Bitcoin Price Manipulation: Will ETFs Cause The Next Bitcoin Crash?

Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website guidelines before making any financial decisions.

For years, dozens of companies have applied for an ETF to be approved by the SEC. Delayed again, now is a good time to explore what would happen if either a Bitcoin ETF or a futures-based Bitcoin ETF hit the market.

Bitcoin starts October with Sharp Rally

As we left a historically below average September behind us, Bitcoin bounced back quickly. Bitcoin jumped from $ 41,000 on September 28 to $ 47,000 on October 1, seeing a 14.6% increase in just three days. It appears that $ 47,000 is Bitcoin’s current resistance level, with a possible $ 45,000.

Interestingly, when Michael Saylor bought 3,907 BTC in this price range on August 24, we had speculated that $ 45,000 could be the new BTC low. Going forward, BTC price would have to overcome the previously tough resistance of $ 50,000 to regain lost ground before the Musk / China FUD combination.

Bitcoin is recovering from the September flash crash but is still a long way from receiving support prior to April, Photo credit: TradingView

The question is, what message could break the resistance? Speculation on social media usually centers around these possible factors.

What will trigger the next stage of the #bitcoin bull market?
– ETF approval (SEC)
– Nation adoption (next El Salvador)
– LN / Strike Surprise (Jack Mallers)
– Introduction of Apple / Amazon / Google / MS
– RSK killer use case (blockstream)
– Continue Michael Saylor / Paul Tudor Jones
– China turnaround

– PlanB (Beware of imitators, I don’t make DM) (@ 100trillionUSD) September 29, 2021

We are now more than a year away from Bitcoin’s third halving in May 2020. After the same period after previous halving in the fourth quarter of 2013 and the fourth quarter of 2017, Bitcoin gained at least 300%. This time around, given Bitcoin’s drastically higher market cap, that doesn’t seem likely. It would cost a lot of money to get the price so high in such a short amount of time.

Could Bitcoin ETFs be the catalyst the market is waiting for? Or could they have the opposite effect in the short term?

Bitcoin ETFs postponed … again

The last time we talked about the possible launch of Bitcoin ETFs in late August, we looked at the potential first mover advantage of the top 5 Canadian BTC ETFs. It was clear at the time that Gary Gensler, chairman of the Securities and Exchange Commission (SEC), favored futures-based ETFs. Since they are based on derivatives, i.e. exchange-traded funds, futures would avoid the direct custody of Bitcoin, which makes regulation by the Chicago Mercantile Exchange (CME) easier.

Although some analysts had speculated that we might see a Bitcoin futures ETF by the end of October, Gensler recently postponed the schedule to at least December. However, whether it is approved sooner or later is of less importance than its impact on the price of Bitcoin.

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Why are Bitcoin ETFs a big deal?

For stock market investors, the point of investing in ETFs is to take passive exposure to a basket of stocks at low fees and achieve better tax efficiency. More importantly, these ETFs can trade just like stocks – futures, options, long and short positions – which mutual funds cannot.

Bitcoin is not the same as stocks, however, as it does not represent a company. Accordingly, it is more volatile and more accessible. Any person could go to PayPal, Cash App, Robinhood, or any number of crypto exchanges to buy bitcoin. Then what use is an intermediary as an ETF?

The operative words are Individual vs. company. Due to its relative novelty and volatility, the company’s shareholders are likely to oppose major acquisitions of Bitcoin, with exceptions like MicroStrategy. ETFs solve this problem by offering professional security, custody services, and insurance, all of which are SEC approved and regulated.

Additionally, familiarity with ETFs as popular investment vehicles could help alleviate psychological resistance. In short, a Bitcoin ETF would open a funnel of institutional money into the crypto space. However, this funnel could push the price of Bitcoin down in the short term.

How could a Bitcoin ETF suppress the price?

In January, JP Morgan analysts warned their clients that getting Bitcoin ETF approved by the SEC could cause BTC prices to drop.

“A cascade of GBTC outflows and a collapse in its premium, given the flow and signaling effect of GBTC, would likely have a negative impact on Bitcoin in the short term.”

The Grayscale Bitcoin Trust (GBTC) works similarly to an ETF: investors give Greyscale cash to buy BTC. The fund is then listed on exchanges where its shares can be bought and sold, with its price movement reflecting that of Bitcoin. In this way, GBTC offers investors access to Bitcoin trading without having to trade it themselves.

When the BTC price rises, investors can sell their GBTC shares for a profit. As you can see, GBTC stocks closely follow BTC.

GBTC vs. BTC, Photo Credit: TradingView

Since Greyscale is considered the crypto whale (at 654,885 Bitcoin as of April 2021) and an ETF would be a cheaper investment vehicle, JP Morgan predicted that an approved Bitcoin ETF could break Bitcoin’s support price. In the meantime, we’re talking about futures-based Bitcoin ETFs and how they could negatively affect the price of Bitcoin.

The Potential Impact of Futures-Based Bitcoin ETFs

Courtesy of MarketWatch, Grayscale CEO Michael Sonnenshein expressed concern about Gensler’s preference for futures-based Bitcoin ETFs, which he described as short-sighted.

“It may be shortsighted by the SEC to really focus on futures-based products and not see them.”

On a spot market, assets such as stocks, currencies or commodities are traded immediately based on order books. Futures contracts, on the other hand, have a fixed delivery date. This gives traders the ability to cash out before the contract expires if the contract price is lower than the sell price.

It would then logically follow that the price of Bitcoin could be manipulated more easily. That is, suppressing the BTC price as derivative contracts do not derive ownership. Instead, they derive market signals. We have a historical example of when the CME Group, the world’s largest futures exchange, launched Bitcoin futures on December 17, 2017.

Photo credit: TradingView

In other words, Bitcoin ETFs based on futures could create a market situation where speculative whales dominate the space without holding any crypto assets. If they push the price down, HODLers would almost certainly be buying the dip – real BTC – instead of a derivative.

This in turn would ease the speculative pressure with derivatives.

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Who is currently controlling the BTC price?

We have already mentioned Michael Saylor and GBTC as large crypto whales, with the latter holding 6x more BTC than Saylor. Above them, of course, are miners who make it their business to amass BTC and sell it at the most convenient time. For example, in March 2020 it was justified that the miners crashed the BTC price 51 days before it halved.

This would make perfect sense as halving increases the scarcity of Bitcoin, causing the price to increase after each one. The miners would then accumulate BTC at a discount only to sell it at a premium a few months later.

Currently, Bitcoin’s wealth is highly concentrated. According to BitInfoCharts, 2.12% of Bitcoin addresses hold 94.73% of all Bitcoins. Cryptocurrency exchanges keep much of this BTC in cold stores, which is another vector for price manipulation. BitMEX were accused of such gimmicks, but the lawsuit was recently dismissed because it was “too lengthy and a copy of a similar lawsuit was pasted in”.

In the end, when futures Bitcoin ETFs come into play, you should expect a brief price decline. Institutional investors are likely to benefit from these phantom bitcoin derivatives, but holding them would only take until the market corrects itself. In the long term, non-future BTC ETFs should further strengthen the price.

How long are you willing to wait to cut the profit on your BTC investment? More or less than a year? Let us know in the comments below.

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