Crypto Derivatives: Weighing The Resurgence In Synthetic Bitcoin Pros Vs Cons
A new report suggests that 2019 could be the year for crypto derivatives. We may need to wait until 2019 for a bitcoin ETF to be approved, but when approval comes, it will send shockwaves through the market.
Over the last few months, there have been a number of positive news stories about bitcoin. Wall Street is increasingly getting involved with bitcoin. It was recently revealed that Morgan Stanley wants to offer bitcoin swap trading, for example. Microsoft, Starbucks, and the parent company of the New York Stock Exchange are preparing to launch Bakkt, a crypto on-ramp for retail and institutional investors. All of these positive news stories, however, have failed to resuscitate crypto markets in the midst of a bear spell.
The launch of cryptocurrency derivative products in 2019 could change that. Crypto derivatives could attract more institutional investors to the space, swelling crypto to new heights.
As Paddy Baker at CryptoBriefing.com explained, 2019 could be the year bitcoin derivatives become mainstream:
“Despite derivatives sometimes being disparagingly referred to as ‘synthetic bitcoin’, crypto has become obsessed by the financial products. Starting in December, an already bullish market flew up to over $800bn when CBOE began offering bitcoin futures. This intensified in the summer as the community awaited the SEC’s ruling on Bitcoin ETFs. When regulators pushed back their decision until the end of September, the market cap fell by a third in less than a week.”
Bitcoin ETF approval is looking increasingly unlikely in 2018. The SEC has rejected every bitcoin ETF proposal to date, and it seems markets have hardly changed since rejecting several ETFs over the summer.
As institutional investors continue jumping on board bitcoin throughout the end of 2018, however, bitcoin ETF approval in 2019 is a realistic possibility.
Why Has The SEC Rejected Bitcoin ETFs To Date?
The SEC has rejected every bitcoin ETF to date. In late August, the SEC rejected 9 ETFs from three different companies, although they stayed that decision a week later. Earlier this summer, the SEC rejected the bitcoin ETF proposed by the Winklevoss twins for a second time. The Winklevoss twins had accepted the previous rejection, revised the rules of the ETF, and sought approval once again.
So why has the SEC rejected every bitcoin ETF? Does the SEC hate bitcoin? Is this part of a global banking conspiracy to take down bitcoin?
Not really. The SEC is concerned with protecting American investors. It wants to prevent an average retail investor in the United States from being manipulated or taken advantage of. One of the ways the SEC does this is by denying investment products for markets seen as manipulated.
Essentially, the SEC is rejecting bitcoin ETF proposals not because of the ETFs themselves, but because of the underlying bitcoin markets. The SEC feels these markets aren’t mature enough to handle a product like an ETF.
The SEC has two specific concerns with bitcoin markets:
- Lack of liquidity in bitcoin markets
- Fears of market manipulation in bitcoin markets
That’s it. These are the two main reasons the SEC has rejected all bitcoin ETFs to date. Compounding matters further is that the ETFs don’t have adequate safeguards to protect investors from either of these issues.
The market manipulation problem is also compounded by the fact that exchanges like Gemini – run by the Winklevoss twins – would have a huge conflict of interest. Gemini’s ETF would use the exchange’s own data, exposing the market to manipulation.
Because of the two problems above, bitcoin ETFs and similar derivative products are a risk for retail and institutional investors.
What Will Change In 2019 To Allow The SEC To Approve A Bitcoin ETF?
Lack of liquidity and fears of market manipulation are two huge concerns. Are these concerns really going to be solved in 2019? What is expected to change between now and 2019?
There’s reason for hope in one upcoming bitcoin ETF: the much-anticipated VanEck SolidX Bitcoin Trust ETF.
This ETF has one crucial difference with all other bitcoin ETF proposals to date. Other proposed bitcoin ETFs held bitcoin futures contracts. The VanEck SolidX Bitcoin Trust ETF holds physical bitcoin. Every share of the ETF is backed by 25 BTC on the BTC blockchain.
Crypto Briefing interviewed a bitcoin ETF expert who expressed optimism about this ETF, but claimed it’s not quite there yet:
“The VanEck-SolidX Bitcoin ETF is better [than the Winklevoss ETF], but it’s still not there”, says [Frans] Strajnar, [CEO of Techemy]; applicants need to improve their regulatory compliance angle if they want to succeed in getting their ETFs approved. “The SEC isn’t stupid: they’ll keep denying until applications meet their criteria”,
Are Crypto Derivatives Bad For Cryptocurrency?
There’s also a whole new issue that people are starting to realize: crypto derivatives might not be good for bitcoin.
For months, we’ve been excited about the possibility of a bitcoin ETF and crypto derivative products. However, bitcoin has grown successfully since 2009 without institutional support and financialization. Could the launch of bitcoin derivatives be bad for bitcoin?
Some might claim that crypto derivatives are bad. These are the same people who fear centralized banking institutions and claim bitcoin succeeds when it’s completely decentralized.
That’s partly true, but there are also plenty of benefits to the launch of crypto derivatives.
“Most observers are in favor of crypto derivatives,”
writes Crypto Briefing.
“Approval would enable an influx of new capital from the institutional investors. A significant surge in demand for cryptocurrency would cause the underlying asset to rise in value, an ideal outcome for existing holders.”
It's also important to remember that crypto derivatives are fully-regulated products. Institutions need to abide by financial regulations. The launch of crypto derivatives would mean investors of all sizes would have a regulatory-compliant way to participate in crypto markets. Instead of the “gray area” that crypto investments occupy today, investors could relax knowing they’re doing everything by the book.
Crypto Derivatives Conclusion
As institutional support flows into crypto, it will inevitably lead to better crypto infrastructure. On-ramps like Bakkt will help retail and institutional investors jump into the space.
There are plenty of benefits of the launch of crypto derivatives. Watch for these benefits to emerge over the end of 2018 and into 2019. 2019, however, and the 10-year anniversary of bitcoin, could be a landmark year for the world of crypto.