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Week in Review: SEC's spot ETF rejection and Tether shorts close out one of crypto's worst semesters to date


The NCI closed Monday 10.6% below last week’s closing. The index’s performance was heavily influenced by Ethereum, down 13.3%, while Bitcoin fell 9.5%.



After a brief uptick during the weekend before last, the crypto market slipped back into a downtrend early last week. 

Continued uncertainty regarding the effects of the ongoing interest rate tightening cycle on the US economy and the SEC’s (Securities and Exchange Commission) rejection of Grayscale’s spot bitcoin ETF were the primary drivers during the last week of the first half of 2022, a six-month period in which the global crypto market cap shrank by 57%.

After several days with no major news concerning the credit contagion affecting crypto funds and CeFi (Centralized Finances) lenders, Bitcoin opened the week above $21,000, while Ethereum remained above $1,200. However, in the absence of positive headlines, prices began to wane as early as Tuesday.

On Wednesday, Fed Chairman Jerome Poweell admitted monetary policy could possibly go “too far” as the Fed attempts to rein in inflation. Powell readily admitted that restoring price stability had become the top priority and that an overcorrection that compromised growth was preferable to ineffective action on the inflation front. 

Powell’s tone during the European Central Bank Forum seemed to grow more pessimistic since his last public appearance, when investors were reassured by the fact that he spoke about a possible recovery for the US economy before year’s end.

While Powell emphasized his commitment to tackling inflation, the SEC rejected yet another spot Bitcoin ETF application. Grayscale planned to transform its $13.5 billion Bitcoin Trust into an exchange-traded fund—but the SEC had other plans. In its release, the regulatory authority sighted concerns regarding market manipulation, among other matters supposedly unaddressed by Grayscale’s application. 

The rejection was hardly a surprise, as the SEC has shot down several other spot Bitcoin proposals. Grayscale seemed unfazed by the rejection, immediately filing a lawsuit seeking to overturn the decisions in the US Court of Appeals while publicly reaffirming their unwavering commitment to the launch of a spot ETF. 

Unsurprising as the SEC’s rejection may have been, it effectively squashed any remaining hope that a positive driver could partially wind back the abysmal price action before the month’s closing. Powell’s reassurance of the Fed’s unwavering commitment to price stabilization and the SEC’s rejection closed out of the worst  months (-37.3%), quarters (-59.1%) and semester (-60%) for Bitcoin in over a decade, while Ethereum registered its worst month (69.3%) since its 2015 inception.

Circling back to credit crunch news, while Three Arrows Capital (3AC) filed for bankruptcy, another controversy brewed in the background. Genesis Global Trading Inc., a crypto exchange for professional investors, revealed to the Wall Street Journal that hedge funds are betting against Tether, the world’s largest stablecoin (market cap: $66 billion).

According to the WSJ’s reporting, growing interest in shorting the dollar-pegged crypto has resulted in “hundreds of millions” in short trades. Short sellers are hoping Tether’s value will stray from the US dollar, in a repeat of the TerraUSD (UST) implosion that occurred in early May. 

Differently from UST—which guarded its parity to the US dollar through an arbitrage mechanism involving the LUNA token, Terra blockchain's native token—Tether is not an algorithmic stablecoin, and its issuer claims its peg is 100% collateralized by US Treasury Bills and short-term commercial paper holdings. 

But short sellers believe Tether’s collateral has been compromised by Chinese property developers, an over-leveraged industry dealing with an enduring real estate crisis. 

Tether Chief Technology Officer Paolo Ardoino took to twitter to address concerns early last week hoping  to reassure holders that Tether’s portfolio “is stronger than ever.” Ardoino revealed that the stablecoin reduced its exposure to commercial paper holdings by roughly $45 billion. 

However, a Bloomberg article published Monday claims the stablecoin issuer “failed to calm jittery nerves,” citing as evidence the pervasive over representation of Tether in a liquidity pool that allows traders to swap between several stablecoins.


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