Here’s what’s keeping Bitcoin investors awake at night

Many investors are looking for exposure to cryptos without having to actually buy them.

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A bitcoin trader looks afraid and holds his hands to his mouth among graphics of red arrows pointing down

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Bitcoin (CRYPTO: BTC) is down 2% over the past 24 hours, currently trading for US$37,894 (AU$51,208).

That gives the world’s biggest crypto a market cap just north of US$711 billion, down from some US$1.2 trillion at mid-April’s peak.

Bitcoin is still well below its US$64,829 record high.

But even after the past few days of falls, the token remains up more than 27% over the past 2 weeks. On 21 July, as you may recall, it was trading for US$29,790.

And it’s that rapid price gain, among other issues, that’s keeping some crypto investors up at night.

Flying too high too fast?

JJ Kinahan is the chief market strategist at TD Ameritrade. According to Kinahan (quoted by Bloomberg), “This rally has been so quick that you have to be a little bit careful of how quickly it’s accelerated over the last few weeks.”

Technical analysts also point to Bitcoin falling below its 100-day moving average as a sign of potential further weakness.

According to Matt Maley, chief market strategist for Miller Tabak + Co, “If it does indeed bounce back, it’s going to be quite bullish. If, however, it sees much more downside follow-through, things are going to get scary pretty quickly.”

Pressure from US infrastructure bill

Another recent issue that’s cropped up for Bitcoin is the infrastructure package currently being debated by the United States Congress. As part of the package, with the intent of raising US$28 billion in revenue, crypto brokers would need to reports their transactions to the Internal Revenue Service (IRS).

The thing here is that US$28 billion won’t be conjured from thin air. It will come directly from the pockets of crypto investors who’ve banked profits. As the infrastructure bill progresses, it could put further pressure on the Bitcoin price.

And investors who’ve been pining for the US to greenlight a Bitcoin exchange-traded fund (ETF) have been left wanting.

US Bitcoin ETF proposal disappoints enthusiasts

While the Canadian government has approved several Bitcoin ETFs this year, the US has been slow to do. The US has cited concerns over money laundering and fraud, among others.

This week, however, US Securities and Exchange Commission chairman Gary Gensler appeared to open the door to such an ETF. But crypto enthusiasts were disappointed to learn the fund would rely on Bitcoin futures, rather than one actually backed by the token.

Matthew Sigel, head of digital assets research at VanEck, was among those sounding less than pleased. Speaking to Bloomberg over the phone, Sigel said:

We see Bitcoin futures-based funds as inferior products that have consistently underperformed the Bitcoin price and bring additional complexities in regards to how they must be managed, at a higher cost than ETFs. Simply put, they are substandard vehicles…

What the SEC seems to be doing is pushing individual investors into higher-risk, lower-quality products to get their Bitcoin exposure instead of sticking with the tried-and-true ETF wrapper, which has given millions of investors exposure to so many different assets, many of which are much more speculative and illiquid than Bitcoin.

Nate Geraci from the ETF Store views this as a potentially positive first step. But he says it will add unnecessary complexity:

Investors want the real deal and a quick glance north of the border shows the real deal not only exists, but is prospering…

Futures introduce a layer of complexity, as contracts held by an ETF must be managed and rolled. Futures-based ETFs are unlikely to perfectly track the spot price of Bitcoin. Plus, there are differences in taxation.

What about price manipulation?

We’ll leave off with James Seyffart, the ETF analyst for Bloomberg Intelligence, who addresses investor concerns about price manipulation.

Seyffart points out that one benefit of futures is that they’re regulated. He says this “provides a bit of an additional layer of investor protection from the underlying Bitcoin market”.

“But in my mind, it doesn’t make much of a difference,” he adds. That’s “because if you truly believe Bitcoin is manipulated, Bitcoin futures are going to be affected by said manipulation of the underlying market”.

With prices continuing to be highly volatile, the best advice for crypto investors tossing and turning at night remains never to invest more than you’re prepared to lose.

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The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Bitcoin. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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