95% Approval? Solana, XRP ETFs Face 3 Hidden Risks SEC Overlooks

Bloomberg Intelligence analysts are almost ringing alarm bells on main street for the practically-inevitable approval of Solana and XRP ETFs. 95% odds? Sounds like a done deal, right? Maybe too done a deal. On the one hand, I want to commend the SEC’s engagement, which looks great on paper. A rising tide lifts all boats, but this euphoria could be keeping us from seeing a few major icebergs lurking beneath the surface.

Regulatory U-Turns Ahead?

Everyone is now drawing on the SEC’s “positive engagement” as the panacea of the SEC’s golden ticket. Just keep in mind, this is the same SEC that has changed its position more often than a politician during an election cycle. Just because they're asking for amendments to S-1 filings now doesn't guarantee smooth sailing later. What happens if, as new administration comes in, or the SEC decides to reverse course? All at once, those 95% chances seem much less reassuring.

Think of it like this: you’re building a house on land you think you own. Retrospective became the way your city council smiles, pats you on the back and approves your original plans. You start construction, feeling great. Then, bam! They change the zoning laws. Suddenly your dream house is nothing but a code violation in the making. Here’s hoping that’s the likely scenario with these crypto ETFs. Regulatory uncertainty is a feature, not a bug, of this nascent market.

Volatility's Venomous Bite

Solana, XRP, Litecoin... you know the drill. They’re famous as hell for their violent boomerang price actions. These aren't your grandfather's blue-chip stocks. An ETF wrapper may provide an illusion of stability, but it’s not going to make the scary stuff beneath the surface vanish. In fact, it could amplify it.

Consider for example the likelihood of a sudden, sharp, detrimental market correction accompanied by significant systemic stress. Panic selling ensues. The ETF price plummets. Leveraged traders get margin called. The selling pressure intensifies. Suddenly, you're caught in a death spiral. That’s the danger of cramming very volatile assets into a 40-Act ETF wrapper. That’s like putting nitro-glycerin in a gold-plated safe with a digital lock – it’s still going to blow up if you rattle it too much.

These are back of the envelope calculations, obviously, but they make the point.

Multiply that ETF’s increased volatility by how many shares that ETF trades on an average day, can you stomach that?

ETFs are regulated, yes. But the underlying assets – Solana, XRP, Litecoin – are still out there on blockchains and blockchains are still hackable. Whether it’s hacks, or exploits or just plain old human error, losses can be massive. Remember the DAO hack on Ethereum? Or countless exchange collapses?

Security: The Achilles Heel

Of course, custody solutions are getting better all the time, but they still aren’t tamper-proof. The larger these ETFs get, the larger the target they are for malicious actors. After all, building a giant vault filled with gold makes for a much flashier story. The bottom line skilled thieves will always attempt to hack it.

The SEC appears to be focusing on the minutiae around staking arrangements and in-kind redemption. Are they really addressing the core security dangers that accompany these unregulated cryptocurrencies?

I'm reminded of a line from Neuromancer: "The sky above the port was the color of television, tuned to a dead channel." We're so focused on the shiny new technology that we're missing the grim realities lurking beneath the surface.

Before you jump on the Solana or XRP ETF bandwagon, ask yourself: Do I really understand the risks? Am I really willing to accept that I will lose a large part of my investment? Am I simply drinking the cool-aid here?

Don’t let the SEC’s purported “positive engagement” trick you into thinking everything is going to be fine and dandy. Do your own research. Understand the risks. And don’t get so distracted by those 95% approval odds that you ignore danger lurking around every corner. After all, in crypto, nothing is written in stone.

The SEC's "positive engagement" shouldn't lull you into a false sense of security. Do your own research. Understand the risks. And don't let the 95% approval odds blind you to the potential pitfalls. Because in the world of crypto, nothing is ever truly certain.