ETF, Bitcoin and the risk of manipulation with derivates

[ForkThis]

There are many news about the ETFs proposals that are being discussed by the US SEC. The creation of these will have a strong influence in Bitcoin and many people said that the futures over bitcoin could potentially tame Bitcoin and ETFs may have an even stronger effect.

For me is easier to understand if I use a football comparison: Let´s say that I bet 4 million on a game, so if the Red Team wins, I will make 4 millions of profit. The manipulation could occur if buying the referee and perhaps a few key players only costs 1 million. So:

- I bet 4 million.
- I spend 1 million in bribes.
- I get 8 million once I win.

With bitcoin or other coins you don´t have to bribe, you just buy and rise the price or sell if you need it to be low and then you make your profit with the leverage of the derivatives. e.g. Raising the price of bitcoin on a certain day would cost 1 million. If you used leveraged derivatives you will get x5 the increase and that can be more than the million you´d put in.

There is a long article here about the topic, and some historical references here and here. The references date back to BC.

"Jumping forward to Mesopotamia in the late 1700s B.C., trade and commodity security became dictated by rulers’ codes, which functioned as some of the first recorded contracts. Like those by Hammurabi of Babylon, "

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[BitHodler]

ETFs that are backed with the underlying asset stimulate long activity rather than short activity, but the futures markets could turn out to be an obstacle, but the volumes have to pick up significantly before that happens.

On the other hand, people start to worry about manipulation with financial instruments but completely forget that the market has always been subject to manipulation, especially in the early days.

I think that with more institutions entering crypto, the usual whales will face tough competition which is in the benefit of the market in my opinion. It results in more overall stability and less impulsive pumps and dumps.

Let's be honest, has the market ever respected support levels like how it does so this year?

[oriontab]

Every market is manipulated,even the highly regulated ones such as stocks and shares.the introduction of ETF will only it less obvious  as the players are more. Imagine watching a football match with just 2 players on each side, the ball will move faster,you could easily score a goal. Now imagine same pitch with 20 players on each team, the ball will hardly move in any direction and will take a lot of effort to get things going in a certain  direction .

[figmentofmyass]

ETFs that are backed with the underlying asset stimulate long activity rather than short activity

i wouldn't say that. brokers are free to loan ETF shares for short selling. it happens in other markets everyday.

also, shares can be issued or redeemed for bitcoins. just as bitcoins are bought, put in custody and exchanged for ETF shares, the shares can be redeemed for bitcoins and those BTC sold on the spot market.

but the futures markets could turn out to be an obstacle, but the volumes have to pick up significantly before that happens.

i think the lack of physical settlement leaves the futures markets completely following the spot market, rather than leading it. the volume doesn't matter if the market can't be used to buy/sell real BTC. real supply and demand meets on spot and OTC order books.

[davis196]

Bitcoin won't be approved as an ETF anyway,so your theory is pointless.
Bitcoin futures trading is active on CBOE and CME for about 9 months.Do you see any big price manipulations?
I'm not a fan of bitcoin futures trading,but when you post your theories just put some real life example.
If btc price is really manipulated,why it was approved for future contracts trading?

[xtrump101]

base on your premise and refereed article all of those are centralize kind of trading including how bitcoin was traded today, so until bitcoin and alt coins moves to decentralize state of trade, there will be manipulation at some point.. today many developers are shifting to decentralize not that just in exchanges, and they are growing in numbers , and until we dont yet see it now (total decentralization) progress of adoption will be so slow.

[deisik]

There are many news about the ETFs proposals that are being discussed by the US SEC. The creation of these will have a strong influence in Bitcoin and many people said that the futures over bitcoin could potentially tame Bitcoin and ETFs may have an even stronger effect.

For me is easier to understand if I use a football comparison: Let´s say that I bet 4 million on a game, so if the Red Team wins, I will make 4 millions of profit. The manipulation could occur if buying the referee and perhaps a few key players only costs 1 million. So:

- I bet 4 million.
- I spend 1 million in bribes.
- I get 8 million once I win.

With bitcoin or other coins you don´t have to bribe, you just buy and rise the price or sell if you need it to be low and then you make your profit with the leverage of the derivatives. e.g. Raising the price of bitcoin on a certain day would cost 1 million. If you used leveraged derivatives you will get x5 the increase and that can be more than the million you´d put in.

All proposals have been rejected so far

I know that there's always a first time for everything, but the chances for the "first time" this time or in the foreseeable future are pretty pathetic. It is not like tossing a coin when you intuitively* expect that the longer you see only one side, say, tails, the higher are your chances to see the other side, i.e. heads. Even if that were true (which it is not), it wouldn't work in this case as the SEC won't accept Bitcoin ETF proposal due to Bitcoin's purely speculative nature. Adding a layer of derivatives will only make this speculation even more insane than it already is

*some jerk will definitely pop up here and say that your chances remain the same no matter how long you toss the coin

[stompix]

With bitcoin or other coins you don´t have to bribe, you just buy and rise the price or sell if you need it to be low and then you make your profit with the leverage of the derivatives. e.g. Raising the price of bitcoin on a certain day would cost 1 million. If you used leveraged derivatives you will get x5 the increase and that can be more than the million you´d put in.

There is a tiny problem, you're not alone in this market.
So when you decided to buy so you could raise the price you might trigger a selling wave from somebody who wants to short the coin, just last week we had an example of this strategy.

And the same is for you betting on the RS and bribing a few players from the other team and the referee. You can't be sure that your own team hasn't been bribed and somebody is willing to spend twice as much on this as you;) ...there's always a bigger fish...  

[talkbitcoin]

On the other hand, people start to worry about manipulation with financial instruments but completely forget that the market has always been subject to manipulation, especially in the early days.

i think a part of this fear is about the big players entering the market. we are talking about wall street veterans who only care about making money who also have a lot of experience in the market and on top of that have access to media to manipulate the price if they wish to.
we have seen small examples before but if it becomes a serious thing we may end up with a terrible market at least for a year where they can pump and dump bitcoin!

[Siren]

Bitcoin won't be approved as an ETF anyway,so your theory is pointless.
Bitcoin futures trading is active on CBOE and CME for about 9 months.Do you see any big price manipulations?
I'm not a fan of bitcoin futures trading,but when you post your theories just put some real life example.
If btc price is really manipulated,why it was approved for future contracts trading?

Agreed on this mate,since i am in the same point that ETF will never become reality and always be denied

But about manipulation,maybe theres a possibilities mate,since whales are holding tons of bitcoins in their wallet and if some of them will make one stand,so price will be easily goes ups and downs and may mislead investors to become a victims

[deisik]

On the other hand, people start to worry about manipulation with financial instruments but completely forget that the market has always been subject to manipulation, especially in the early days.

i think a part of this fear is about the big players entering the market. we are talking about wall street veterans who only care about making money who also have a lot of experience in the market and on top of that have access to media to manipulate the price if they wish to.
we have seen small examples before but if it becomes a serious thing we may end up with a terrible market at least for a year where they can pump and dump bitcoin!

They are the wolves of Wall Street

And that is likely the reason why they are not getting their feet wet on Bitcoin cause they firmly know their limits. In other words, Bitcoin is so much speculative, dancing upon nothing, figuratively speaking, that their tricks won't work as they work with regular goods and commodities like oil and to a lesser degree gold. People will just keep their bitcoins tight no matter what, and these dudes will be losing money, and that's why they won't losing it. Besides, cash-settled futures are meaningless for big-time manipulations, everyone knows that and doesn't give a fuck

[esetop01tryba]

Perhaps the post of a positive decision in bitcoin will come a lot of money but it does not hurt him as bitcoin is not subject to the state. The only downside is that the US government can buy most of the assets !

[aencarnaci]

I know derivatives are horrible and it looks scary but bitcoin is barely getting into ETF market, if bitcoin gets accepted as an ETF which I think is still quite far away than there is still a long way to derivatives as well.

Let's wait out until bitcoin gets accepted as ETF let alone derivatives before we overreact on the risks of manipulation.
But, if you are worrying about the manipulation think of it this way we already have people (whales) who manipulate the market buying bitcoin or selling it whereas this would be derivative that will not be buying or selling directly and just wager on which direction bitcoin will go without actually buying bitcoin.

[deisik]

I know derivatives are horrible and it looks scary but bitcoin is barely getting into ETF market, if bitcoin gets accepted as an ETF which I think is still quite far away than there is still a long way to derivatives as well.

Unless Bitcoin proves itself as an established means of payment, all its derivatives will be irrelevant. Derivatives are deriving their value from real value of an asset. It can be said that they are exploiting this value or even abusing it (see oil as an example). But if there is no such value as is in case of Bitcoin (well, at least not to a required degree), its derivatives will have no such support of the solid underlying asset. You can build a home only on a firm base as otherwise it will be a house of cards built on another house of cards. Besides, as others and I have previously said on numerous occasions, cash-settled derivatives are not an instrument of influencing the price of the underlying asset simply because there is no underlying asset, only its price across the market

In other words, can the tail wag the dog if this tail belongs to another dog?

[figmentofmyass]

I know derivatives are horrible and it looks scary but bitcoin is barely getting into ETF market, if bitcoin gets accepted as an ETF which I think is still quite far away than there is still a long way to derivatives as well.

Unless Bitcoin proves itself as an established means of payment, all its derivatives will be irrelevant. Derivatives are deriving their value from real value of an asset. It can be said that they are exploiting this value or even abusing it (see oil as an example). But if there is no such value as is in case of Bitcoin (well, at least not to a required degree), its derivatives will have no such support of the solid underlying asset.

i wouldn't say derivatives will be irrelevant. of course, bitcoin must have users, transaction liquidity, etc to have a basis for value. however, i see no reason why derivatives can't be built on speculative value (ie the assumption that adoption will grow). a derivative is just a financial security whose value is derived from the underlying asset, whether because of physical delivery, arbitrage, or some other mechanism to peg prices.

Besides, as others and I have previously said on numerous occasions, cash-settled derivatives are not an instrument of influencing the price of the underlying asset simply because there is no underlying asset, only its price across the market

In other words, can the tail wag the dog if this tail belongs to another dog?

yes, cash-settled derivatives shouldn't influence price. but physically delivered derivatives sure can, if there is demand for them.

whether institutions really care about bakkt's futures launch remains to be seen.

[timerland]

Any derivative that holds leverage will be prone for manipulation.

In fact, anything that is being traded that is not actual, real, bitcoins and some form of token on an exchange without official, full reserve backing could be used for manipulation. We see this with all commodities, including precious metals with paper gold and silver.

Anyhow, it'll be interesting to see what these derivatives/futures do to the market once they are introduced for institutional investors on a large scale. Nothing we can do to stop them, but it's a reason why I personally really don't care for any news about ETF approvals, futures, etc.

[tenebriscaelum]

Every market is manipulated,even the highly regulated ones such as stocks and shares.the introduction of ETF will only it less obvious  as the players are more. Imagine watching a football match with just 2 players on each side, the ball will move faster,you could easily score a goal. Now imagine same pitch with 20 players on each team, the ball will hardly move in any direction and will take a lot of effort to get things going in a certain  direction .

I highly agree to your comment that every market is manipulated, in actuality it is just a matter of how they are controlling it. So with different market comes a different way of manipulation and even though some regulations change people who does this will just adapt and find new ways so it is up to us the investors to be aware of it.

[Evetemot]

There are many news about the ETFs proposals that are being discussed by the US SEC. The creation of these will have a strong influence in Bitcoin and many people said that the futures over bitcoin could potentially tame Bitcoin and ETFs may have an even stronger effect.

For me is easier to understand if I use a football comparison: Let´s say that I bet 4 million on a game, so if the Red Team wins, I will make 4 millions of profit. The manipulation could occur if buying the referee and perhaps a few key players only costs 1 million. So:

- I bet 4 million.
- I spend 1 million in bribes.
- I get 8 million once I win.

With bitcoin or other coins you don´t have to bribe, you just buy and rise the price or sell if you need it to be low and then you make your profit with the leverage of the derivatives. e.g. Raising the price of bitcoin on a certain day would cost 1 million. If you used leveraged derivatives you will get x5 the increase and that can be more than the million you´d put in.

There is a long article here about the topic, and some historical references here and here. The references date back to BC.

"Jumping forward to Mesopotamia in the late 1700s B.C., trade and commodity security became dictated by rulers’ codes, which functioned as some of the first recorded contracts. Like those by Hammurabi of Babylon, "

This is not the first time manipulation is happening in the market, it has happened a lot of times. Cryptocurrencies are subject to manipulation and there are people who uses that as a way for them to make profit. So this is not the first time and I don’t think it will be a reason for Bitcoin to fall or whatever. No matter what happens, people always come back to Bitcoin.

[raven.tiu17]

its the start of something very big in my opinion....dont listen to the mainstream media who are not telling it how it really is.... all the big banks and large organisations are waking up to Bitcoin & cryptocurrency's... do your own research guys, every market has their own derivatives.

[deisik]

I know derivatives are horrible and it looks scary but bitcoin is barely getting into ETF market, if bitcoin gets accepted as an ETF which I think is still quite far away than there is still a long way to derivatives as well.

Unless Bitcoin proves itself as an established means of payment, all its derivatives will be irrelevant. Derivatives are deriving their value from real value of an asset. It can be said that they are exploiting this value or even abusing it (see oil as an example). But if there is no such value as is in case of Bitcoin (well, at least not to a required degree), its derivatives will have no such support of the solid underlying asset.

i wouldn't say derivatives will be irrelevant. of course, bitcoin must have users, transaction liquidity, etc to have a basis for value. however, i see no reason why derivatives can't be built on speculative value (ie the assumption that adoption will grow). a derivative is just a financial security whose value is derived from the underlying asset, whether because of physical delivery, arbitrage, or some other mechanism to peg prices.

If they are cash-settled they are as close to irrelevant as it ever gets (the point which we seem to agree on)

Besides, as others and I have previously said on numerous occasions, cash-settled derivatives are not an instrument of influencing the price of the underlying asset simply because there is no underlying asset, only its price across the market

In other words, can the tail wag the dog if this tail belongs to another dog?

yes, cash-settled derivatives shouldn't influence price. but physically delivered derivatives sure can, if there is demand for them.

And here lies the problem, or rather a dilemma

Namely, you can't issue physically delivered derivatives without first accepting the underlying, right? Since otherwise how are you going to deliver at the expiry and with what exactly? But accepting real bitcoins on an exchange like CME would be a game changer for sure. If you trade, for example, physically delivered futures, you should trade the underlying as well. And I would venture to say that in that case it would beat in its effect and consequence all ETF proposals combined even if they were accepted all at once in their entirety