A comprehensive look at the BTC ETF: the holy grail of crypto market participants


Translation: Zoe Zhou

Source: Crypto Valley

Editor's Note: The original title was "Understanding the BTC ETF"

  • The approval of the U.S. Securities and Exchange Commission (SEC) for the launch of an ETF is mainly dependent on three conditions: the size of the derivative must be large enough, third-party custodian institutions can be regulated, and there are manipulation measures;
  • The remaining concern appears to be that potential price manipulation exists on unregulated exchanges and that most price discovery occurs on these exchanges;
  • The current market structure is unlikely to change soon, which makes the prospect of BTC ETF very slim;
  • So far, a total of 26 BTC ETFs have been issued, but 12 of them have been rejected by the CSRC, and the rest have been withdrawn by the issuers themselves.
The BTC ETF has long been the Holy Grail for many market participants. It has been more than 6 years since the first application of the BTC ETF, and the market has obviously matured, but the SEC has not yet approved any application for the issuance of the BTC ETF.
In July 2013, the Winklevoss brothers submitted their first ETF application, which was also the first application rejected by the SEC. Since then, the BTC ETF has been the focus of market discussions.
In July 2018, the SEC rejected the Winklevoss brothers' second ETF application and issued a 92-page statement detailing why the decision was made. The decision was supported by three members, but Hester Peirce, who is also a member, disagreed. She said the decision impeded further institutionalization of the BTC market, weakened investor protection and showed skepticism about innovation.
The lengthy rejection statement can be summarized as three points:
  • The BTC derivatives market does not have sufficient trading volume to support ETFs;
  • Lack of qualified hosting services (regulated third-party hosting agencies);
  • Compliance alone is not enough to prevent fraud and manipulation.
Since then, the regulated derivatives market has matured: The Chicago Mercantile Exchange (CME) trades about $ 4 billion a month. Although Cboe announced the suspension of the BTC futures market in March, Bakkt launched BTC futures in September and reached a transaction volume of $ 450 million in December.
In terms of unregulation, the growth of the derivatives market in 2019 is even more significant. The monthly trading volume of BitMEX's flagship product, the BTC perpetual swap, reached a record high in 2019. In June and July of this year, monthly product sales exceeded 140 billion U.S. dollars, about 33% higher than the 105.8 billion U.S. record set in March 2018.
The same trend can also be observed on the Deribit platform. In June, total sales of BTC and ETH reached $ 18.1 billion.
Hosting services are also maturing. The escrow provider has received approximately $ 1.3 billion in investment, of which approximately $ 419 million is allocated to purely digital currency custodian companies. Several companies now focus on serving institutional customers.
In October 2019, the U.S. Securities and Exchange Commission refused to issue BTC ETFs on the ground that BTC ETFs did not have sufficient resistance to fraud and manipulation in the underlying market.
BTC price discovery mostly occurs on exchanges with little regulatory oversight-BitMEX, Bitfinex, and Binance. If the prices of the underlying markets are determined by unregulated exchanges, and the SEC does not understand the conditions of these exchanges, then it does not matter how the ETF will eventually be priced.
Although the spot market of most ETF commodities is less liquid and has greater spreads compared to BTC, the price discovery itself occurs in the more liquid derivatives market.
Therefore, although the regulated BTC derivatives market currently has considerable trading volume, and the current escrow program seems feasible, the main problem raised by the SEC is that there are no relevant measures to curb fraud and manipulation. At present, the market structure is unlikely to change in the short term, which makes the prospect of BTC ETF very slim.
One could argue that if the BTC ETF is approved, it could lead to the institutionalization of BTC, and that the price discovery function could shift from an unregulated exchange to a regulated derivatives market. But the SEC may not give up their main focus of debate in the short term.
ETF application
There are currently two high-profile ETF applications (Wilshire Phoenix and Kryptoin) in the pipeline, awaiting SEC approval. However, VanEck SolidX and Bitwise have both withdrawn their applications.
According to Block research, there are a total of 26 BTC ETFs to date. Twelve of them have been rejected by the US Securities and Exchange Commission, and the rest have been withdrawn by the issuers themselves.
The details of some BTC ETFs are as follows: