Bitcoin ETF Approval: What's the Downside?

Photo - Bitcoin ETF Approval: What's the Downside?
The endorsement of a Bitcoin ETF by the U.S. regulator undeniably marks a positive shift for cryptocurrency. However, it may also usher in unpredictable setbacks.
Sooner or later, the SEC is likely to give the nod to Bitcoin ETF applications from powerhouse funds such as Blackrock, Fidelity, VanEck, WisdomTree, Valkyrie, and Invesco. This would allow these firms to allocate billions of investor dollars towards Bitcoin purchases, amplifying demand. 

However, we'll examine the potential pitfalls, both from the heightened attention to Bitcoin ETFs and from the initiative's practical implementation.

SEC's Ongoing Hesitation

The U.S. Securities and Exchange Commission (SEC) appears to be consistently delaying the approval of spot Bitcoin ETFs. In August 2023, decisions regarding Bitcoin ETF applications were postponed twice. This hesitation from the SEC caused a noticeable drop in Bitcoin's price, with a 4% decline on August 31st directly attributed to these SEC actions.

The next evaluation is set for mid-October, but there's no certainty that further delays won't occur. Such market events can trigger a type of hyper-inflation, where the asset's value drops significantly due to negative news, only to later underperform even when the news is positive. In essence, each postponement of the Bitcoin ETF can trigger a sharp decline in Bitcoin's price, a decline that may not be subsequently recouped.

Traders' Elevated Expectations

Despite major cryptocurrency funds like Blackrock, Fidelity, and VanEck having billions at their disposal, their investment into the leading cryptocurrency will likely be gradual following the approval of the Bitcoin ETF. This is to prevent excessive pressure on liquidity. Such a cautious approach might not align with the hopes of retail investors and everyday traders.

As a result, while a Bitcoin ETF may offer long-term benefits, its short-term impact on asset prices might be minimal. This can be likened to the LTC halving event, where the asset surged due to event anticipation but then fell by 10% following the activation of the update.

Potential Volatility Surge

If these crypto funds decide to pour their vast reserves into Bitcoin, it could exert additional pressure on exchange order books, potentially leading to increased market volatility. It will be particularly intriguing to see how these entities choose to lock in their profits.

A logical move might be to offload BTC as its value climbs. Such a strategy could lead to scenarios where thousands of BTC are being sold at the same price point, triggering major price swings and potentially causing liquidity issues on certain exchanges.

The Danger of a Bitcoin Market Monopoly

Centralizing large volumes of Bitcoin in the hands of institutional investors goes against the grain of Bitcoin's decentralized ethos. The approval of a Bitcoin ETF could, over time, allow a few cryptocurrency funds to dominate the market.

This concentration means that a larger share of assets is held by a smaller segment of the population, which could potentially manipulate the market. While this may not directly impact individual Bitcoin investors, it contradicts the core principle of decentralization.

Risk of Corporate Insolvency

While the market managed to navigate through scandals like that of the crypto company Terra and FTX exchange, an intriguing question arises: What if a theoretical crypto fund, boasting a hefty 100,000 BTC in capital, finds itself unable to meet its obligations? Such an eventuality could stem from a precipitous decline in Bitcoin's price, its inherent high volatility, or simply misguided risk management strategies.

The bankruptcy of such significant BTC stakeholders can instigate a domino effect of liquidations: one firm's downfall can spark off asset sell-offs, potentially triggering another's bankruptcy, continuing until the last traders' stakes are wiped out. Although this cascade is less probable in the context of a spot Bitcoin ETF, dismissing it entirely might be premature.