Hi, Pankaj here 👋
⭐️Valuation
If you have ever invested in an ETF you may know how important it's valuation is. This is what determines what you as an investor pay when you buy or get when you sell/redeem an ETF and thus it determines a fund's performance. In contrary to this as per the SEC the valuation of cryptocurrencies and other digital assets has unique issues because of all the forks and airdrops to which VanEck stated that they don't see valuation as “novel issue for their futures based Bitcoin ETF, as according to them the use of futures contracts to gain exposure to an asset is not unusual, and the valuation of futures contracts is a well-established practice, in fact, there are over 100 exchange-traded products on U.S. exchanges basing their value on futures contracts.
VanEck also stated that they believe that the prices provided by CBOE and CME afford fund sponsors adequate information to value the bitcoin futures contracts held by a fund for the purpose of determining the fund's net asset value, as with other futures contracts traded on the exchanges. Also neither the CBOE nor the CME contracts include forks or airdrops in the calculation of the futures contract price. So valuation won't that much of a problem and no changes to current policies would be required for valuing the CBOE and CME contracts.
⭐️Liquidity
The SEC has also raised it's concerns regarding sufficient liquidity of the ETF to which the firm has responded by stating that bitcoin futures market has sufficient liquidity to support their futures-based bitcoin ETF. Currently, the total combined daily bitcoin futures volume on CBOE and CME is in the $150 million to $200 million range.Also that they have analyzed various redemption scenarios for their proposed ETF taking into account trading patterns on the bitcoin blockchain as well as the redemption history of various commodity-related ETFs that they believe are appropriate comparisons for the proposed ETF and they reasonably expect that the proposed ETF will have sufficient liquidity to meet redemptions.
⭐️Custody
As far as custody is concerned, VanEck stated in the response letter making it clear that they do not currently intend for the proposed ETF to invest in physically settled bitcoin futures contracts. They also added that they are working with market participants regarding arrangements to satisfy the requirements applicable to holding bitcoin directly, but do not intend for the proposed ETF to do so (including as a result of settling physically-settled futures contracts) until such arrangements are viable.
⭐️Arbitrage
Speaking of artbitrage, the firm said that due to the diversified structure of bitcoin exchanges, market participants arbitrage price differences across exchanges. Also currently bitcoin futures contracts are cash-settled and are not available for physical delivery but when they do become available they should further increase the liquidity of bitcoin futures markets ( even if the proposed ETF does not currently intend to hold such contracts).
They goes on by further adding that they do not believe the volatility of the bitcoin futures market is significantly greater than assets such as gold miner stocks or certain other equities.
⭐️Potential Manipulation
Regarding manipulation, VanEck said that they are very well aware of the cited concerns raised by the media and academia with respect to manipulation in the underlying digital asset markets. However, they believe that all of these concerns will be reduced with the introduction of a regulated, U.S. exchange-traded product such as the ETF they are proposing. Also, the SEC's increased enforcement and regulatory actions can reduce the number of bad actors in a basically sound market.
As far as manipulation in the bitcoin futures market is concerned, bitcoin futures are already regulated and fall under the well-established Commodity Futures Trading Commission ("CFTC") supervision framework. By offering investors a regulated product that invests in futures contracts on regulated exchanges, the proposed ETF would provide protections to investors who wish to gain exposure to bitcoin that are otherwise not currently available to them. We believe that the key to addressing risk with respect to retail investors is to offer the ETF through brokerage firms that already have well-developed methods for assessing client risk tolerance and offering different access based on client risk appetite.
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