Bitwise Chases America’s First Bitcoin ETF

As the decision date for a Bitcoin ETF enters the home stretch, Bitwise Asset Management is pulling out all stops to convince the SEC that crypto markets are ripe for a fund.

Over the course of two weeks recently, senior executives from the San Francisco-based firm made presentations to and educated senior SEC officials, including commissioners and senior SEC lawyers, about the current state of crypto markets. Their presentations were made public by the federal agency earlier today and are available here.  

Bitwise filed for a physically-settled Bitcoin ETF in January this year. But it has yet to receive approval. The SEC has kicked the ETF can down the road due to a range of concerns, from lack of transparency in crypto markets to the absence of industry regulation.

A decision on Bitwise’s filing is expected on or before October 13.  

Producing Research to Support ETF Application

Bitwise has produced reams of research to support its application and convince regulators about the legitimacy of cryptocurrency markets. Its most-widely cited report was released in May. The report estimated that 95% of the total volume reported at cryptocurrency exchanges was fake.

The process of creating it started with basic questions about the crypto ecosystem. One of them was about swirling rumors of fake volumes at cryptocurrency exchanges. Another had to do with the perception of cryptocurrency markets being disorderly and criminal in mainstream media.

“…the (cryptocurrency) market we experienced as operators was extraordinarily efficient and institutional in quality, while the market as reported in the media was anything but,” says Matthew Hougan, Global Head of Research, at Bitwise and a veteran of the ETF industry.

To answer these questions, Hougan assembled a team consisting of four to six people. They worked long hours, collecting and collating information, and using 83 different screen-scraping tools to capture data from exchanges with and without APIs (Application Programming Interfaces, which are used to scrape publicly-available data about tokens listed there).

“A lot has transpired since then,” says Hougan, referring to the development of new infrastructure solutions and flow of institutional investors towards the market. Bitwise itself has bolstered its ETF application, adding an administrator and custodian, marketing agency, and an auditor for the offering. It also stopped tracking crypto prices at Hong Kong-based Bitfinex after the New York Attorney General (NYAG) filed a case against it.  

A Time of Change in Cryptocurrency Markets

While they have produced research highlighting fake volumes in cryptocurrency markets, Hougan and his team had a different mission during their latest visit to the SEC. They wanted to rid the agency’s officials of misconceptions about crypto markets.

Hougan says the widespread belief that cryptocurrency markets are an unregulated wild west of volatile price swings is false. “The data suggests that this is not true,” he said. As example, he pointed to the whittling away of price differences for Bitcoin at the top ten cryptocurrency exchanges tracked by Bitwise.

Differences in the original cryptocurrency’s price between these exchanges were as much as one percent during the height of crypto mania in 2017. Now they are as little as 0.07 percent (implying that investors are arbitraging away the differences), says Hougan.

The emergence of a futures market for cryptocurrencies and entry of large market-makers, such as Jane Street and Flow Capital, has also contributed to an overall order. “We now have a two-sided market with the Big Boy traders in there, squeezing out inefficiencies in the market,” he says. 

A Case of Limited Regulatory Clarity

Still the “Big Boy” traders are trading in a market limited in potential. This state of affairs is mostly due to the regulatory uncertainty associated with cryptocurrencies.

Even as it encouraged greater transparency in the crypto ecosystem, the SEC has reserved comment on the status of tokens or coins used on blockchain platforms. Only Bitcoin and Ethereum’s Ether have received regulatory clearance from authorities.

Other prominent cryptos, notably Ripple’s XRP, are still swimming in a sea of uncertainty. A negative remark from SEC officials has the potential to drastically reduce valuations or, in some cases, regulate these cryptoassets out of existence.

Bitwise has taken a studied approach to the markets for cryptoassets. Apart from filing for a Bitcoin ETF, the firm has launched funds dedicated to tracking Bitcoin and Ethereum prices. These are open to accredited investors. It also has indices for the top 10, top 70 and top 100 cryptocurrencies used by other industry participants.

Hougan says it is important to separate remaining cryptoassets from Bitcoin. “They are different categories,” he says, explaining that there is a large, regulated futures market for Bitcoin at the CME. “At least from an ETF perspective, one of the things that the SEC has said is that having a significant regulated derivatives market could be helpful in gaining comfort with a bitcoin ETF. No other cryptoasset has that.”

An Incremental Advance

While Bitwise waits for a Bitcoin ETF decision, one of the other applicants has moved on. VanEck and SolidX, who had also applied for a Bitcoin ETF, recently launched a fund, described as a “Bitcoin ETF-like” in mainstream media, and targeted at Qualified Institutional Buyers (QIB). This means that the fund is open only to entities that have large amounts, typically $100 million, under management. 

Hougan says the fund’s launch is an “incremental advance for those lucky enough to have $100 million for investment.” To be sure, the Grayscale Bitcoin Investment Trust Fund (GBTC) is already available for those interested in making profits from Bitcoin trading. But GBTC, which trades in OTC markets, has a hefty premium attached to it. Hougan says VanEck’s fund, which does not have the wide price disparity of GBTC, functions as an alternate investment vehicle to investors hungry for exposure to Bitcoin.

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