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Read more: 21Shares to List Ethereum, Bitcoin Cash ETPs on Deutsche Boerse’s Xetra

Bitcoin is a “highly speculative” asset, the staff statement, published Tuesday by the Division of Investment Management, said. The note warned that investors in mutual funds that trade bitcoin futures may be taking on more risk than they’re aware of.

The warning comes as high profile funds from Morgan Stanley and BlackRock begin to diversify into bitcoin through adjacent products like cash-settled bitcoin futures and Grayscale’s Bitcoin Trust. Those bets represent major steps in the institutional adoption trend of the last 12 months. 

While aimed at investors in mutual funds, Tuesday’s note has implications for bitcoin ETFs, which crypto proponents have been hoping to see for years.

“The staff among other things expect to … consider whether, in light of the experience of mutual funds investing in the Bitcoin futures market, the Bitcoin futures market could accommodate ETFs, which, unlike mutual funds, cannot prevent additional investor assets from coming into the ETF if the ETF becomes too large or dominant in the market, or if the liquidity in the market starts to wane,” the note said.

A robust bitcoin futures market was key to launching an ETF, Bitwise Asset Management Chief Investment Officer Matt Hougan told CoinDesk in February.

Proponents expected newly-confirmed SEC Chair Gary Gensler to oversee the approval of an ETF.

On Thursday, Bloomberg ETF specialist Eric Balchunas said the prospect of an ETF “isn’t dead yet, but it just took a nasty blow to the head.”

Read more: Buying Your First Crypto? 10 Things You Should Know

SEC staffers will “closely monitor”’ mutual funds’ bitcoin positions with an eye toward ensuring investor protection, one of Gensler’s top priorities for the crypto space. 

“The staff welcomes further input from ETFs and other market participants, particularly input that focuses on efforts to ensure compliance with the Investment Company Act and its rules and promote investor protection,” the statement said.

That means analyzing market liquidity, how funds are valuing their holdings, what impacts their positions have on bitcoin futures and the market itself and assessing whether fraud and manipulation might be influencing price. 

BlackRock’s $27 billion Global Allocation Fund invested $6.5 million in bitcoin futures last year, for example. Morgan Stanley has also given a handful of its mutual funds permission to bet on cash-settled bitcoin futures, though it’s unclear if the mega-bank has made any allocations. 

UPDATE (May 11, 2021, 23:28 UTC): Added additional details and context.

Bitcoin is a “highly speculative” asset, the staff statement, published Tuesday by the Division of Investment Management, said. The note warned that investors in mutual funds that trade bitcoin futures may be taking on more risk than they’re aware of.

The warning comes as high profile funds from Morgan Stanley and BlackRock begin to diversify into bitcoin through adjacent products like cash-settled bitcoin futures and Grayscale’s Bitcoin Trust. Those bets represent major steps in the institutional adoption trend of the last 12 months. 

While aimed at investors in mutual funds, Tuesday’s note has implications for bitcoin ETFs, which crypto proponents have been hoping to see for years.

“The staff among other things expect to … consider whether, in light of the experience of mutual funds investing in the Bitcoin futures market, the Bitcoin futures market could accommodate ETFs, which, unlike mutual funds, cannot prevent additional investor assets from coming into the ETF if the ETF becomes too large or dominant in the market, or if the liquidity in the market starts to wane,” the note said.

A robust bitcoin futures market was key to launching an ETF, Bitwise Asset Management Chief Investment Officer Matt Hougan told CoinDesk in February.

Proponents expected newly-confirmed SEC Chair Gary Gensler to oversee the approval of an ETF.

On Thursday, Bloomberg ETF specialist Eric Balchunas said the prospect of an ETF “isn’t dead yet, but it just took a nasty blow to the head.”

Read more: Buying Your First Crypto? 10 Things You Should Know

SEC staffers will “closely monitor”’ mutual funds’ bitcoin positions with an eye toward ensuring investor protection, one of Gensler’s top priorities for the crypto space. 

“The staff welcomes further input from ETFs and other market participants, particularly input that focuses on efforts to ensure compliance with the Investment Company Act and its rules and promote investor protection,” the statement said.

That means analyzing market liquidity, how funds are valuing their holdings, what impacts their positions have on bitcoin futures and the market itself and assessing whether fraud and manipulation might be influencing price. 

BlackRock’s $27 billion Global Allocation Fund invested $6.5 million in bitcoin futures last year, for example. Morgan Stanley has also given a handful of its mutual funds permission to bet on cash-settled bitcoin futures, though it’s unclear if the mega-bank has made any allocations. 

UPDATE (May 11, 2021, 23:28 UTC): Added additional details and context.

Bitcoin is a “highly speculative” asset, the staff statement, published Tuesday by the Division of Investment Management, said. The note warned that investors in mutual funds that trade bitcoin futures may be taking on more risk than they’re aware of.

The warning comes as high profile funds from Morgan Stanley and BlackRock begin to diversify into bitcoin through adjacent products like cash-settled bitcoin futures and Grayscale’s Bitcoin Trust. Those bets represent major steps in the institutional adoption trend of the last 12 months. 

While aimed at investors in mutual funds, Tuesday’s note has implications for bitcoin ETFs, which crypto proponents have been hoping to see for years.

“The staff among other things expect to … consider whether, in light of the experience of mutual funds investing in the Bitcoin futures market, the Bitcoin futures market could accommodate ETFs, which, unlike mutual funds, cannot prevent additional investor assets from coming into the ETF if the ETF becomes too large or dominant in the market, or if the liquidity in the market starts to wane,” the note said.

A robust bitcoin futures market was key to launching an ETF, Bitwise Asset Management Chief Investment Officer Matt Hougan told CoinDesk in February.

Proponents expected newly-confirmed SEC Chair Gary Gensler to oversee the approval of an ETF.

On Thursday, Bloomberg ETF specialist Eric Balchunas said the prospect of an ETF “isn’t dead yet, but it just took a nasty blow to the head.”

Read more: Buying Your First Crypto? 10 Things You Should Know

SEC staffers will “closely monitor”’ mutual funds’ bitcoin positions with an eye toward ensuring investor protection, one of Gensler’s top priorities for the crypto space. 

“The staff welcomes further input from ETFs and other market participants, particularly input that focuses on efforts to ensure compliance with the Investment Company Act and its rules and promote investor protection,” the statement said.

That means analyzing market liquidity, how funds are valuing their holdings, what impacts their positions have on bitcoin futures and the market itself and assessing whether fraud and manipulation might be influencing price. 

BlackRock’s $27 billion Global Allocation Fund invested $6.5 million in bitcoin futures last year, for example. Morgan Stanley has also given a handful of its mutual funds permission to bet on cash-settled bitcoin futures, though it’s unclear if the mega-bank has made any allocations. 

UPDATE (May 11, 2021, 23:28 UTC): Added additional details and context.

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Yusko told CBNC’s Trading Nation on Friday that’s because bitcoin is more than just a store of value.

It’s “about network adoption and increased usage,” he said. “This is a network, and networks grow in an exponential way. This is the fastest network in history to $1 trillion, right on the heels of the FAANGs that took 15 to 20 years depending on which one you look at.”

FAANGs refers to the stocks of Facebook, Amazon, Apple, Netflix and Google, now Alphabet. The bitcoin market hit $1 trillion in value earlier this year, 12 years after its creation.

Yusko based his bitcoin target on equivalence with gold, which has a market capitalization of $4 trillion. If BTC reaches that level, each coin would be worth $250,000.

Comparisons with gold are often used to illustrate bitcoin’s upside, but critics cite limits on the crypto’s ability to scale such as the time it takes to settle transactions and the computing power required to mine bitcoin as reasons to be skeptical.

“What people miss is this is a technological evolution of computer power that isn’t going away,”  Yusko said. “It is a powerful computing network that is going to become the base layer protocol for the internet of value.”

See also: Veteran Analyst Peter Brandt Expects Bitcoin to Reach $200K

Why is this important? It’s not just the benefits the upgrade brings, which are significant. Taproot is important because it reminds us of what Bitcoin is.

Before we dive into why this matters, let’s look at some of the main benefits of the proposed upgrade:

With all of the above, Taproot is the most significant upgrade to the Bitcoin network since the block size increase of 2017. The relative infrequency of Bitcoin upgrades highlights one of its main features: It is robust.

Making any amendments to Bitcoin is hard. There is no one “in charge” who can decide what changes get pushed through. And achieving consensus among such a diverse and dispersed group of participants is a challenge, to say the least. That Taproot is more or less unanimously supported highlights what a big deal this upgrade is.

What has turned out to be contentious, however, is the method of the upgrade. In March, a compromise was reached in the form of a “Speedy Trial,” which gives miners a series of two-week blocks in which to signal support for Taproot.  

This kicked off last Saturday, with the most recent difficulty adjustment. From that moment, Bitcoin miners had until the next difficulty adjustment (two weeks later) to signal support for the Taproot upgrade in their mined blocks. If 90% of processed blocks signaled support, the upgrade would get “locked in” for activation in November.

On Tuesday, however, it became apparent this signaling round wasn’t going to be successful. With almost 25% of the window’s blocks processed by around mid-day, 20% had not signaled support, so the 90% threshold was out of reach.

This is not a big deal – rather than rejection of the idea, it’s more likely that miners hadn’t yet gotten their heads or their software tweaks around the necessary steps. The next two-week window of signaling opportunity is coming up, and if that is also unsuccessful the network tries again and so on until Aug. 11. If by that date 90% signaling has not been achieved, Taproot goes back to the drawing board.

So, the Taproot upgrade will boost Bitcoin’s functionality and potentially broaden its market. That’s good for its prospects and its valuation.

But here’s the most important impact for the investing market overall: it reminds us that Bitcoin is a technology.

Many investors see bitcoin (BTC, -0.76%) as a store of value. Others are drawn in by the volatility. Most tend to overlook one of the Bitcoin system’s most defining features – it is a relatively new technology, with all the upside that implies.

When you buy gold, you don’t wonder how it will evolve while in the vault. Bitcoin, on the other hand, does evolve. It did so in 2017, and it will most likely do so again this year.

“Technology” implies risk, though – things can go wrong, code has bugs and/or unintended consequences. That’s why it is key that Bitcoin’s upgrades are few and far between, because they need to be carefully vetted and tested. Also, because there is no central body to decide on Bitcoin upgrades, they need to be agreed upon by all the key stakeholders. Consensus is always extremely difficult to achieve.

This is a good thing. There’s over $1 trillion of market value riding on the Bitcoin network now, not to mention the valuation of all of the businesses built to support the network, so the risk needs to be minimized to an almost negligible level.

Taproot drives home that bitcoin may be an excellent store of value, and it may provide good returns for speculators – but the cryptocurrency also represents the opportunity to get in early on a transformative technology investment. It’s like being able to take an early stake in a hot startup, but with much more liquidity and less paperwork.

So Taproot will not only improve Bitcoin’s usability, which could have the effect of broadening its market and therefore potentially its value as well. It also reminds us of one of Bitcoin’s core characteristics, which seems to have gotten drowned out in the prevailing market-driven narratives of late. Bitcoin is still a new technology, and its potential upside comes from more than its supply schedule, its inflation resistance and its decentralization.

You may be sick of hearing about it, but we can’t not talk about dogecoin (DOGE, -10.35%) this week. It does feel like the sentiment has morphed from “Hee hee, this is fun!” to “Oh no, we’re going to get into trouble.” It’s like having a party at your parents’ house when they’re away for the weekend, only to have it spin totally out of control.

The dogecoin concern is not unfounded: A price increase of over 15,000% so far this year, on objectively poor fundamentals (concentration of ownership, relatively weak security and narrow fully synced node distribution for starters) is fine until someone gets hurt.

When (if?) that happens, will the out-of-pocket investors cry foul and demand intervention? If so, will the intervention materialize?

What could the regulators do? Insist that investors only invest in things with solid fundamentals? Such as?

Could they insist that even more warnings be sprinkled about? What would these warnings say, and would they just be on dogecoin? If so, why? If not, would people even listen?

I suppose the authorities could publicly speak out against such speculation. Oh wait – they did that.

This is the regulators’ dilemma: They have to protect the investor, but they also have to encourage markets and innovation. How can they do both in a market fueled by sentiment? Do they restrict the sentiment or the market? How would they go about doing either effectively?

Part of the intensification of the attention frenzy is the appearance of Elon Musk on “Saturday Night Live” (which has not yet aired when I am typing this, but will have aired by the time this newsletter lands in your inbox), which he teased along with the epithet “The Dogefather.” So we’re expecting some Shiba Inu references, which, given Elon’s power among the meme crowd, could move the price even more. [But ultimately did not.]

Should the regulators go after Elon for talking about dogecoin? Public figures often talk about their investments – should that be banned? When does that morph from protecting the public to restricting speech? At the risk of sounding ingenuous, Elon is not out there touting dogecoin’s fundamentals. Should he be banned from talking about things he finds fun?

When the economic value of an investable asset is driven entirely by collective enthusiasm as well as meme amplification on social media, then what, really, can regulators do? How do you damp said enthusiasm without trampling on fundamental human liberties, which will ignite the crypto crowd even more?

What’s more, it seems like both access to the asset and its potential use case are broadening. Crypto exchange Gemini and multi-asset brokerage platform eToro now offer dogecoin trading. The Oakland Athletics has become the first Major League Baseball team to accept dogecoin for tickets to games. And the American Cancer Society now allows dogecoin donations.

If all these questions are giving you a headache, imagine how those of us who need to explain this feel. It’s enthralling but also disconcerting, and reconciling the two is a struggle.

Personally, I believe fears the regulators will come down hard on the crypto industry are overblown. Yes, people will lose money when the dogecoin market corrects, and that’s a huge pity. But that happens outside of cryptocurrencies, too. And U.S. regulators are no doubt aware that interfering with personal choice and financial freedom generally doesn’t end well.

As Securities and Exchange Commission Commissioner Hester Peirce said in a recent appearance on CoinDesk TV, “If [investors] are just having fun, they can do that as well. But don’t come complaining to the government if you lose your money.”

Sports are mainstream. Crypto assets are not (yet). So the deepening relationship between the two is an intriguing development that will help crypto reach more mainstream markets and help sports teams and athletes appear more “cutting edge.” And, of course, there’s the potential income.

The overlap mainly comes from two intriguing trends:

Both saw a handful of examples this past week:

I’m starting to get the uncomfortable feeling I may have to begin learning about team sports to keep you up to date with potential market-moving trends. This could end up reshaping my weekends.

Galaxy Digital has agreed to buy BitGo, the U.S.-regulated crypto custody specialist, for $1.2 billion in stock and cash. TAKEAWAYS:

Goldman Sachs (NYSE: GS) was in the crypto news twice this week: once when it announced a new desk that will offer trading in bitcoin derivatives (non-deliverable forwards), and then again when it emerged as a lead investor in the latest raise for crypto data aggregator and index provider Coin Metrics. TAKEAWAY: In our write-up of the Coin Metrics raise, we quoted a Goldman Sachs executive as saying, “Our clients will greatly benefit from Coin Metrics’ institutional-grade data insights and emerging risk management tools.” Could this be a teaser of more services to come?

Investment management firm VanEck has filed with the SEC for an ether-based exchange-traded fund. TAKEAWAY: If approved, this would be the first ether (ETH, +5.65%) ETF in the U.S. That’s a big “if” because the SEC has yet to approve a BTC ETF. Canada, on the other hand, has approved several BTC and ETH ETFs. Might the SEC approve a BTC and ETH ETF at the same time? It’s possible, but the U.S. regulator has spent years getting familiar with the bitcoin markets – its surveillance, price transparency, liquidity, etc. – and it’s not clear that it has the same level of knowledge about ether’s markets, which are complicated by the upcoming technology shift to Eth 2.0.

Square’s (NDAQ: SQ) Cash App generated $3.51 billion of revenue from its bitcoin operation in Q1 and $75 million of gross profit, both up approximately 11x from Q1 2020. TAKEAWAY: This kind of result is likely to make other payments services sit up and take notice. PayPal has already started down this road. Who’s next?

Among large Wall Street banks, it seems Citi (NYSE: C) is next. The global financial institution is reportedly considering launching crypto trading, custody and financing. TAKEAWAY: This is a reminder that institutions are increasingly asking their traditional banks for crypto services. There are several institutional-grade, crypto-first services that have good track records. But let’s face it, many institutions are going to prefer to deal with a name they already know, trust and have accounts with. This is unlikely to divert business away from the current roster of institutional crypto services; rather, it is likely to continue broadening the pool of participating deep-pocketed investors.

Digital Currency Group (DCG), the parent of investment manager Grayscale and also of CoinDesk, has authorized the purchase of up to $750 million worth of the Grayscale Bitcoin Trust (GBTC), up from a $250 million level previously announced. TAKEAWAY: This is a smart move for two main reasons: one, it should act as a boost to the market of GBTC as well as to investor interest in the product, which has effectively dried up as a result of the post-lockup trading discount to NAV; and two, if the trust gets converted into a redeemable ETF, as Grayscale has said it intends to pursue, then there’s a nice profit for DCG.

Listed fintech company Mogo (NDAQ: MOGO) revealed it has bought approximately $405,880 worth of ETH and almost $600,000 worth of BTC as part of its plan to allocate up to 5% of its cash and investment portfolio in cryptocurrencies. TAKEAWAY: Much has been written about the role of BTC in corporate reserves – I have written about the likelihood of companies starting to hold ETH as well. So far, few companies have revealed ETH balance sheet positions, Meitu being a notable exception. I expect we’ll see more of this in the coming months, although I maintain my position that ETH is better suited to a working capital holding than a store-of-value treasury asset.

S&P Dow Jones Indices has launched its first three cryptocurrency indexes: SPBTC (which measures BTC’s performance), SPETH (the same for ETH) and SPCMC (a combination of the two). TAKEAWAY: This is a notable move in that a known name, trusted by institutions and product issuers, is investing resources in the crypto markets in the form of indexes that could broaden the range of crypto products in the markets.  

The Marathon OFAC pool, which was first announced in late March, “refrains from processing transactions from those listed on the U.S. Department of Treasury’s Specially Designated Nationals and Blocked Persons List (SDN)” to stay “compliant with U.S. regulatory standards,” according to the company.

Marathon said it is addressing a concern among “many large funds and corporations” that have” expressed interest in purchasing bitcoin” by marketing its mined bitcoin as OFAC-compliant. Marathon spokesman Jason Assad confirmed that the firm’s first OFAC pool block censored some transactions, but didn’t specify which ones.

“By excluding transactions between nefarious actors, we can provide investors and regulators with the peace of mind that the bitcoin we produce is ‘clean’, ethical and compliant with regulatory standards,” Marathon said in a statement.

It should be noted that Marathon is mining “compliant” blocks of its own volition and that nothing in the current U.S. regulatory or legal code explicitly mandates that practice for miners. 

The company uses DMG’s Walletscore blockchain surveillance software to filter transactions, Assad told CoinDesk. The blacklist is “based on information provided by the U.S. Department of the Treasury and Office of Foreign Assets Control, databases of OFAC restricted cryptocurrency addresses, as well as other sources including the dark web,” he said.

Iran, which is included on OFAC’s sanctions list, is a hotbed of bitcoin adoption, partly in response to the pressures sanctions place on its citizens. (Notably but unrelated, Iran’s government just said that only bitcoin produced in Iran is legal to trade.)

The practice of censoring transactions, sanctioned or otherwise (put another way, excluding them from blocks because of the sender’s presumed identity), is a subject of heated debate within the Bitcoin community. Satoshi Nakamoto designed Bitcoin mining to facilitate permissionless and censorship resistant transfers of value, but initiatives like Marathon’s undermine that feature for no reason, critics say.

“It is totally against the Bitcoin ethos as they are trying to make it a permissioned protocol instead of open for all,” said Ben Carman, a Bitcoin Core and Suredbits developer.

He also said Marathon’s approach doesn’t make sense. “They are mining blocks that will not have the highest fee transactions, but (are) still on top of blocks with transactions they deem ‘bad,’ giving them more security,” he said.

Others also questioned the practicality of making a compliance claim.

Indeed, despite Marathon’s surveillance, transactions from a Russian dark web market, Hydra, were still processed in the “clean” block.

Further, shortly after Marathon blazoned the “clean” block on social media, bitcoiners from Iran and around the world began to send bitcoin to the address that received the Marathon “clean” block reward. The gesture was meant to display how easy it is to undermine Marathon’s initiative (and thus demonstrate how futile the chase is for “clean” coins).

Miners speaking to CoinDesk from other pools declined to go on the record about Marathon and its compliance push, but the sentiment was generally negative. One miner laughed at the notion, while another called it a manufactured issue.

Marathon began directing its hashrate, or computer processing power, to the OFAC pool on May 1 and mined its first block on May 5, Bitcoin block 682170. That block’s transaction fee reward, 0.05 BTC (worth less than $3,000 at the time) is substantially less than the fees collected in the blocks before or after it (both of which were 0.31 BTC or ~$17,800). Block 682172 included 0.48 BTC for nearly $28,000.

BitMEX Research’s diagnosis notes that the block “contained 0.00330944 BTC less transaction fees than expected.” The block excluded a number of transactions that BitMEX’s own hypothetical template would have included, which “could indicate censorship,” the post said. 

Interestingly, it also included many transactions that BitMEX’s model excluded because their fees were too low to be considered a priority. That could indicate “out-of-band payments” for the fee, BitMEX says, which are under-the-table payments that are not included in the payer’s transaction.

If Marathon is not receiving out-of-band fees, then so far its “compliant” blocks are netting significantly less in transaction fees. That portion of the block reward has become increasingly important for miner profits as bitcoin’s block subsidy has dwindled to its current rate of 6.25 BTC per block and demand for bitcoin has grown.

Marathon’s block occurred only a minute after the one before, which could explain the block’s lower fee reward and transaction count. Marathon, however, still used it to censor transactions that, for other miners, would have gone through.