Markets See Massive Sell-Off As Fear Grips Investors

New Yearly Low Established — Are We Oversold?

The market continued to dig a deeper hole today as it sold off 20 Billion and established a new yearly low — We are now equivalent in total market cap to November 15th, 2017. Interestingly, Bitcoin had nearly the same market dominance then, 51%, as it does today, 49%.

What’s truly amazing here is that the market is operating on a fear of nothing, as nothing has happened.

For those unaware, the VanEck / SolidX ETF proposal was delayed by the SEC yesterday, leading to 30 Billion being sold off.

The key word there is delayed. Not denied.

They have delayed other ETF applications as well.

Why this one hurts so badly is that the market did a great job of convincing itself that we were going to see an approval in August, despite what the rational voices have been saying.

So rather than speculating, let’s get empirical and discuss rationally what is going to happen so that we may be smarter and less emotional than this clearly oversold market.

For one, there are 4 ETF applications on the table of note:

ProShares ETF:

– First update: Tue Jan 30 (+35 days)
– Second update: Fri Mar 23 (+87 days)
– Third update: Fri Jun 15 (+171 days)
– Final deadline: Aug 23 (+240 days)

Direxion ETF:
– Notice originally posted on January 24
– First extension issued on March 1 (~45 days later)
– Second extension issued on April 23 (~45 days later)
– Third extension issued on July 24 (~90 days later)

– Final deadline is September 21 (~60 days later)

CBOE VanEck / SolidX ETF:

– First deadline 16 Aug

– First extension issued on 7 Aug

– Second deadline Sept 30

– Final deadline 27(?) Feb 2019

Bitwise Hold 10 Cryptocurrency Index Fund:

– Filed on July 24th

– First deadline is Sept 7

So if you’ll notice the pattern, the timing of the ETF approval process follows a standard formula:

– the ETF files a “proposed rule change” with the SEC
– the SEC posts notice of the filing in the Federal Register and solicits comments
– the SEC has 45 days from posting to approve or deny the ETF

But the thing to note is that the SEC doesn’t have to decide within 45 days. It can extend the deadline up to three times:

– 45 more days if “a longer period is appropriate”
– 90 more days for the ETF to address grounds for disapproval
– 60 more days if again “a longer period is appropriate.”

This means the real deadline for the SEC to approve or deny an ETF is 240 days after it files notice in the Federal Register (45+45+90+60).

Because of how the law works, the SEC can’t just set a 240-day deadline as the initial span of time for consideration. It has to do the extensions one at a time.

So, for example, the Direxion ETF was given its third & final extension allowed by law (15 U.S.C. § 78s(b)(2)).

This means that we will likely see another two ETFs denied or approved within the coming month. Proshares (deadline Aug 23) and Direxion (deadline Sep 21) are different animals than the CBOE VanEck / SolidX ETF.

Unlike that ETF, the Direxion and ProShares ETFs are not commodity-backed.

In other words, these funds won’t involve buying actual Bitcoin, instead being based off futures.  Hence, they are not expected to have as much impact on Bitcoin price as the VanEck/SolidX Bitcoin ETF. When the Direxion ETF was delayed last month it barely affected the market, but yesterday’s delay of the commodity-backed ETF sent the market into an existential crisis.

The market’s expectation is that a commodity-backed ETF would significantly impact spot price, while a futures-backed ETF like ProShares or Direxion won’t. Still, how the SEC handles futures-backed ETFs could signal what they’ll do with VanEck/SolidX.

After all, the VanEck/SolidX ETF the market cares so much about is merely a copy of a previous application.

There was another SolidX ETF proposal that was denied March 29th, 2017. The VanEck/SolidX ETF currently under review has exactly the same insurance and exactly the same custodian (SolidX.) For all intents and purposes, it is the same proposal just with some amendments to the registration.

Overall there aren’t that many changes from the application that was denied. Specifically, after the SEC letter with concerns/questions from January 18th, 2018, it seems like they didn’t do much to address those concerns.

Having read the application itself, I would go so far as to say it is sloppy and unfinished. There are brackets everywhere, and the OTC index it relies on is unfinished.

Those concerns could be somewhat alleviated before February of 2019, but I think it should be clear that the market is putting far too much faith and hope into this clearly flawed ETF.

Obviously biggest change is that VanEck’s name is on it and the CBOE is behind it as well. But in terms of changes they just added like 2 small paragraphs about VanEck’s role, likely just for “marketing”.

Do some digging and you’ll find that these aren’t the people we should be entrusting the health of our market with.

In August of 2017, Joe Foster, portfolio manager and strategist for VanEck is on the record saying,

“Bitcoin and other digital currencies are a fad that has attracted the attention of programmers, speculators, and early adaptors. It is my opinion that governments will not allow digital currencies to reach the critical mass needed to challenge the utility of fiat currencies (such as the dollar).”

I’m sure after the run-up of late 2017, VanEck thinks Bitcoin and cryptocurrencies are even more of a “fad”. I ask, are these really the people that deserve to move the market 20 Billion in one day?

Once again, I need to stress that this ETF is dangerously polluting the mind of the market, and it is much more important that we focus on technology and adoption than the ETF.

After all, the news from this weekend regarding Bakkt and their custodial services / fiat to crypto platform / emphasis on retirement funds / emphasis on retail payments is much bigger news than the ETF.

But, for a moment, let’s put on our investigative hats one more time and try to predict what is going to happen over the next couple months.

First question, do either the Proshares or Direxion Futures-backed ETFs get approved?

As the Proshares the filing acknowledges, the market for bitcoin-tied derivatives is still nascent and early-stage.

“Bitcoin futures contracts have only recently been listed for trading and have a very limited trading history. There can be no assurance that an active trading market for bitcoin futures contracts will develop or be maintained,” the firm wrote.

So this is a bit of a tossup. Bitcoin futures have been traded successfully for 8 months, and while they’re still not widely used, they are increasing in popularity as the CME reported their Q2 volume was up 93% over Q1.

We could see their approval go either way, and with both of them being decided within a month, that sets the stage for more market disappointment if there’s back-to-back denials. Again, the market doesn’t regard these as highly as the commodity-backed ETF, but let’s consider the worst-case scenario.

Proshares is denied on August 23rd, Bitwise is denied / delayed on September 7th, Direxion is denied on September 21st, and the VanEck/SolidX ETF is denied once again on September 30th.

That’s a whole lot of FUD. September may be worse than what August is currently.

But let’s look at the opposite side. The SEC commissioners responsible for deciding the fate of these Bitcoin ETF applications are currently split 3-1 as we saw with the Winklevoss ETF denial. Hester Peirce is clearly pro-ETF and I think she’ll continue to hold that sentiment.

Then Elad Roisman will most certainly succeed Michael Piwowar this month. He is on the record saying that the SEC must treat ICOs, Blockchain, and other emerging technologies in a fair and transparent manner.

He also used to work for ICE/NYSE, which as we’ve seen from the Bakkt launch is clearly warming up to crypto.

In addition, the Democrats have now made their recommendation for the other replacement. They will probably approve the Republican and Democrat candidates simultaneously to keep balance. They will put forth a progressive, open-minded candidate in Allison Lee. 

This is two new chances for a yes vote, both replacing current no votes, and potentially swaying the deciding body from 3-1 to 2-3 in favor of Bitcoin (there is currently a vacancy necessitating the 4 votes when there should be 5).

So, it is very possible that we might see a bloody August and September, but keep your eyes on what’s going on in the SEC and how we might see the tides shift in time for the final decision in February.

The market is clearly oversold. We have endured a bear market predicated on fear and uncertainty. We could very well be approaching the capitulation point.

Keep your chin up, even through days like today.

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Defensive Actions for the next trading day: 

• None.