The wild price swings bitcoin experienced in late June mean that you won’t be investing in a cryptocurrency index ETF in the near future, according to an analyst.
Arca Chief Investment Officer Jeff Dorman said in a note on July 2 that after a “brutal [June] with unprecedented volatility,” the U.S. Securities and Exchange Commission (SEC) is unlikely to approve cryptocurrency index funds (also known as exchange-traded funds) anytime soon.
While volatility itself isn’t necessarily bad, “unnatural volatility caused by excessive leverage and outsized risk-taking” is, he said.
With the SEC already having turned down ETF proposals this year from well-run exchanges like the Winklevoss’ Bats BZX based on concerns about market manipulation, “it’s almost a slam dunk now that an ETF won’t be approved any time soon,” said Dorman. “[A]n 81% 14-day levered rally, most of which occurred after U.S. trading hours, is not exactly the formula for successful SEC approval.”
The problem isn’t that bitcoin (BTC) rose so high in June, he said. It’s how and why it did it.
After falling 10% by June 10, bitcoin soared 81% through June 26 with almost no retracement—meaning a short downturn while on a long run of climbing prices—and then dropped 24% in one day. While June 27 through June 30 saw a relatively modest rise of 3%, bitcoin’s price rose and fell 15% within that four-day window.
While the price run-up began for “real reasons” Dorman said, it quickly turned into a massive gamble with highly leveraged bitcoin futures bets fueled by unregulated exchanges that offer 100:1 leverage. That caused both shorts and longs—bets that prices will drop or rise over a set period, respectively—to be liquidated in that June 26 to June 27 period.
Another problem, he added, was unstable long-short ratios—the amount of bitcoin futures available for a short sale compared to the amount actually borrowed and sold.
“Such rallies are inherently unstable and prone to sudden and violent collapses, which we just witnessed at the end of the month,” said Dorman.
That said, Dorman remains bullish on digital assets like bitcoin over the long term, noting that “[b]itcoin has transcended crypto, and has now infiltrated mainstream media, economics, finance and politics … while other projects have grown their networks via strong partnerships with Fortune 500 companies.”