The launch of US exchange-traded funds (ETFs) tracking Bitcoin has sparked discussions and concerns regarding potential risks to the broader financial system. If widely adopted, these products could pose challenges during times of market stress, potentially exacerbating volatility in both the Bitcoin market and other financial sectors.
One analysis suggests that Bitcoin ETFs might introduce systemic risks, creating a ripple effect that impacts various parts of the financial system.
Bitcoin ETFs leave unseen threats to the financial world order
Some experts assert that the introduction of U.S. exchange-traded funds (ETFs) that monitor bitcoin strengthens ties between the volatile world of cryptocurrencies and the traditional financial system, as reported by Reuters. This could lead to the emergence of unanticipated new risks.
The SEC had previously declined the products on the grounds of investor protection concerns. However, subsequent to Grayscale Investments’ unsuccessful court challenge, the SEC was compelled to reconsider its stance.
According to crypto devotees, the products will enable investors to acquire more securely and conveniently acquired bitcoin exposure. Gary Gensler, chairman of the SEC, cautioned investors against speculating on bitcoin given that it remains a “volatile asset” while approving the products.
Some analysts predict that the ETFs, which jointly hold approximately $21 billion in assets, could attract up to $100 billion from retail and institutional investors this year alone. Bitcoin has declined by over 6% since the introduction of the products.
By exacerbating bitcoin price volatility or causing dislocations between the price of the ETF and bitcoin, the products could pose risks to other components of the financial system during periods of market stress if they were widely adopted, according to some ETF experts who cite evidence from previous ETF volatility events.
Others have stated that last year, the banking crisis in the United States demonstrated that risks can be transferred between the financial and crypto markets. For instance, Silvergate Bank, a crypto lender, ceased operations subsequent to withdrawals incited by the collapse of FTX, a crypto exchange.
This state of chaos, according to regulators, contributed to the downfall of Signature Bank. USD Coin experienced a surge in the interim following the failure of Silicon Valley Bank.
Experts thoughts on the BTC ETFs dangers
Bitcoin, which was initially designed as a substitute payment method in 2009, is primarily employed for speculative purposes. In accordance with the Wells Fargo Investment Institute, its daily average volatility is approximately 3.5 times that of equities.
As with other channels through which ETFs can generate systemic risks, Bitcoin ETFs could “particularly exacerbate” volatility during periods of market duress, according to Antonio Sánchez Serrano, principal economist at the European Systemic Risk Board, the financial risk watchdog of the European Union.
The decoupling of the ETF price from the underlying asset is one of these alternative channels. This can be problematic for institutions that have substantial exposure to the products or depend on them for liquidity management.
Bitcoin ETF issuers include a number of market, policy, and operational risks in their risk disclosures, but acknowledge that certain dangers may be unforeseeable due to the immaturity of bitcoin.
Additionally, executives from the crypto industry note that crypto crises, most notably the approximate two-thirds decline in value of $3 trillion in cryptocurrencies in 2022, have been confined to the crypto sector.
ETF issuers assert that they have also established safeguards. An instance of this is when the products are redeemed in cash as opposed to bitcoin, which reduces the quantity of intermediaries that maintain physical copies of the crypto.
In January, SEC Commissioner Caroline Crenshaw stated in a statement that the agency had not considered whether the ETFs would create a nexus with traditional markets that “permits crises in largely non-compliant crypto markets to spill over” when voting against their approval.
