And as we all know, 24/7 crypto markets are often vulnerable to market manipulation. Traders have been known to buy and sell for themselves to create the appearance that there is demand for their assets. This is called wash trading. Other traders have so much Bitcoin concentrated in one or two wallets that if they move large amounts of it at once, the entire market is changed. These traders are called “whales.”
So the SEC conducted an experiment. It wanted to find out whether futures markets were actually good at predicting price. If this were the case, discrepancies would alert regulators to strange trades. Futures traders would watch for wash trading or changing their futures bets when whales move.
Using hourly and minute-by-minute data from crypto exchanges Kraken and Coinbase on the BTC/USD pair, the SEC compared it to the CME's Bitcoin futures contracts with the next expiration.
And over a two and a half year period, the SEC found that the futures markets were pretty good. The correlation between the two was 98.4 percent for hourly data, 94.2 percent for five-minute interval data and 76.9 percent for one-minute interval data.
This, the SEC said, provides “empirical evidence” that prices “move in close (although not perfect) consistency between the spot market and the CMR Bitcoin futures market.”
This is helpful because the SEC says manipulation in the spot market would likely be picked up by the futures markets. And thanks to the close surveillance data-sharing relationship between the Commodity Futures Trading Commission, which licenses the CME, and the SEC, they could respond quickly.
Therefore, the SEC said the futures market “can reasonably be expected to assist in monitoring for fraudulent and manipulative acts and practices” that may be associated with the currently active and traded spot Bitcoin ETFs.
In Australia we do not have a Bitcoin futures market. We have futures traders betting on everything from iron ore to coal to carbon credits, but not Bitcoin. And without a Bitcoin futures market, ASIC may have to find another way to be alerted to market manipulation.
This will not necessarily impact the spot Bitcoin ETF applications that Monochrome Asset Management and DigitalX have submitted to the ASX. These funds are quite uncomplicated in that the ETFs are backed one-to-one by real Bitcoins.
However, over time, ETFs tend to become more complicated. Some could be bundled partly in cash and partly in cryptocurrency. Others may start by adding a basket of different cryptocurrencies that serve different functions.
In a world where products are being launched and spat out at breakneck speed, a liquid and accurate futures market could prove a handy addition to the regulator's toolkit.
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