Bits and stuff: decisions, derivatives and decentralization – August 19, 2018

Yet again cryptoland enters ETF fever, although this time with a twist.

Barely a month after publicly dismissing the Winklevoss’ application for a bitcoin ETF, and just two weeks after postponing a pronouncement on the VanEck SolidX bitcoin ETF petition, next week the SEC is supposed to announce its decision two more proposed ETFs – ProShares Bitcoin ETF, and ProShares Short Bitcoin ETF.

These are different, in that the underlying asset in both is not bitcoin itself, but bitcoin futures. Specifically, the bitcoin futures that trade on CME and/or Cboe, two regulated markets.

A significant detail is that the futures in question are cash-settled. That is, no actual bitcoin changes hands, which removes the thorny problem of custody from the table.

That aside, will the transparency and oversight be enough to quell the SEC’s concerns of price manipulation?

Perhaps, but there’s another problem, quite a big one, that is likely to lead to a rejection: the relative lack of liquidity.

Although the bitcoin futures in question trade on regulated exchanges, the volume is still relatively low, about 7% of bitcoin volume. The concern is that, if the ETFs are well subscribed, they could dominate the futures markets.

Why is that bad? Concentration of volume in a handful of buyers and sellers is never good for a market’s reliability – erratic behaviour (for whatever reason) can produce volume spikes and price swings that could send ripples of uncertainty throughout the whole market, which is relatively volatile anyway.

Another factor against it is that it does not have measures to prevent retail investors from piling in. It’s unlikely that the SEC will be comfortable with that.

Obviously there are more issues taken into account than just these mentioned. And it will be illuminating to see what justification for a rejection the SEC chooses to stress.

(And who knows, maybe I’m wrong and it will get approved. But I don’t think so.)

One thing we can be sure of: the proposers of bitcoin ETFs are not going to give up easily. Nor should they. The barriers to approval will be worn down with time. And the first to market will enjoy not only massive publicity, but also a fair amount of demand.

As Winston Churchill allegedly said: “Success is going from failure to failure without losing your enthusiasm.”

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This article on ethereum-based collectibles by Brady Dale veers between the endearing and the ludicrous. You thought CryptoKitties were strange? Check these out. (I’m tempted by the dancing crystals.)


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The more I dig into bitcoin swaps, the more confused I get.

First of all, the ICE recently announced that it is developing an exchange that will allow regulated trading of bitcoin swaps. This was greeted with jubilation by the crypto media, because (finally!) institutions will have a regulated venue on which to get exposure to bitcoin.

Only, LedgerX has been doing this for ages. And they are regulated by the CFTC, as a registered swaps execution facility.

Why is the ICE idea so much “better”? I don’t know. Perhaps the liquidity will be higher? Perhaps because of name recognition?

And on the ICE proposal of 1-day swaps. If I understand it correctly, I commit to buying bitcoin tomorrow at a set price. How is this different from buying bitcoin with 1-day settlement? Delayed settlement is already a feature of most investment asset markets. This could be interpreted as a “reshaping” of bitcoin to suit institutional habits. While the inflow of liquidity would be good for the sector, it does seem to sort of defeat the point of bitcoin.

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I was on the Blockchain Insider podcast again last week! So much fun seeing Todd McDonald, Martin Bartlam and Anthony Macey again. Simon Taylor, as always, was a stimulating and original host.

BI ep 59

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Maybe it’s confirmation bias, but I’m seeing more thought going on about what decentralization means, and whether we really want it (or can achieve it in a socially acceptable form).

This tweet thread (with valuable external links) is definitely worth reading.

Meltem Demirors took Sarah’s analysis further:

And I’m looking forward to seeing the results of this, from Angela Walch:

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While not ostensibly about crypto or blockchain, this article by Zeynep Tufecki speaks to the dangers of not thinking about not thinking about longer term consequences of supposedly “liberating” technologies… (so maybe it is a bit about crypto).

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Bear market or not, the crypto sector has never been more interesting.

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