October - 2021 - Woodstock Fund Blog

BITCOIN FUTURES ETF

The Securities and Exchange Commission (SEC) allowed the first U.S. Bitcoin futures exchange-traded fund to begin trading, ushering in a watershed moment for the digital assets industry. This move helped the market cap to cross US$ 2.5+ trillion, sending Bitcoin to an all-time high just above US$ 67k on 20 Oct’ 21 before fading and closing the week 1% down. Unlike prior Bitcoin ETF applications that were rejected by the SEC, the proposals by ProShares and Invesco Ltd. are based on futures contracts, according to SEC Chairman Gary Gensler, providing “substantial investor protection.” Bitcoin futures ETFs are different from Bitcoin spot ETFs as they are based on futures contracts and are filed under mutual fund rules.

WHAT IS BITCOIN FUTURE ETF?

A Bitcoin futures ETF is an ETF that derives its price from the world’s most popular digital currency. This enables investors to invest in the currency without having to go through the difficult procedure of trading bitcoin itself. Furthermore, because ETF holders would not be directly investing in bitcoin, they will not be subject to the onerous storage and security measures needed of digital assets investors.

ProShares Bitcoin Strategy ETF (BITO) hit the exchanges on 19 Oct ‘21 to roaring demand, gobbling up US$ 570 million in assets under management on its first day of trading. By the end of Day 2, ProShares’ product toppled the billion-dollar mark and closed with US$ 1.1 bn in AUM. The fund stole that glory from GLD, the dominant gold-tracking ETF, which took an extra day, or three total, to reach the milestone back in 2004.

BITCOIN SPOT ETF

Lots of speculation has been doing rounds for Bitcoin Spot ETF to get approved in the near future since the SEC has given a nod to the futures ETF. As much as proponents of the digital assets community would want this to happen as early as possible, the chances seem pretty slim. Gary Gensler, Chairperson of the SEC, has already highlighted his concerns around approving the spot ETF. In a recent interview, he said that most of the crypto is yet to come under the “investor protection remit,” leaving investors vulnerable to fraud and manipulation in these markets.

The majority of assets held in ETFs are traded on federally regulated exchanges in the name of the company that owns them. Bitcoin is unique in its own right and is not owned by one single entity.

Because the price of bitcoin is determined by hundreds of marketplaces that are not regulated by the federal government, it becomes easy for a bad actor to register an account on a number of different platforms and trade in a circular fashion to manipulate the price. Gensler has not stated whether this is the reason he is still unwilling to approve a spot-based product, although the SEC has previously expressed similar concerns in its rejection orders. For his part, he has stated that he believes in bitcoin futures contracts traded on the Chicago Mercantile Exchange (CME). This is most likely due to the fact that the CME is a federally regulated market, which means that the Commodity Futures Trading Commission (CFTC) monitors its operations and offers a significant amount of investor protection.

Ryan Louvar, general counsel for WisdomTree, which lists an ETF that holds some bitcoin futures, has argued that if a derivative can be considered to be safe then why not the underlying itself, because the price of the derivative would ultimately be derived from the spot and any manipulation in the spot price would end up impacting the future contracts prices as well.

It seems SEC is trying to take the middle ground for now and would want to have a more robust regulatory framework around Bitcoin and other digital assets before opening it up to a large set of investors. These additional regulatory layers between the investor and the underlying allow the SEC to intervene if something goes wrong. It has no authority over bitcoin trading, but it does have some power over the futures market, CME, and how it values its futures.

ETH ETF – A POSSIBILITY?

SEC has already stated in the past that it does not consider ETH a security, and Ethereum currently has the strongest network effects after Bitcoin in the digital assets space, which could pave the door for the SEC to approve an ETH ETF as well down the road, potentially opening the floodgates for institutional money to come into Ethereum.. An ETH ETF will provide exposure to Ethereum to a wide proportion of institutional investors who already have a brokerage account and are comfortable buying equities and ETFs but do not want to go through the trouble and learning curve of opening a new account with a cryptocurrency provider and work around all the security risks that come with it. However, due to the low volumes in the ethereum futures markets, obtaining regulatory approval before Q1 2022 seems like a long shot.

WRAPPING IT UP

The Bitcoin futures ETF approval by the SEC definitely is a great move and gives a lot of boost to the digital assets and their existence. It shows the intent of the regulators and their willingness to provide a regulatory solution to the complex nature of digital assets and their operations. This would also imply that the SEC will now have more leeway to question and investigate the business more closely, putting pressure on the industry to demonstrate greater integrity and legitimacy.

WOODSTOCK ARTICLES

ELROND – BUILDING FOR GLOBAL ADOPTION

Elrond’s novel approach to sharding has propelled the platform on a path of explosive growth. And through its intuitive applications and superior UX, Elrond is focused on capturing the global audience. Stress testing these applications before launch further minimizes the risks of hacks and bugs, bettering user engagement. Through these steady innovative efforts, the network has gathered impetus for growth and is effectively moving up the blockchain ladder. Read more here.

WOODSTOCK IN NEWS

In a conversation with YourStory, our Founding Partners share their Woodstock journey and how they went about identifying high potential early and growth stage DLT starts ups.

We host a webinar series on “Demystifying Digital Assets” to bring you up to speed with this nascent asset class and explain why you should consider adding exposure to this space. You can register for our next webinar.

Pranav Sharma, Founding Partner of Woodstock Fund, talked about convergence, financialization, and virtualization at YourStory’s TechSparks 2021.
Himanshu Yadav, Founding Partner of Woodstock Fund, shared his views on the due diligence process for startups in the digital assets space at DSRPTD 2021.

MARKET NEWS

Following the launching of the first Bitcoin Futures ETF, Bitcoin finally broke its all-time high on 20 Oct’ 21 after months of bouncing between US$ 40,000 and US$ 55,000. BTC reached a new high of around US$ 67,000 before fading and falling back to around US$ 60,000.
Mastercard will soon offer digital asset support to its network of millions of banks and merchants.
Visa has developed a conceptual protocol for CBDCs.

DeFi

Goldman Sachs released a report on DeFi. The authors said, “the narrative around DeFi has shifted from whether or not these decentralized products on the blockchain can work to how they can continue to grow in scale.”
FATF provided guidance regarding the DeFi industry. Currently, DeFi applications do not fall under virtual assets service providers (VASPs), however, the report states that DeFi developers and maintainers can be considered as VASPs.
DeFi’s total value locked (TVL) reached an all time high of US$ 233bn.

NFTs

Viacom is venturing into NFTs with SpongeBob and South Park IPs.
Facebook Goes All In on Metaverse and rebrands Facebook to Meta. All the “metaverse” projects rally post this announcement from the social media giant
Coinbase and Reddit are launching their respective NFT platforms in the coming months.