The Bitcoin ETF approval was huge. Ethereum followed, and now? Now everyone is yelling “Altcoin Season! A tidal wave of other ETF applications — nearly 40 — are currently flooding the SEC’s inbox, all hoping for a regulatory green light. VanEck, WisdomTree and Franklin Templeton have all thrown their hats into the ring on this one. They are diving headfirst into a new world of crypto with BNB, Avalanche, XRP, Dogecoin, and yes, even a memecoin based on Donald Trump!

Already, the prospect of Paul Atkins replacing Gary Gensler at the SEC has many celebrating an impending crypto revolution. Moving from “regulation by enforcement” to “notice and comment”? The “innovation exemption” mandates shorter paths to market for those products. But hold on. Hold on there, before you take out a mortgage on your house to invest in that Dogecoin ETF. Perhaps this “altcoin summer” narrative is jumping the gun.

A more crypto-friendly SEC comes as no surprise – it is definitely a welcome relief after the heavy-handed regulations of the Gensler era. This turn of events does not remove the risks that are still inherent in the altcoin space. The ability for ETFs to exacerbate those dangers is indeed very much real. It would be like handing a toddler a chainsaw – exciting, potentially groundbreaking, but all-around unsafe.

Liquidity Dries Up, Dreams Die

Think about it. Bitcoin has the deepest liquidity. Ethereum, a respectable second. But what about the rest? Okay, altcoins have strong daily trading volumes on a few exchanges. But those volumes can disappear quicker than morning dew in the Sahara.

An ETF, almost by its nature, produces a perpetual liquidity demand. When investors make or redeem shares, the fund needs to sell or buy those stocks respectively, and vice versa. Now, picture this same ETF but focused on a new, very illiquid altcoin. A heart attack type surge in sell orders would likely set off a death spiral. This would require the fund to sell its holdings at fire-sale prices, devastating the underlying asset and allowing ETF holders to escape the fallout.

It’s the Gamestop short squeeze in reverse. Now, the average investor feels that volatility head on, instead of just as a pass-through from an underlying hedge fund. Unlike Gamestop, most of these altcoins have no real-world utility or intrinsic value. They’re built on hype and speculation, so they are incredibly vulnerable to shifts in market sentiment.

The SEC still needs to consider whether these marks are fully developed to sustain a structure such as an ETF. You’ll want to consider this key condition as well. Opening the floodgates of illiquid altcoins to 16+ new ETFs is a very serious systemic risk. This would turn the exciting “altcoin summer” into a miserable “altcoin ice age” for everyone involved.

Regulatory Roulette: Spin to Lose?

Atkins at the SEC strikes me as a pretty positive development. Perhaps most importantly, he’s unwinding some of Gensler’s more draconian policies, and that’s great news for innovation. Let’s not confuse an upcoming change in leadership with a ticket for regulatory certainty.

The crypto landscape is still evolving. Sooner or later, new laws will be enacted, or new interpretations assigned to existing regulations, or the political winds change once more. What occurs if under a different administration, the SEC determines that one of the approved altcoins ETFs has become non-compliant.

The fund might be required to sell all of its stock in a fire-sale liquidation, harming investors. Or, better yet, the detrimental impact may be the regulatory uncertainty which produces a chilling effect, dissuading institutional investment and stunting innovation.

The SEC remains at a loss about how to apply the statutory definition of “investment company” to these funds. The staking questions still aren’t clarified. Just because the SEC is seeking clarification doesn’t automatically mean they’re rubber-stamping anything. That doesn’t mean they’re in favor of it, which is a long way from approval. Don't confuse optimism with reality.

Manipulation Mania: Pump It and Dump It

This is the big one, folks. The ultimate elephant in the room that no one wants to discuss. As we all know, the altcoin market is one big casino run by criminals and charlatans.

Additionally, the low market capitalizations of most altcoins make them highly vulnerable to pump-and-dump operations. A coordinated group of whales can easily drive up the price of an altcoin, create a frenzy of FOMO (fear of missing out), and then dump their holdings, leaving unsuspecting investors with massive losses.

Now, imagine an altcoin ETF. And it serves as an effective vehicle for a new breed of manipulators to reach far more unsuspecting people. They can pump the price of the underlying altcoin, knowing that the ETF will be forced to buy more, further inflating the price. Then, they can sell all their holdings, short the ETF on the way down, and make a killing while everyone else gets rekt.

It's a recipe for disaster. The SEC’s core mission is to protect investors from being victims of market manipulation. It’s quite hard to police the crypto market — especially with so many bad actors operated offshore and anonymously.

The SEC’s recent move in the opposite direction—a more crypto-friendly direction— is a promising sign. But it's not a free pass. What we do need is a thoughtful, balanced regulatory framework. It should foster innovation, but insulate investors from the speculative nature of the nascent altcoin market. If not, the “altcoin summer” will instead become a long, cold winter for us all.

  • Diversify, diversify, diversify! Don't put all your eggs in one altcoin basket, especially if that basket is an ETF.
  • Do your own research. Don't rely on hype or social media buzz. Understand the underlying technology, the team behind the project, and the potential risks.
  • Be skeptical. If something sounds too good to be true, it probably is.
  • Recognize that ETF approval != guaranteed profits. Ether's muted price performance after ETF approval is a stark reminder.
  • Only invest what you can afford to lose. This is crucial, especially in the volatile world of altcoins.

The SEC's shift toward a more crypto-friendly approach is a welcome development. But it's not a free pass. We need a balanced regulatory framework that promotes innovation while protecting investors from the inherent risks of the altcoin market. Otherwise, the "altcoin summer" could turn into a long, cold winter for everyone.