Is the US SEC Trying to Manipulate the Bitcoin Supply?


When CME Group launched its first Bitcoin futures contract in 2017, the firm’s Chairman Emeritus Leo Melamed famously declared that it would “tame” Bitcoin. Since then, several ETFs have been approved by the SEC. But as exchanges increased the supply of BTC by selling “paper Bitcoin,” questions of market manipulation began to emerge.

Melamed told Reuters at the time: “We will regulate, making Bitcoin neither wild nor wild. We will turn it into a regular trading tool with rules.”

An exchange-traded fund, or ETF, allows investors to buy an asset that tracks the price of Bitcoin. But without actually directly owning the underlying asset. In the US, such funds fall under the jurisdiction of the Securities and Exchange Commission (SEC).

Structured like an IOU, an informal document accepting debt, an ETF takes paper form that can be exchanged during the trading process. Observers worry whether the purpose of paper Bitcoin is to manipulate the underlying asset with the help of the SEC as a regulator.

Bitcoin manipulation: Banks want control

“These banks are trying to take control, but this is the normal system they use,” James Crypto Guru, founder and CEO of the MagicCraft cryptocurrency, told BeInCrypto.

“It’s kind of controlling and manipulative. But people are realizing that they want Bitcoin from the blockchain, and over time, theirs [banks’ BTC holding] its 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] too good for adoption,” he added.

In October 2021, the SEC approved the first Bitcoin ETF that invests in futures contracts. The Proshares Bitcoin Strategy exchange-traded fund launched on the New York Stock Exchange on October 19, becoming the first Bitcoin ETF in the US.

About $1 billion worth of shares changed hands on the first day of trading. After the ETF’s approval, the price of Bitcoin rose to a then-record high of $64,124. But bitcoin has since fallen 75% to $16,500.

Cryptocurrency analyst Willy Woo commented that the Bitcoin futures ETF would be bad for retail investors because it is dominated by institutional investors such as hedge funds.

“I think it’s going to be an expensive way to hold BTC,” Woo said he tweeted after. “The exchange-traded fund is effectively holding Bitcoin to hedge funds through a chain of profit incentives,” he said.

Woo argued that the Bitcoin futures ETF has “the potential for underpricing and greater volatility due to the dominance of futures.” This is because it expects BTC futures to be more expensive than the spot price due to the large, long positions opened by hedge funds.

The gold standard

In the gold markets, it is common practice that ETFs are now leading prices. According to experts, they are also used for price discovery. This same practice seems to be adapted for the Bitcoin markets.

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 EXMO cryptocurrency exchange, told BeInCrypto that the implementation of paper Bitcoin should be investigated. “Financial market manipulation is a serious problem not only for cryptocurrencies, but also for other publicly traded assets,” he said.

“When it comes to CME, the SEC acts as a watchdog that guarantees the safety of assets. Creation and regulation of such assets should be transparent and understandable for investors. This ensures that their investments are reliable.”

BeInCrypto reached out to SEC Commissioner Hester Peirce, but she was unavailable for comment “due to business press.”

Chris Esparza, CEO of Vault Finance, said that the purpose of Bitcoin futures contracts is never to manipulate the underlying asset, although that can happen. He went on to warn against potential scammers.

“The goal is to open up trading to more investors without physically handling the underlying asset. Unfortunately, it allows people to trade things they don’t have,” Esparza told BeInCrypto.

“The impact is huge. When people can trade futures and Bitcoin without holding a physical asset. As ‘Paper Bitcoin’ is bought and sold, it can have a huge impact on the price.

It’s not all gloom and doom

Bitcoin’s main value comes from two things. First, unlike other cryptocurrencies, BTC is truly decentralized. Second, its shortage, the maximum supply is 21 million coins.

However, Bitcoin ETFs increase the supply of Bitcoin by selling paper Bitcoin. Investors do not have to hold any BTC directly. An increased supply decreases the value of the coin.

According to Ben Sharon, founder and CEO of tokenized gold platform Illumishare, “whether the intent is to manipulate the underlying asset or not, it certainly happens to some extent.”

It’s not all gloom and doom with Bitcoin futures contracts. Andrew Weiner, vice president of Asian cryptocurrency exchange MEXC, explained that the so-called paper Bitcoin is managing the skepticism of people who know little about cryptocurrencies.

“The emergence of more paper Bitcoin shows that the compatibility and maturity of BTC is highly recognized by the market,” Weiner told BeInCrypto in an email.

“This not only accelerates the entry of traditional institutional investors and other traditional traders, but also increases the confidence of cryptocurrency users. Paper Bitcoin will introduce funds from the traditional financial world, which will propel BTC to new heights.”

Serhii Zhdanov, CEO of the EXMO exchange, shares Weiner’s views. Jdanov has compiled a list of supposed benefits from Bitcoin ETFs. This includes diversification, “flexible risk management, the ability to hedge positions and institutional capital flows.”

“The idea behind paper Bitcoin can hardly be called manipulation, as it serves the development of the sector as a full-fledged financial industry participant,” Zhdanov elaborated.

“The positives of such an asset outweigh the negatives. But as no one wants to lose money, it is necessary to reasonably evaluate the fund or the stock exchange that issues assets.”

If managed well, paper Bitcoin could work like paper gold, oil, silver and copper, among other commodities, Zhdanov said. He said that Bitcoin ETFs will have a positive impact on the price of BTC due to the increased participation of institutions.

Bitcoin BTC Dominance BTCD

The threat of decentralization

A Bitcoin futures ETF may be good for mainstream adoption. However, it may be “contrary to the decentralized ethos that BTC represents.”

There are concerns about BTC being “captured” by hedge funds and big banks, who can manipulate the price.

“BTC is fundamental as a decentralized bearer. Imagine all Bitcoin held as an ETF controlled by one provider,” Willy Woo said last year.

“That provider can now change the conversion rate, then issue 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, which “provide substantial investor protection” as defined by the Investment Company Act of 1940.

However, the full benefit of the idea will be seen when there is better stability in the market. Experts say this is especially true in relation to political events that affect the market and economic dynamics.

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