Here's why the SEC keeps rejecting spot Bitcoin ETF applications

This is not the first time that the United States Securities and Exchange Commission (SEC) has rejected proposals for a Bitcoin cash exch...

This is not the first time that the United States Securities and Exchange Commission (SEC) has rejected proposals for a Bitcoin cash exchange-traded product (ETP), but efforts continue to be made by different financial institutions. . The recent attempt by Cboe BZX Exchange on January 25 to list the Fidelity Wise Origin Bitcoin Trust as a Bitcoin ETP also failed.

The SEC letter published on February 8, pointed out that the exchange had failed in its obligation to demonstrate that the fund was “designed to prevent fraudulent and manipulative acts” and “to protect investors and the public interest”.

Although Bitcoin spot ETP proposals have never been approved by the SEC and such products are not available in the US market, they do exist in the European market. By investigating the prices of ETPs traded in the European market, one could get a good idea of ​​the possibility of fraudulent acts and manipulation.

To determine whether the SEC’s concerns about fraudulent and manipulative acts are justifiable, this article will compare the historical prices of three European-listed ETPs and the Bitcoin spot price history of 18 exchanges to see if there are any discrepancies in price. significant prices that could induce market manipulation.

The main concerns of the SEC

From a technical standpoint, the SEC raised two major concerns with BZX Exchange’s proposal:

(1) No data or analysis has been provided to support the claim that arbitrage between bitcoin platforms helps keep global bitcoin prices aligned with each other, preventing manipulation and eliminating any price difference. between markets. There is no indication of how closely aligned Bitcoin prices are across different Bitcoin trading venues or how quickly price disparities can be arbitrated.

(2) The exchange does not demonstrate that the proposed methodology for calculating the index would render the proposed ETP resistant to fraud or manipulation. Specifically, the exchange has not assessed the possible influence that spot platforms not included among the constituent bitcoin platforms of the index would have on the bitcoin prices used to calculate the index.

To see if the above problems exist and if acts of manipulation are possible within ETPs listed on European markets, historical data (from Google Finance) of the following three ETPs listing at SIX Swiss Exchange are compared with Bitcoin spot price from exchanges (data from Cryptowatch).

  • WisdomTree Bitcoin ETP (BTCW-USD)
  • 21Shares Bitcoin ETP (SWX:ABTC-USD)
  • Physical ETP BTC Coinbase (SWX:BITC-USD)

Correlation Between Bitcoin ETPs and Spot Price Suggests Price Disparities Exist

As described in the BZX Exchange proposal, the index calculation will be based on the volume-weighted median price (VWMP) over the previous five minutes from five exchanges – Bitstamp, Coinbase, Gemini, itBit and Kraken..

In a very simple and basic attempt to replicate the index calculation with best efforts, daily spot prices from four of the five aforementioned exchanges – Bitstamp, Coinbase, Gemini and Kraken – are used.

Since the Bitcoin ETP price scale is often different from the Bitcoin spot price, the daily percent change (or daily return) is used in all charts to help compare price disparities.

The charts below show the comparison of daily returns between each of the three ETPs and the aggregate spot price of Bitcoin, calculated from the four exchanges using the volume-weighted median method.

The left scatterplot shows how closely the ETP price is aligned with the spot price. If the two are perfectly aligned, all the points should fall on the blue dotted line. The graph on the right compares the daily return percentage and also plots the difference between the two.

Comparing WisdomTree ETP and Spot, although most points in the scatter plot cluster within the +/-5% radius, there are certainly significant price disparities outside of this radius. On one day during the three-month period, the difference in daily return (blue dotted line) between the ETP and the spot price exceeded 10%.

Bitcoin spot of 4 exchanges against WidsdomTree ETP (% change). Source: Cryptowatch

It is also interesting to note that the volatility of the percentage change in the price of ETPs tends to be higher than the spot. The graph below comparing Coinbase Physical Bitcoin (blue line) and Bitcoin spot (pink line) shows that the percentage change of the first could reach almost 15% while the second only exceeded 10%.

Spot Bitcoin from 4 exchanges against Coinbase Physical Bitcoin (% change). Source: Cryptowatch

Similarly, the price of 21Shares Bitcoin ETP is also more volatile than the spot and the correlation with the spot is lower (62%) than that of WisdomTree (67%) and Coinbase Physical Bitcoin (66%).

Spot Bitcoin from 4 exchanges against 21Shares ETP (% change). Source: Cryptowatch

The price comparisons presented above suggest that there are price differences across markets between the ETP price and the Bitcoin spot price of the exchanges. Price discrepancies were not arbitrated quickly enough to prevent acts of manipulation.

However, it is important to stress that this is only a very rough comparison using daily data. The difference in price may be due to the different cut-off times that each ETP uses to calculate the end-of-day price, i.e. exchange-traded products do not trade over 24 hours like the spot price of cryptography; they trade during the Exchange’s normal trading hours of 9:30 a.m. to 4:00 p.m.

Also, in practice, a much higher frequency will be used to calculate the index price, i.e. BZX Exchange’s proposal suggests calculating the index price using data from previous five minutes of five exchanges and update the Intraday Indicative Value (IVI) per share every 15 seconds. The analysis performed here only uses daily aggregate data to represent the index price and may not reflect the actual index price when using high frequency data.

It should be noted that while price discrepancies can be observed between ETPs and the spot price using daily data, the price discrepancies between ETPs themselves are much smaller, as shown in the charts below. -below.

Scatterplot of price differences between ETPs. Source: Cryptowatch

It is very likely that these ETPs listed on the same exchange all use the same frequency and cut-off time to calculate their prices; therefore, the price differences are smaller between them. This reinforces the fact that price disparities between the spot price of Bitcoin ETP and Bitcoin could stem from the frequency and cut-off time used in the ETP index calculation methodology, which cannot be reproduced in exactly the same way in this analysis.

Spot price differences between exchanges are minimal

In the first point of concern mentioned at the beginning of the article, the SEC also asked how aligned Bitcoin prices are across different Bitcoin trading venues.

Based on BTC/USD cross-platform data collection from 18 Cryptowatch exchanges, exchange price disparities are very low. As an example to show how closely the prices align with each other, Coinbase, Gemini and Bitstamp are compared to Kraken and the correlation between each pair is very close to 100%.

The SEC is also concerned about the possibility of influence and price manipulation by spot platforms that are not constituents of the index. If Bitcoin prices on other platforms are significantly different from the four constituent platforms, market manipulators Bitstamp, Coinbase Gemini, and Kraken could seek to exploit the disparities for profit.

To see if there are any price disparities between the four platforms and the rest, the bottom right chart below compares the aggregate volume-weighted median price of the four platforms with the aggregate price of all 18 scholarships. The almost perfectly aligned line shows that there is almost no difference between the two. Spot platforms do not have large price disparities and prices are closely aligned across different Bitcoin trading venues.

Scatter plot for price disparities between exchanges. Source: Cryptowatch

With such great similarity in daily prices, acts of manipulation will be very difficult across exchanges. However, price manipulation can still occur intraday, but this is beyond the scope of this analysis due to the lack of high-frequency intraday data.

Based on the analysis of the three ETP prices listed on the SIX Swiss Exchange and Bitcoin spot prices from 18 exchanges, it appears that there are price disparities between the ETP and the spot. This could potentially lead to acts of price manipulation of the ETP index, although plaintiffs have frequently claimed that the index’s sophisticated calculation methodology prevents such acts.

The SEC’s concerns about fraud and manipulation seem justified given the price differentials between these listed European ETPs and the spot price. That said, the difference could be caused by the daily frequency of data used in this analysis, which is different from the high frequency data used in practice.

On the contrary, no significant price disparity can be found between different Bitcoin trading platforms. Although spot markets on these platforms are more decentralized and less regulated than traditional exchanges, malicious price manipulation on these platforms could still be very difficult.

Considering the large number of centralized and decentralized, regulated and unregulated crypto exchanges, proving pricing efficiency and similarity between them is extremely difficult. US ETP plaintiffs still have a long way to go to convince the SEC.

The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Every investment and trading move involves risk, you should conduct your own research when making a decision.