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New bit-wise Bitcoin filing drops a research bomb

Bitwise (vis NYSE) has just (again) submitted a 19b-4 for a physical ETP in the “GLD for Bitcoin” style – one that would actually own Bitcoin. This is not news in and of itself: so many people have made and withdrawn such requests at the moment that it’s hard to keep track of them. The 19b-4 is the true “mother-can-me” for any of these types of products – it is essentially listing and trading permissions when the 1940 Act is not involved. It is the research bomb Bitwise dropped that is the real story: 150 pages of detailed analysis of Bitcoin trading. And it could actually point to a launch of Bitcoin futures ETFs sooner rather than later.

I wrote about the problems with a potential Bitcoin futures ETF on Tuesday. I’m not going to warm it up here; However, one of the reasons the SEC is hesitant about any type of Bitcoin ETF is because it is concerned about the impact on price and market structure that results from a theoretical flood of money that appears in every version of a Bitcoin ETP One of the many ways the SEC has endlessly put the can off the beaten track is to give issuers big, long checklists of things to prove.

Bitwise, one of about a dozen people in the running right now, has only attached about 130 pages of research to answer two questions (which are likely literal questions / topics SEC staff asked them in private communication or in a public communication didn’t find enough coffee.) Here are the two titles that link directly to the PDFs:

Is it likely that a US bitcoin ETP, if approved, will have the predominant influence on prices in the CME bitcoin futures market?

Pricing in the Modern Bitcoin Market: Examining the Lead Lag Relationships Between the Bitcoin Spot and the Bitcoin Futures Market

Both papers are dated June 11, 2021, which likely means employees have only seen them now but have had them for months. This is actually a good thing for a Bitcoin ETF’s chances of approval. Eagle-eyed watchers have noted a number of last-minute updates to the existing filings, in addition to Bitwise today, and these last-minute adjustments “on the slide” are pretty common in these situations.

This time around, however, the change involves a huge dump of data on how Bitcoin futures and pricing actually work. I’ll include the conclusions and some thoughts below.

Conclusion # 1: Bitcoin products are “unlikely” to drive futures prices

From the paper “Is it likely …”:

Based on 30 years of data on US ETPs as well as the direct experience of a publicly traded Bitcoin trust accessible through the brokerage window, we conclude that a Bitcoin ETP is unlikely to have the predominant impact on the Would exercise prices in the CME market.

My thoughts: This paper focuses directly on the question, “If a ton of money is raving about a BTC ETP, will it be wagging its tail in CME futures, the only regulated market for Bitcoin?” Bitwise’s goal here is to get the physical ETP approved and the point they are trying to make here is “Puhleeeeze … no way”.

I would say the data here is as solid as it could be given the hypothesis, and if nothing else, it’s a great data dump on how many days go into the Grayscale Bitcoin Trust (GBTC which is not an ETF) and that SPDR Gold Trust (GLD, which is an ETF!) Have – or, more importantly, not – moved the underlying prices. It also includes some up-to-date analysis of how non-US listed products (did not) drive prices up. Great thing here, worth reading.

Conclusion # 2: Bitcoin Futures Lead Price Discovery vs. Spot Bitcoin

From the pricing paper:

The results show that the CME bitcoin futures market beats the bitcoin spot market in a. leading
Major fashion … These results may not come as a surprise. Futures markets often lead at the top of pricing when compared to spot markets.

My thoughts: This is absolutely correct. In traditional commodity futures, “the market” is actually the futures market. This is, of course, a huge exaggeration; Wheat elevator costs still play a role. But the real action in the future lies on the volume.

I think this paper – largely an academic synopsis of a lot of other work that I hadn’t read before – proves the above as well as any academic finance hypothesis can prove. It goes through 10 more studies, discusses their pros and cons, and then backs it up with a lot of additional data and analysis. Read it and draw your own conclusions, but I found it pretty compelling.

Big money in CME trading is what Bitcoin is doing on big money days. That’s important because “pricing” is a big bugaboo for the SEC, and sticking a pin in it helps. The SEC wants pricing to take place in a surveillance-friendly, regulated market. Well, SEC. Complete. If you do not believe this paper, now is the time to refute it.

Will this research matter?

Like I said, Bitwise goes into the big game here – a physical Bitcoin ETF – and they clearly did the leg work with the SEC to support their efforts. Does the SEC care about “who does the work” or “who comes first?”? Who knows. Have other emitters done tons of work that we haven’t seen yet? I am sure you have.

However, I am confident that none of this will serve as “public pressure” on the SEC. I think the SEC is largely immune to public opinion. But I think having this nice and close research out there and available is an optimistic sign because it means the conversation is on a serious level – and has been for a while. Ironically, it could (at least initially) move the needle for Bitcoin futures ETP approval more than the physical product Bitwise is hoping for.

But hey, take the Ws when they come, right?

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