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Insatiable demand for bitcoin is forcing U.S. regulators to walk an increasingly fine line between opening up the booming market to investors, and shielding them from what is still a highly speculative, volatile and risky asset.

By authorizing the first-ever bitcoin futures exchange-traded funds last week, while doubling down on its resistance to cash-based ETFs, the Securities and Exchange Commission may be getting the balance just about right.

The risks bitcoin poses to investors broadly fall into three categories: market opacity (such as highly concentrated ownership, potential for price manipulation, fraud and illicit transactions); market infrastructure (where the asset is traded, ease of access for investors); and price volatility.

By giving the green light to ETFs tracking the Chicago Mercantile Exchange’s bitcoin futures but keeping the door closed on cash-based ETFs, the SEC is reducing the first two while allowing investors with the stomach for it to enjoy the upside of the third.

“Bitcoin is unregulated and has risks related to fraud or manipulation which concerns the SEC. Their concerns are hefty,” notes Todd Rosenbluth, head of ETF and mutual fund research at research firm CFRA in New York.

Last week the spot price of bitcoin surged to a new high above $67,000, open interest on the Chicago futures market reached the highest since the contract was launched four years ago, and ProShares and Valkyrie debuted their ETFs .

More bitcoin ETFs tracking futures contracts rather than the cash market will likely be approved in the coming weeks and months. But that is as far as it is likely to go for now.

Regulators’ skepticism and caution surrounding bitcoin and cryptocurrency is long-standing and deep-rooted. Fraud, manipulation, front-running, opaque pricing, and other abuses are seen as features, not bugs.

“It’s really a matter of bringing as much of this space within the investor protection remit. That’s the story here. Without that, it really is ... a bit of the Wild West,” SEC Chairman Gary Gensler told Yahoo Finance on Monday, stressing that the global $2.5 trillion crypto market is mostly unregulated.

400% WORTH THE RISK?

From an investor point of view, ETFs are not without actual or opportunity cost either.

Futures don’t track spot prices exactly, so investors could miss out on perhaps 5% to 10% of the upside over the course of a year, according to some analysts. And as contracts expire, buyers will have to roll into the next front month, which in a bull market is at a higher price.

Gensler’s latest salvo - he made similar comments the day of ProShares’ ETF debut - comes at a particularly frenzied time for crypto currencies.

Bitcoin is up 45% so far in October, on track for one of its best-ever months, and ProShares Bitcoin Strategy’s ETF amassed over $1 billion of assets in a record-breaking two days.

Not only are investors desperate to ride the crest of that wave, there is a growing view that bitcoin and cryptocurrencies are vying with gold as the de facto hedge against inflation.

Cash is being pulled out of gold ETFs even with inflationary pressures and expectations rising, JP Morgan strategists note, and many wealth managers are replacing gold in their portfolios with bitcoin and crypto assets.

“Clearly, it (crypto) is winning the race against gold at the moment,” billionaire hedge fund manager Paul Tudor Jones told CNBC last week. He would prefer to own physical bitcoin rather than the ETF, but “the fact that it’s SEC-approved should give you great comfort.”

Figures from digital asset manager CoinShares on Monday showed that cryptocurrency products and funds attracted a record $1.5 billion in inflows last week, their 10th straight week of investments. The bulk of that - $1.45 billion - went to bitcoin.

Inflows so far this year of $8 billion already exceed the record set for the whole of 2020 of $6.7 billion. Some $6.1 billion of that is bitcoin, the report showed.

A 400% rise in bitcoin’s price over the past year will help soothe investor concerns over its volatility - bitcoin halved in value between May and July - and other myriad risks. Gains like that will only intensify the clamor for cash-based ETFs.

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