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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 Jamie McGeever

ORLANDO, Fla. (Reuters) - 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.

A crypto exchange advertisement shows a Bitcoin symbol at Mass Transit Railway (MTR) station, in Hong Kong, China. October 27, 2021. REUTERS/Tyrone Siu

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. Fr...

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