Research the dynamics of market manipulation before you jump in Bitcoin ETFs

Investors are eagerly anticipating the potential approval of a spot bitcoin exchange-traded fund (ETF) by the United States Securities and Exchange Commission (SEC). The excitement began in early June when the investment giant BlackRock submitted a filing for the product and gained further momentum after a court decision mandated the SEC reconsider its rejection of

Is there a setup that effectively shields the ETF from manipulation? The use of spot prices derived from the futures curve for calculating NAV, coupled with in-cash creations and redemptions, emerges as the most promising alternative. If an arbitrageur attempts to apply the same method as in the previous case, there is no guarantee of selling the commodity at a price similar to that used in NAV calculation, especially in the presence of a manipulator in the spot market. The trade is no longer an arbitrage. The pipes connecting the spot price and the ETF price are obstructed.

On the flip side, this setup facilitates a straightforward arbitrage path between the ETF and futures. Whenever the ETF price diverges from the spot price implied by the futures curve, an arbitrageur can execute a trade in the opposite position with perfect hedging on futures, establishing a robust link between the ETF and the futures market. It is reasonable to believe that an ETF with such characteristics would be as resistant to manipulation in unregulated spot markets as the futures contracts or a futures ETF.

Both academics and practitioners have already found some robust evidence supporting the idea that CME Bitcoin Futures are dominant in Bitcoin’s price discovery. Undoubtedly, a spot Bitcoin ETF in the U.S. would be a good development for the traditional markets and the crypto industry. As the American pastor Chuck Swindoll once said, “The difference between something good and something great is attention to detail.” By keeping the devils away, a Bitcoin ETF has the potential to be truly great for investors.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.