Bitwise (vis NYSE) filed (again) a 19b-4 just now for a “GLD for bitcoin”-style physical ETP — one that would actually own bitcoin. That in itself isn’t news: At this point, so many people have filed and withdrawn those types of applications, it’s hard to even keep track. The 19b-4 is the real “mother-may-I” for any of these types of products — it’s the permission to list and trade, essentially, when the 1940 Act isn’t involved. It’s the research bomb Bitwise dropped that’s the real story: 150 pages of detailed analysis on bitcoin trading. And it may actually point towards a bitcoin futures ETF launch sooner rather than later.
I wrote about the issues with a potential bitcoin futures ETF on Tuesday. I won’t rehash it here; however, one of the reasons that the SEC has been foot-dragging on any kind of bitcoin ETF is that they’re concerned about the price and market structure impacts from a theoretical flood of money showing up in any version of a bitcoin ETP.One of the many ways the SEC has endlessly kicked the can down the road is by giving issuers big, long checklists of things they have to prove.
Bitwise, one of the dozen or so folks now in the race, just attached 130 or so pages of research to answer two questions (which are likely verbatim questions/topics that SEC staff had asked them in private communication, or in some public communication I have not had enough coffee to find.) Here are the two titles, which link directly to the PDFs:
Both papers are dated June 11, 2021, which likely means that while we’re just seeing these now, the staff has had them for months. That’s actually a good thing for a bitcoin ETF’s odds of approval. Eagle-eyed filings watchers have noted a bunch of last minute updates to the existing filings, in addition to Bitwise’s today, and those last minute “rearing in the chute” adjustments are pretty common in these situations.
This time, however, the change includes a giant data dump of how bitcoin futures and price discovery are actually working. I’ll paste the conclusions and some thoughts below.
Conclusion #1: Bitcoin Products “Unlikely” To Drive Futures Prices
From the “Is it likely…” paper:
Drawing on 30 years of data on U.S. ETPs, as well as the direct experience of a publicly traded bitcoin trust that is accessible through the brokerage window, we conclude it is unlikely that a bitcoin ETP would become the predominant influence on prices in the CME Market.
My thoughts: This paper is focused squarely on the question of, “If a ton of money swarms a BTC ETP, will it become the tail wagging the dog in CME futures, the one regulated market for bitcoin?” Bitwise’s objective here is to get the physical ETP approved, and the point they’re trying to make here is “Puhleeeeze… no way.”
I’d say the data here is as solid as it could be, given the hypothetical, and, if nothing else, it’s a great data dump on how big flows days into the Grayscale Bitcoin Trust (GBTC, which is not an ETF) and the SPDR Gold Trust (GLD, which is an ETF!) have–or more importantly, have not–pushed around the underlying prices. It also includes some then-recent analysis of how non-U.S.-listed products have (not) pushed prices around. Great stuff here, worth reading.
Conclusion #2: Bitcoin Futures Lead Price Discovery Compared To Spot Bitcoin
From the price discovery paper:
The results show that the CME bitcoin futures market leads the bitcoin spot market in a
significant fashion … These findings are, perhaps, unsurprising. Futures markets often lead price discovery when compared to spot markets.
My thoughts: This is totally true. In traditional commodities futures, “the market” is really the futures market. That’s a huge overstatement, of course; elevator costs for wheat do still matter. But on-volume, the real action is in the futures.
I think this paper — largely an academic survey of a lot of other work I had not yet read — proves the above about as well as you can prove any academic finance hypothetical. It walks through 10 other studies, discussing their pros and cons, and then backs that up with a ton of additional data and analysis. Read it and make your own conclusions, but I found it fairly compelling.
Big money in CME trading is what pushes bitcoin around on big money days. That’s important, because “price discovery” is a big bugaboo for the SEC, and putting a pin in it is helpful. The SEC wants price discovery to happen on a surveillance-friendly, regulated market. Well, here you go, SEC. Done. If you don’t believe this paper, it’s on you to disprove it now.
Will This Research Matter?
Like I said, Bitwise is going for the big game here — a physical bitcoin ETF — and clearly they’ve been doing the legwork with the SEC to back up their efforts. Does the SEC care “who does the work” or “who’s in first?” Who knows. Have other issuers done tons of work we haven’t seen yet? I’m sure they have.
One thing I feel confident of, however, is that none of this serves as any kind of “public pressure” on the SEC. I think the SEC is largely immune to public opinion. But I do think having this nice and tight research out there and available is a bullish sign, because it means the conversation is happening at a serious level — and has been for some time. Ironically, it may move the needle more (at least at first) for a bitcoin futures ETP approval, rather than the physical product Bitwise is hoping for.
But hey, take the Ws if they come, right?
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