In their report ETF application to SEC, Bitwise dissected the data from the world’s top exchanges to make a point, that is, it is all fake.
Coinmarketcap daily volume on the day used in the report was about $6 Billion, however, Bitwise’s report examines that only $270 Million of this is actual volume. That means over 95.5% of total volume reported on the world’s top exchanges could be fake.
The report that runs over 220 pages, in the powerpoint slide deck format, is filled with amazing information. We definitely recommend Crypto enthusiasts to go through it.
Public sentiment is not in line with the truth
The fake volumes and the manipulation of data is what people focus on while the truth is, according to the report, “The Bitcoin Market Is More Orderly and Efficient Than Is Commonly Understood,” because, at the core of it, the 10 exchanges that report identifies to having actual trade volume showcase a “singular price.”
Furthermore, the bitcoin market also “More Regulated and Surveilled Than Is Commonly Understood,” according to the report.
General public perception of bitcoin and crypto markets is not in line with the facts and reality.
FinCEN has required Crypto exchanges to register as Money Service Businesses (MSBs) since 2013. This means, exchanges have similar, if not more stringent, list of obligations to comply with like any other financial institution.
In addition, Crypto Exchanges require BitLicenses to operate in a State like New York, which means, they have an even bigger list of obligations to comply with.
This indicates that the ‘authentic crypto exchanges’ have protocols in place to avoid any sort of unethical behaviors or illegal activities.
Special note: We have warned Crypto users about the need to report account details in a foreign crypto exchange on FinCEN Form 114. You can get the free guide here.
Bitcoin markets evolution over the past 18 months
Pointing out the fact that arbitrage has improved significantly over the past 18 months in the bitcoin market, the report lists out 3 major factors contributing to the change.
Factor 1: Launch of futures: Report points out the Federal Reserve Bank of San Francisco’s Economic Letter from May 2018 which traced the peaks in bitcoin prices in 2017 to the launch of bitcoin futures. Since that time, the market has an overall stabilized in terms of price action.
Factor 2: Entry of Institutional Market Makers: Entry of big-name institutions into the bitcoin space has contributed to bringing sophistication to the space.
Factor 3: Launch of institutional Bitcoin Lending: Genesis Global Capital processed over $1.1 Billion in crypto loans in 2018, which was not available in 2017.
These factors together have contributed to bringing institutional quality, “two-sided market” for the first time to the crypto space creating the idle situation for bitcoin ETFs, according to the report.
What does it take to get ETF Application approved?
Bitwise essentially has to demonstrate that it can satisfy Conditions of Exchange Act 6(B)(5) by showcasing:
- Bitcoin market is uniquely resistant to market manipulation
- The Exchange has Surveillance Sharing Agreement with bitcoin futures market of significant size
In the report, Bitwise’s presentation demonstrated why bitcoin market meets both these conditions, item by item.
1. Bitcoin market is uniquely resistant to market manipulation
“Bitcoin is the first digital commodity in the history of the world” report states making it the easy to compare against “other commodities in three important ways”:
Fungibility: No matter how or where you get your Bitcoin from, a “bitcoin is a bitcoin”
Transportability: Being digital – it can be transported anywhere in the world
Exchange tradability: Commodities need representatives, bitcoin doesn’t, “allowing for open price discovery.”
Together, these factors make the bitcoin market “uniquely resistant to manipulation,” the report concludes.
2. The Exchange has Surveillance Sharing Agreement with bitcoin futures market of significant size
Bitwise has devised a Net Asset Value (NAV) model that pulls data from the 10 most reliable exchanges with confirmed average daily volumes. This is different from previous applications which only pulled data from one or two sources.
On top of that, Bitwise has a ‘last minute’ fraud detection in place.
In addition, CME Futures price is derived from four exchanges: Bitstamp, Coinbase, ItBit and Kraken. These 4 exchanges are part of Bitwise’s NAV data gather.
Custody, the next big question in way of ETF approval
Bitwise addressed, in our opinion, eloquently the question of bitcoin custody.
“The Bitwise Bitcoin ETF Trust intends to use a regulated, insured, third-party custodian to custody its assets. This has been the gold standard for investment products for decades; we believe it should be the gold standard in crypto as well.”
Report also talks about the insurance space that has grown significantly to address the needs of the crypto custody market in the past few years.
Hard question: What about Hard forks?
Addressing the issue of hard forks in the context of The Trust handling bitcoin custody, Bitwise has proposed the position to use “the coin with the larger market capitalization is deemed to be the continuation of the original blockchain, and the lesser coin is deemed the forked coin.”
Bitwise plans to sell the hard forks coins and distribute the proceeds with its shareholders.
Bitwise has decided to not claim the airdrops at this point to simplify the ETF application process.
There is ample Liquidity
The bitwise report indicates that the entrance of major market makers into the crypto market has brought about the required liquidity needed for the bitcoin ETFs.
It sited following market makers in its report.
Binance still leads the charts
Another highlight in the report was Binance. Binance tops the list of top 10 exchanges with real volume.
Of the estimated 273 million dollars’ worth of actual volume, Binance dominates over $110 million, representing 40% of total actual volume globally.
This volume also represents 18% more average daily volume than the bitcoin futures volume on CME and CBOE, combined. Together CME and CBOE manage an average daily volume of $91 Million compared to $110 Million average daily volume on Binance.
In our view, Bitwise presented one of the most logical and articulated support for their ETFs in the application. It addressed all the previously raised questions and also addressed anticipated questions (hard fork/air drops, etc.).
It would be interesting to see if SEC approves this ETF or if it rejects this application as well, if so, on what grounds.
Thank you for reading this article.
Everything in this article is an opinion, not an advice of any kind. This material has been prepared for general informational purposes only and it is not intended to be relied upon as accounting, tax, investment, legal or other professional advice. Please consult with a professional for specific advice.
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About the author
RK Reddy holds two Masters degrees, one in Accounting and another in Business Administration with over 15 years of experience in the financial services industry.
RK Reddy is an ardent fan of Blockchain and Cryptocurrencies. You can see the excitement about this new technology in every article on Cryptotapas.com. Sometimes this excitement leads to an overly optimistic view. Guilty as charged. RK Reddy says “what may seem like an ‘overly optimistic expectation’ today may become an everyday norm in 5-10 years; look at the history of cars or airplanes, Blockchain and Cryptocurrencies belong to a similar frame of reference.” Of course, that is just his opinion.