BTC ETF's road to hope

Guide

ETF is a high-profile financial innovation in recent years. After more than 20 years of development, the total amount has reached more than 4,000 and the fund management scale is nearly 4.8 trillion US dollars. The application for the BTC ETF began in 2016, but why is the result always unsatisfactory?

Summary

An ETF is a fund that tracks changes in the underlying index and is traded on a stock exchange. Its essence is an open-end fund that can be freely purchased, redeemed, and real-time traded. It has the operating characteristics of closed and open-end funds, and has the characteristics of diversified investment risk, low transaction and management costs, and high transparency.

ETFs are a product of hedged investment risks in financial markets. In 1993, the American Stock Exchange introduced the Standard & Poor's Depository Receipt (SPDR S&P500), the industry's first true ETF. After entering the 21st century, ETFs entered a period of rapid development, and innovative products emerged in an endless stream. ETFs achieved double growth in both quantity and asset size.

In the past 20 years, ETFs have been enriched with products, and their coverage has gradually expanded from traditional wide-based index ETFs to styles, industries, and themes. At present, the current situation of the ETF market is relatively concentrated: from a regional perspective, the United States is the country with the highest number of ETFs and net assets. From the perspective of publishers, head companies dominate the number of ETF products and the size of their net assets.

The BTC ETF is an investment fund that is tracked by the BTC price as a target. It can be traded on the exchange freely and has the characteristics of an ETF product. The BTC ETF provides investors with a convenient access to the digital pass economy. Once approved, the BTC ETF will bring in $84 billion to $336 billion in new funding for the CIS market. Starting with the Winklevoss brothers in 2016, there have been dozens of BTC ETF applications submitted to the US SEC, but they have repeatedly failed.

We believe that the main reasons for the current frustration of BTC ETF applications are: implicit market manipulation risks, liquidity risks, lack of global market regulation and sharing mechanisms, and information opacity. In addition, issues such as the suspension of trading during the listing process, the “forking” behavior of the BTC during the operation, and the price changes of the BTC ETF to the BTC during its rest period have not yet been resolved by the issuer.

Risk warning: policy supervision, hacking.

table of Contents

1 ETF concept analysis

1.1 ETF: An Open Trade Fund

1.2 ETF: from risk, at risk

2 ETF development status

2.1 ETF classification: covering the day wide, gradually deepening

2.2 ETF market status: higher concentration

3 BTC ETF's tough road

3.1 BTC ETF: Open the golden key of the trillion market

3.2 Good things and more grinding: repeated defeats and hope stars

3.3 Difficult BTC ETF: How to solve fraud, manipulation and opacity

text

ETF is a high-profile financial innovation in recent years. After more than 20 years of development, it has more than 4,000 funds and a fund management scale of nearly 4.8 trillion US dollars. Since 2016, BTC has embarked on a long journey to apply for ETFs. However, frequent security issues, implied market manipulation risks, lack of global regulatory agreements, and opaque BTC information are still insurmountable on the BTC ETF application road. The mountain.

1

ETF concept analysis

1.1 ETF: An Open Fund

ETF (Exchange Traded Funds) is a fund that tracks changes in the “target index” and trades on stock exchanges.

ETF is an open-ended fund that can be freely purchased, redeemed, and traded in real time. ETFs combine the operational characteristics of closed and open funds. It is possible to buy and sell ETF shares in the secondary market like a closed-end fund, and realize real-time trading on the same day, and has the advantage of freely purchasing and redeeming open-end funds.

ETFs are characterized by diversified investment risks, low transaction and management costs, and high transparency. An ETF usually contains several investment targets, which can effectively spread the risk of a single target investment and reduce the fluctuation of the portfolio. In terms of transaction costs, ETF (≤0.3%) is the same as closed-end index funds, which is lower than open-end index funds (purchase rate 1.5%, redemption rate 0.5%); in terms of management fees, ETF 0.5% The administrative expenses are also lower than 0.5%~1.25% of open and closed index funds. At present, most ETF passive tracking index, fund holdings are transparent, and IOPV (fund share reference net value) is updated every 15 seconds in the session for investors to refer to.

1.2 ETF: from risk, at risk

ETFs are a product of hedged investment risks in financial markets. In 1987, the US stock market crashed. On October 19, the $500 billion in assets evaporated in an instant. The market urgently needed a trading mechanism that could effectively hedge the risk of stock portfolios. In 1989, the Toronto Stock Exchange, the largest stock exchange in Canada, launched index participation shares (TIPs) that tracked the Toronto Stock Exchange 35 Index (TSE-35). TIPS-35 attracts a large number of investors in the trading market and is recognized as the originator of ETFs. In 1993, the American Stock Exchange launched an ETF that tracks the S&P 500 index, the Standard & Poor's Depository Receipt (SPDR S&P500), the industry's first true ETF.

After entering the 21st century, ETFs entered a period of rapid development, and innovative products emerged in an endless stream. ETFs achieved double growth in both quantity and asset size. In 2000, the first bond ETF product, iShares DEX, was launched; in March 2003, the first commodity ETF, Physical Gold, was produced in Australia; in July 2003, the first currency ETF was born – Goldman Sachs Liquid BeES; ETFs of different categories such as classes, active management, and foreign exchange have been produced. According to ICI data, from 2003 to 2017, the number of global ETFs increased from 276 to 4,535, with an average annual growth rate of 22.13%, while the global ETF net assets also increased from US$204.3 billion to US$4,644.1 billion, with an average annual growth rate. Up to 24.65%.

Since ETF assets account for 93.82% of ETP (Exchange-Traded Product) assets, it is referred to here by ETP. According to BlackRock, since 2000, the global average number of ETPs has grown at an average annual rate of 27.15%, and the average annual growth rate of net assets is 27.26. %.

2

ETF development status

2.1 ETF classification: covering the day wide, gradually deepening

In the past 20 years, ETFs have been enriched with products, and their coverage has gradually expanded from traditional broad-based index ETFs to industries, styles and themes. At present, ETF product types are mainly divided into two categories: index-based ETFs and actively managed ETFs.

Most ETFs currently traded on the market are index-based ETFs. ETF products such as stocks, bonds, commodities, currencies, foreign exchange, etc. can be classified according to different investment targets; they can be divided into cross-market and cross-border ETFs according to market coverage; Leveraged ETFs are new categories that arise from different ways of operation.

The biggest difference between an actively managed ETF (also known as an enhanced ETF) and an index-based ETF is that the portfolio of investment targets can be changed at any time to achieve the stated investment objectives.

2.2 ETF market status: higher concentration

At present, the ETF market is highly concentrated: from a regional perspective, the United States is the country with the highest number of ETFs and net assets. From the perspective of publishers, head companies dominate the number of ETF products and the size of their net assets.

As the beginning of the ETF in the United States, since 2003, the global ETF's net assets have remained at around 75.55%. As of 2017, the US is still the world's largest ETF market, with 1,832 ETFs and $3.4 trillion in net assets, accounting for 41.04% and 76.19% of the global market, respectively.

Head ETP publishers dominate the market share and net asset size. As of December 31, 2017, iShares, Vanguard, and State Street accounted for 70.40% of ETP's global market share, with iShares topping the world with a 36.70% share. In addition, the above three publishers had net assets of $3.3 trillion in the same period, accounting for 70.04% of the total assets of the global ETP.

3

BTC ETF's tough road

3.1 BTC ETF: Open the golden key of the trillion market

The BTC ETF is an investment fund that tracks the BTC price and can be traded on the exchange freely and has the characteristics of ETF products.

The BTC ETF enables ordinary and institutional investors to avoid the cumbersome process of acquiring, storing and exchanging BTCs, and provides them with convenient access to the digital economy and diversification of their investment targets. According to Michael Strutto, CEO of IronWood, a technology think tank, once the BTC ETF is approved, the VTC market is officially open to the world, which will bring in $84 billion to $336 billion in new funding.

3.2 Good things and more grinding: repeated defeats and hope stars

The idea of ​​the BTC ETF has been in place since 2013. The Winklevoss brothers made their first attempt in June 2016 and subsequently submitted to the US SEC (US Securities and Exchange Commission) BTC ETF applications dozens of times, but the results were unsatisfactory.

VanEck SolidX Bitcoin Trust's application for the original plan in June 2018 was replied on February 27, 2019, but due to the US government's suspension, it was revoked on January 23, followed by January 30, Cboe BZX under BZX 14.11(e)(4), revised the listing and trading rules for VanEck SolidX's issue of SolidX BTC shares, and submitted a BTC ETF application based on commodities to the SEC. This is by far the most promising BTC ETF in the industry.

VanEck SolidX proposes that the investment objective of the BTC ETF is to enable the trust to reflect the BTC price. To achieve this goal, the trust company invests most of its assets in BTC, which is mainly traded in the OTC market, and purchases and redeems them in five shares of 125 BTCs, at current prices (March 6, 2019) ), objectively excluded a large number of individual investors. In addition to complying with the necessary legal provisions, VanEck SolidX cited the Baltic Dry Index ETF (Baltic Dry Index Fund: BDRY) approved by the SEC in December 2017 as a precedent.

BDI is the authoritative index issued by the London shipping market to measure the international shipping situation. The freight rates of the main dry bulk carrier routes of 21 routes around the world are based on their respective importance and proportion in the shipping market. In December 2017, the SEC passed NYSE Arca's application for the BDI ETF, BDRY, which provides investors with daily price changes in dry bulk freight futures by tracking a specific portfolio. The portfolio consists of a series of three-month futures contracts that measure the dry bulk freight situation of an index futures contract (a futures belt is a financial derivative consisting of consecutive months of futures contracts).

VanEck SolidX believes that the BTC ETF should be adopted by comparing the trading methods, supervision, trading volume and volatility of BDRY (and BDI) with BTC.

First, BDRY's transactions are mainly concentrated on-off through brokers using telephone and online instant messaging. The role of the exchange is mostly attributed to liquidation tools, and the possibility of manipulation is not lower than that of BTC futures with both on- and off-exchange transactions. Second, BTC futures is an important market with daily trading volume higher than BDRY. For example, the average daily trading volume of BTC futures in the third and fourth quarters of 2018 exceeded $150 million and $121 million, respectively, while BDRY is estimated to be between $50 million and $100 million. In addition, BTC futures traded about 44.1 billion US dollars in 2018, even in the fourth quarter of the year when BTC prices fell, the transaction volume exceeded 7.7 billion US dollars; Third, BDI and BTC prices fluctuated greatly, but the committee considered BDI The reason for the high volatility is that it is “a common industry indicator for measuring the dry bulk freight price”, and at the same time, the BTC's volatility is attributed to unregulated and price manipulation.

In addition, VanEck SolidX proposes MVBTCO (BTC Price Index) to track BTC prices on Bitstamp, Coinbase, Gemini, itBit, bitFlyer and Kraken trading platforms, reduce the possibility of manipulation, increase price transparency, and use MVBTCO The exchanges between the exchanges gradually realize the sharing of comprehensive regulatory agreements.

3.3 Difficult BTC ETF: How to solve fraud, manipulation and opacity

There are already ETF products related to the certificate in the market. However, due to the small amount of the body of the exchange and the lack of market recognition, the impact is not significant. In July 2018, the Swiss Stock Exchange launched the world's first ETP listed on a regulated exchange based on Amun's HODL5 index. Amun Crypto Basket Index ETP, Amun Ethereum (AETH) ETP and Amun Bitcoin (ABTC) ETP are currently available. The market maker is Flow Traders BV, which is denominated in US dollars. The index (data as of March 7, 2019) constitutes a monthly update. The administrative fee is 2.5%.

The existing Certified ETF does not solve the hidden market risk, liquidity risk, lack of market supervision and sharing mechanism and information opacity faced by the BTC ETF application. This is also the main cause of the BTC ETF being repeatedly rejected by the SEC. the reason.

The BTC and BTC markets have the potential to be manipulated. There are two main reasons. One is that the BTC distribution is uneven, and a very small number of people hold a large number of BTCs, which easily impact the market to create liquidity risks, and the SEC believes that the excessive concentration of BTCs increases the possibility of manipulating the market; Second, the risk of hacking and BTC networks being maliciously controlled. In 2014, Mt.Gox, the world's largest BTC exchange, was hacked and lost more than $470 million.

Global monitoring and protocol sharing of BTC ETFs is difficult to achieve. At present, BTC's trading scope covers the whole world, and the trading behavior is subject to different regulatory differences in different countries. When the SEC rejected Winklevoss' BTC ETF application, it was mentioned that the prerequisite for the BTC ETF to be adopted was to have a worldwide mechanism for global monitoring and protocol sharing of BTCs to stop fraud and market manipulation. In fact, this requirement is difficult to achieve, even though there is no similar “global monitoring and protocol sharing” in the current mature global market. Perhaps in the future, the SEC will replace the comprehensive “global monitoring and protocol sharing” with mainstream exchanges or major regions.

Information opacity is also a major obstacle to the adoption of BTC ETF audits. Due to the unclear regulation of the clearing exchanges worldwide, many BTC exchanges are currently not transparent enough. In a statement submitted to the SEC by Bats BZX, “No BTC exchange will provide the public with important information about its ownership structure, management team, company practices or regulatory compliance.” Some significant non-public information may It has been a big impact on BTC prices, which in turn affects any ETF that uses BTC as its underlying asset.

Trading in market transactions is suspended. There is currently no plan to deal with the disruption of BTC base market transactions. For example, in February 2014, the MTC.Gox website of the largest BTC exchange was hacked by DDOS, which caused heavy losses and eventually declared bankruptcy. In addition, according to the SEC, the trading system of the Gemini exchange had also taken down at least twice. Suspension of such transactions may result in fluctuations in BTC prices and reduce confidence in any ETF that uses BTC as a base asset.

At present, the BTC derivatives market is still in its infancy, and the trading behavior in the regulated market is still not developed enough to provide investors with credible information about the future prospects of BTC. In a statement submitted to the SEC, Bats BZX acknowledged that the BTC derivatives market is limited and has not yet been fully developed. This is different from the precious metals market. Prior to the introduction of the commodity ETP, precious metal futures products have undergone market testing for decades, and the exchange is able to fully “acquire information about the transaction” to trade regulated derivatives.

There are other influencing factors in the BTC ETF application, such as: BTC's “forking”, whether the BTC ETF issuer has a response, and how the BTC ETF responds to the price changes of the BTC during its rest period.

Note:

For some reasons, some of the nouns in this article are not very accurate, such as: pass, digital pass, digital currency, currency, token, Crowdsale, etc. If you have any questions, you can call us to discuss.

This article is original for the General Research Institute (ID: TokenRoll). Unauthorized reproduction is prohibited.

General Education Institute × FENBUSHI DIGITAL

Text: Song Shuangjie, CFA; Wang Xingang

Special Advisor: Shen Bo