supply of Bitcoin by selling paper Bitcoin. Investors do not need 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, it certainly happens to some extent,” according to Ben Sharon, founder and CEO of tokenized gold platform Illumishare.

It’s 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 deals with the skepticism of 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, CEO of the EXMO exchange, shares Weiner’s view. Zhdanov made a list of benefits supposedly derived from Bitcoin ETFs. It includes diversification, “flexible risk management, an opportunity to hedge positions and institutional capital injection.”

“The idea behind paper Bitcoin can hardly be called manipulative since it rather serves the development of the sector as a full participant in the financial industry,” Zhdanov said in detail.

“The advantages of such an asset outweigh the disadvantages. But it is necessary to fundamentally evaluate the fund or exchange that issues such assets that no one wants to lose money.”

Zhdanov said that if managed well, paper Bitcoin could work in 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 increased participation by institutions.

Decentralization threat

A Bitcoin futures ETF could be good for mainstream adoption. However, it could go “against the decentralized ethos that BTC stands for.”

There are concerns that BTC is being “captured” by hedge funds and big banks, which could end up manipulating the price.

“BTC as a decentralized bearer is the key. Imagine if all Bitcoin was held as an ETF in the custody of one provider,” Willy Woo said last year.

“This provider can now change the convertibility ratio, later delink it as a new fiat. This happened with gold when we were on the monetary gold standard.”

SEC Chairman Gary Gensler has previously expressed support for Bitcoin futures exchange-traded funds that “provide substantial investor protection,” as set forth under the Investments Company Act of 1940.

But the full benefit of the idea will be seen when there is better stability in the market. Experts say that this particularly applies to political events that affect the market and economic dynamics.

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