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There was a lot going on last week. All agree that the content of our Invest: NYC event was original and compelling – videos are up here. And in the links below you’ll see that new product launches were flying thick and fast.
In THE BRIEFING this week, Dave Weisberger of CoinRoutes lays out why he believes that the SEC is wrong to deny a bitcoin ETF. Given their recent decision to review their rejection of the Bitwise ETF proposal, let’s watch this space.
Read on…
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David Weisberger, co-founder and CEO of CoinRoutes, brings to cryptoasset markets more than 30 years of experience in building desks and businesses at the intersection of finance and technology. The opinions expressed in this article are his, and do not reflect CoinDesk’s position.
The Case For a Bitcoin ETF
Issuers have submitted proposal after proposal for a bitcoin-based exchange-traded fund (ETF), and the SEC has delayed or rejected each one. It’s time, however, to ask why and if the SEC’s frustration over not having jurisdiction over cryptocurrencies is clouding their judgement. In my opinion, the answer might well be yes.
To start, it is important to recognize that there is a lot of investor interest in bitcoin as well as other digital assets. Nothing the SEC can do will diminish that, so the only relevant question is if a bitcoin ETF meets the standards for such a product and is consistent with other approved ETFs. That said, the SEC argues that bitcoin, despite having multiple markets that meet a reasonable standard for displayed price discovery, does not meet that standard.
From the disapproval ruling:
“Because, among other things, the Sponsor has asserted that 95% of the bitcoin spot market consists of fake and non-economic activity, but has not established that it has in fact identified the “real” bitcoin market, or that the “real” bitcoin market is isolated from the fraudulent and manipulative activity, we find, in each case, that NYSE Arca has not met its burden to demonstrate that its proposal is consistent with the requirements of Exchange Act Section 6(b)(5), and therefore the Commission disapproves this proposed rule change.”
Why not bitcoin?
This analysis has three main flaws: First, there are a number of bitcoin “exchanges” (1) that are subject to money services business or trust bank regulation with transparent order books and matching methodologies. There is no proof of “fake” trades at those exchanges and they comprise enough liquidity to be meaningful for the purpose of price discovery, as will be discussed later.
Second, ETFs have been approved for gold, silver and other precious metals where the underlying spot markets are demonstrably inferior to bitcoin. The precious metals spot market is almost completely negotiated. As a result, in the case of approved precious metals ETFs, the futures markets are the sole basis for price discovery of the ETF itself. Since there are now multiple regulated futures markets for bitcoin in the U.S., however, it is hard to understand the SEC’s logic in stating that there is insufficient price discovery from those futures markets.
Delving into the comparison deeper, it is important to recognize that the SEC has approved ETFs for gold, silver, platinum, oil and other commodities whose spot market is much more opaque than the market for bitcoin and whose markets are also susceptible to manipulation.
Unlike gold, where spot prices are loosely provided on disconnected websites and transactions happen on a negotiated (almost completely manual) basis, bitcoin pricing is provided by many markets running electronically available order books that are subject to various regulators. As a result, the spot crypto markets are far more transparent than those of spot commodities, with far more liquidity available at tighter spreads.
To put this into context, I checked several leading websites for buying or selling gold coins or rounds and the average spread between buying and selling was over 4%. It is certainly possible that for larger-sized orders the spreads might have been smaller, but it seems unlikely to have been much tighter. That contrasts with a bid-offer spread, inclusive of retail exchange fees for bitcoin, that averages well under 1%, even for order sizes as large as 500-1000 bitcoin (larger than an ETF creation or redemption unit). For example, as I write this, the per-coin cost to buy 500 bitcoin across regulated exchanges, net of (retail level) fees, is $8,491 (calculated using CoinRoutes software), while the per-coin cost to sell 500, net of the same fees, is $8,438 (2). Using our RealPrice mechanism, we could stream the price to redeem or create a full bitcoin ETF in real time, which is a level of transparency well beyond many underlying assets who have approved ETFs.
The third flaw in the analysis is that there have been many allegations of manipulation related to other commodities that already have ETFs, so it seems like the SEC is holding bitcoin to a much higher standard. It is particularly ironic that the SEC cited the possibility of manipulation in the commodity, considering the recent RICO case against precious metals traders. We must recognize that there is always the potential for manipulation, but the question the SEC should ask is if bitcoin is more subject to such behavior and if its markets are harder to surveil than other approved underlying assets. Once again, the answer is no.
Bitcoin has multiple regulated futures markets in the U.S., giving the CFTC similar jurisdiction as they have in precious metals, and, unlike precious metals, the spot markets have significant electronic (and therefore auditable) data on buyers and sellers. These markets represent a critical mass of transparent, displayed liquidity, which should be the defining characteristic for this decision. It ensures that there would be available data for the CFTC to utilize when there are allegations of manipulation.
Judgement aside
Before concluding, I would like to make two other points. First, it should not matter if the SEC is skeptical about bitcoin, of if they are worried that it will go to zero. The agency should not be determining what investments are good or bad, but rather if the information made available to investors, including market data, is accurate and fairly provided.
Second, despite the SEC’s insistence that it is protecting investors by rejecting these applications, the result is harmful. Retail investors that want to invest in bitcoin are driven towards fund products that have significant premiums to their net asset value. Such premiums could, of course, evaporate and hand investors larger losses than had they purchased an ETF. In addition, unsophisticated investors are using a variety of retail platforms to buy bitcoin that charge significantly higher fees or spreads that would likely be offered via an ETF, and feature less investor protection regulation by a wide margin.
Finally, it is important to address the SEC’s contention that “fake” or manipulated markets outside of the U.S. represent a problem for a bitcoin ETF. This is simply wrong. The markets they reference can be excluded from calculations of available liquidity and price. In fact, many commodities trade at different prices in other parts of the world, but those prices are ignored by U.S.-issued ETFs.
In conclusion, I believe that the SEC, perhaps due to its bias against the asset itself, is improperly delaying an ETF approval. Considering the availability of real-time, fully priced liquidity, using only markets that are regulated in the U.S., as well as the existence of multiple CFTC-regulated futures markets – the time is now.
(1) Exchanges is what the markets call themselves, but they are not exchanges in the SEC definition of the term.
(2) Using CoinRoutes cost calculator and retail fee tiers at all exchanges accepting US clients. Exchanges used in this example were Coinbase Pro, Kraken, Bitstamp, itBit, SeedCX, ErisX, Bittrex, Binance.US & Gemini.
– Dave Weisberger
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* never enough time - I've starred six especially compelling links, but do check out the rest when you can!
***RECAP FROM INVEST: NYC***
If you couldn’t make our investor-focused event Invest: NYC last week, or if you did and (most likely) couldn’t make all the panels you wanted to, help is at hand – you can see all the videos from the main stage presentations here.
BIG IDEAS
*Investing in Bitcoin: The Asset Allocator’s Perspective (Byrne Hobart) – On Schelling points, safe haven assets, potential valuation methods and bitcoin’s risk characteristics.
*Bitcoin And The ‘Great Wealth Transfer’ (The Rhythm of Bitcoin) – Millenials will have a greater say in how finance evolves than most of us realise, and almost 20% own bitcoin.
Why Do Crypto Investors Focus So Much on Equities / Recession? (Arca) – When expectation becomes more powerful than value…
An Open Letter to Ray Dalio re: Bitcoin (Robert Breedlove) – What even investment experts get wrong about a decentralized, sovereign store of value.
*2019 Crypto Trends (CoinShares) – The presentation given by Meltem Demirors at our Invest: NYC event last week, packed with good graphics as well as useful big-picture and intriguing small-detail information.
PayPal’s Axing of Pornhub Model Payments May Boost Crypto Conversions (CoinDesk) – This type of “selective access” to payment services highlights a potentially important use case of crypto currencies.
WATCH: Coinmine Adds Interest Payments to Its At-Home Crypto Miners (CoinDesk) – Further evidence of emerging yield in crypto currency holdings.
Avi Felman lays out the “best” and “worst” case scenarios for bitcoin performance.
Willy Woo shares a big-picture look at bitcoin’s role, value and potential evolution.
MARKETS
Crypto Derivatives: A Corner of the Market or the Market Itself? (CoinDesk) – Emmanuel Goh, CEO of derivatives analytics platform skew., shares his view of crypto derivative evolution, and what that says about the sector overall.
What the CFTC Chairman Actually Said About Ether Futures and Ethereum 2.0 (CoinDesk) – Yes, ether _might_ be considered a security after the switch to proof-of-stake, although many believe the shift would make the network even _more_ decentralized.
*A History Of Crypto Exchanges: A Look At Our Industry’s Most Powerful Institutions (Nomics) – It’s important to appreciate the retail roots of and the innovation behind the current crypto exchange landscape.
Tagomi and Coinbase have held acquisition talks, and insiders say it's a perfect match (The Block, paywall) – A merger could boost Coinbase Pro’s market share among active traders, and strengthen Tagomi’s balance sheet, making it a more effective prime broker.
Bakkt Expands Bitcoin Custody Service Beyond Futures Trading Clients (CoinDesk) – Pantera Capital, Galaxy Digital and Tagomi have already signed on as initial customers for “Bakkt Warehouse,” with other “marquee firms” expected to join over the next few weeks.
China Is Poised for Another Crypto Trading Crackdown as Speculative Fever Returns (CoinDesk) – As many pointed out at the time, their “blockchain is good” announcement didn’t have much to do with crypto assets.
No, Royal Bank of Canada Isn’t Opening a Crypto Exchange (CoinDesk) – Contrary to media reports, a spokesperson confirmed that recent patent applications filed by the bank do not indicate any intention to actually launch an exchange.
NEW PRODUCTS
Bakkt in Discussions to Offer Cash-Settled Bitcoin Futures in Singapore (CoinDesk) – The ICE-backed bitcoin futures exchange intends to expand from its current physically-settled offerings to cash-settled futures before 2020, through ICE Clear Singapore, although global customers will be able to access the product.
CME sets date for options product tied to its bitcoin futures (The Block) – Pending regulatory approval, the regulated derivatives exchange plans to launch the product on January 13, 2020.
CoinMarketCap rolls out new metric 'Liquidity,' aiming to fight fake trading volumes (The Block) – The metric looks at factors such as order-book depth changes and distance from mid-price, and will replace “volume” as the default ranking standard.
Swiss stock exchange SIX lists first income-generating crypto product, tied to tezos token (The Block) – Trading under the symbol AXTZ, the fund will bake/stake tokens on investors’ behalf and return the income via a dividend.
Bitcoin Miner Maker Canaan Sets $100 Million Target for US IPO (CoinDesk) – The Hangzhou, China-based manufacturer of the Avalon bitcoin miner aims to offer 10 million American depositary shares (ADS) with each at a price of between $9 and $11. Reports cite a launch date of November 20.
Fintech Arm of Chinese Insurance Giant Files for US IPO After Blockchain Push (CoinDesk) – SoftBank-backed OneConnect Financial Technology, the fintech arm of China’s largest insurance company Ping An Insurance, filed a prospectus to offer American Depository Shares on NYSE or NASDAQ, in a target raise of $100 million.
AlphaPoint’s White Label Tech Now Lets Crypto Exchanges Offer Margin Trading (CoinDesk) – According to the company, several firms are testing the platform, which is customizable, to account for different markets and regulatory regimes.
Chainalysis’ ‘Kryptos’ Tool Is an Inside Look for Outside Investors (CoinDesk) – The crypto forensics platform will help institutions parse regulatory hazards and build risk assessment models.
Binance Exchange Is First Client for Paxos’ New Dollar Gateway (CoinDesk) – Regulated blockchain company Paxos has launched a product allowing crypto exchange customers to more easily execute fiat/stablecoin swaps.
BitGo Offers Institutional Clients New Off-Chain Settlement System (CoinDesk) – The crypto custody provider is launching a new clearing and settlement service for institutional clients, which will ensure that assets never leave custody when being transferred, with BitGo acting as the custodian on either side of a trade, reducing counterparty risk.
ASX-Listed DigitalX Seeds New Fund With Half Its Bitcoin Holdings (CoinDesk) – The first ever cryptocurrency firm to be listed on a major stock exchange has launched a new bitcoin fund, to which it will contribute half of its bitcoin holdings at a market value of almost $1.9 million, with management fees of 1.65% and no performance fees.
PROFILES
*Bakkt’s custody ambitions could trigger market consolidation (The Block, paywall) – The outlook for the sector now that a well-funded institutional player has entered the space.
*The inside story of Binance’s explosive rise to power (Decrypt) – A well-written and gripping profile of the sector’s largest exchange in terms of volume.
As credit concerns loom in crypto, Blockchain.com secretly builds multi-million dollar loan desk (The Block) – Launched over the summer, the firm is now on track to lend over $120 million in November, bringing the total lent, traded or borrowed so far to $1.6 billion.
Two rival trading firms have sprung out of Circle Trade, which faces an uncertain future (The Block, paywall) – As former employees leave to set up their own trading desks, the future of Circle Trade is uncertain.
CRUNCHING NUMBERS
Vision Hill Crypto Hedge Fund Returns: Third Quarter 2019 (Vision Hill) – The firm’s indices show that crypto fund performance declined on average over 20% in the third quarter, with quant funds down only 9%; year-to-date crypto funds are up almost 30%, with fundamental, quantitative and opportunistic funds performing in line.
The Biggest Nightmare in Blockchain Analytics (IntoTheBlock) – “Deanonymization”, necessary for meaningful metrics analysis, is more about “what” you are than “who.”
Dissecting Bitcoin’s Unrealised On–Chain Profit/Loss (Glassnode) – How much of Bitcoin’s circulating supply is at any given point in time in profit or loss, and to what extent?
Analysis of volume per website visit indicates larger traders are re-entering the game (The Block, paywall) – Bitfinex and Bitstamp have the highest traded volume per visit, which either indicates larger clients or that a lot of the traders trade through APIs.
A Model of Supply and Demand for Bitcoin Value (Nick) – This assumes that demand is a function of time.
Chainalysis Says BitForex Trading Volumes Could Be Fake (CoinDesk) – An analysis of the number of times that each bitcoin, recorded entering the exchange on-chain, trades shows that BitForex’s volume is orders of magnitude greater than the average, which hints at questionable reported volume.
REGULATORS AT WORK
The SEC Is Reviewing the Bitwise Bitcoin ETF Rejection (CoinDesk) – According to the company, Bitwise did not request the review.
Wyoming’s New Crypto Banking Law Could Defang New York’s BitLicense (CoinDesk) – One of the recently enacted crypto-friendly laws allows the state to charter Special Purpose Depository Institutions, a new type of fully-reserved fiat bank that can also custody crypto assets and that might be able to operate in New York even without a BitLicense.
UK Law Panel Defines Crypto Assets as Property (CoinDesk) – The UK Jurisdiction Taskforce of the Lawtech Delivery Panel has published a legal statement recognizing crypto assets as "tradable property" under English and Welsh law; it also defines smart contracts as "enforceable agreements" under English law.
SECURITY TOKENS
BnkToTheFuture CEO: 50 Percent of Funding Will Be Through Security Tokens in 2020 (CoinDesk) – The online investment platform will expand its security token offering business to the U.S. with the acquisition of an undisclosed stake in BMI Capital International’s holding company.
STABLECOINS
Stablecoin Crisis Could Wreck Global Finance, Fed Warns in New Report (CoinDesk) – In its semiannual “Financial Stability Report”, the U.S. Federal Reserve Board expressed concerns that an operational or financial problem with a stablecoin could trigger a “run”, which could weaken asset values and collateral across the board.
PODCASTS
FUTURES RADIO SHOW: Anthony Crudele talks to Mark Lamb, CEO of CoinFLEX, about the global crypto derivatives market, its growth and the impact of stablecoins.
BASE LAYER: David Nage interviews Haseeb Qureshi of Dragonfly Capital about investment theses, use cases and “protocol wars.”
CHAIN REACTION: Tom Shaughnessy chats to Ryan Selkis, founder and CEO of Messari, about crypto data, the need for metrics and the advantages of decentralized information.
STATE OF CRYPTO: The Amun team talks to Richard Muirhead, founding partner at Fabric Ventures, about the dynamics of open source governance for crypto assets.
THE SCOOP: Frank Chaparro chats to Paolo Ardoino, CTO of Bitfinex and Tether, about transparency, derivatives and market manipulation.
A-HA!
"Controllable anonymity" (JP Koning) – China’s blockchain plans are not as dystopian as the media portrays; in fact, it has some nifty features.
"The Sovereign Individual" Investment Thesis (Phil Boniello) – Three fundamental economic shifts are under way: 1) the shrinking of global wage gaps, 2) digital money creates truly global markets, and 3) encryption feeds the growing need for “dissident technology.”
Dovey Wan dispels some myths about China’s relationship with cryptocurrencies.
Inside an Arctic Code Vault (Bloomberg, video) – This is kinda cool… or cold, depending on how you look at it.
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FUNDING
Winklevoss Capital, Galaxy Digital, Coinbase Ventures and others have backed a $1.8 million seed round for Bitski, which enables developers to embed a crypto wallet in their applications.
Crypto data provider Messari has closed a $4 million funding round led by Uncork Capital with new participation from Coinbase Ventures and former Coinbase CTO Balaji Srinivasan.
Lending protocol Compound Finance has raised $25 million in a round led by Andreessen Horowitz’s a16z crypto fund.
Tokai Tokyo Financial Holdings, a Japanese financial services provider, has invested approximately $4.6 million in exchange for a 4.8% stake in ICHX Tech, which will operate digital security trading platform iSTOX.
FIRMS
Big-name insurance broker Marsh has arranged a $150 million insurance policy from Lloyd’s of London syndicate Arch for users of crypto custody startup Ledger’s Vault technology platform.
Binance has added support for the euro and the Turkish lira to its direct fiat-to-crypto trading facility, bringing the number of currencies supported to six (the others are the Ukrainian hryvnia (UAH), Kazakh tenge (KZT), Nigerian naira (NGN) and Russian ruble (RUB). Over the next six-to-nine months, it plans to add support for over 170 more.
eToro’s crypto exchange has added five more native stablecoins: the eToroX Turkish lira (TRYX), Polish zloty (PLNX), South African rand (ZARX), Hong Kong dollar (HKDX), and Singapore dollar (SGDX).
PEOPLE
Fidelity has hired Michael Zinaman, previously managing director of blockchain and digital assets at Canaccord Genuity, to focus on the “big picture” and strategy for crypto operations.
ConsenSys chief strategy officer Sam Cassatt is stepping down to launch a new emerging technology venture fund, Aligned Capital, with the backing of ConsenSys founder Joe Lubin.
Benoit Coeuré, outgoing member of the executive board of the European Central Bank, is to lead a new global effort by the Bank of International Settlements to research the benefits of fintech such as digital currencies.
Dan Matuszewski, former head of trading at Circle, Bobby Cho, former head of trading at Cumberland, and Julien Collard-Seguin, a former technology executive at Circle, have partnered to form CMS Holdings, a proprietary crypto trading firm domiciled in the Cayman Islands.
Cryptocurrency exchange Bitstamp has hired Andrew Leelarthaepin, previously of JPMorgan Cash and Saxo Bank, to lead its expansion into the Asia-Pacific region.
Sarah Olsen, a managing director at Gemini who played a role in the exchange's stablecoin effort, has left the cryptocurrency exchange.
Have a tip? Drop me a line at [email protected]. |
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| We have a NEW WEBINAR for you, this time on crypto exchanges and liquidity. We'll talk to Catherine Coley, CEO of BAM Trading Services (Binance.US), and Sam Bankman-Fried, co-founder and CEO of Alameda Research and FTX, about crypto markets, launching new exchanges, where liquidity comes from and much more.
It's tomorrow, November 20, at 12pm ET. And it's free! Sign up here, and let us know what questions you'd like us to ask.
CRYPTO WEBINARS
Crypto podcasts have long been a staple of market education (see links above, for example), but I’ve noticed that there is a growing stable of informative webinars out there that don’t get enough air time in my opinion.
Here you have the crypto market webinars that I know about and that I think you might find interesting. If you’d like your webinar listed here, let me know at [email protected] (no guarantee of inclusion, though).
Crypto Market Data 101 – Nomics - Every weekday, 3pm ET
How to choose the right crypto-asset to invest in? – IntoTheBlock – Nov 20, 12pm ET
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