Signs of market readiness for Bitcoin ETF, what do you need to run the tool?

As you know, on September 17, the BZX stock exchange of the Chicago Options Exchange withdrew its VanEck / SolidX offer on bitcoin-ETF . This event led to the fact that the main applicant for permission from the SEC dropped out of the race, leaving in doubt the prospect of Bitcoin ETF approval in general.

In this article, we will try to explain why the time for Bitcoin ETF has come. This year, Bitcoin (BTC) as an asset showed itself very well, breaking away from its "lows" and for a long time trading at around $ 10,000.

An ETF or exchange-traded fund is a set of securities linked to a specific index. In essence, it is an investment tool that tracks the effectiveness of underlying assets. ETFs can include numerous investment classes, such as stocks, commodities, bonds, or a mix of them. Consequently, ETFs allow investors to diversify their assets without actually owning any assets. Bitcoin ETF simply mimics the price of a cryptocurrency.

So why buy a bitcoin ETF if it just mimics the price of bitcoin? Why not just buy bitcoin yourself and exclude an intermediary?

There are several reasons for this, the main one being that Bitcoin is still a largely unregulated asset, and there are many risks associated with its direct trading. If you invest in bitcoin, you need to store your private keys in some safe place and manage your bitcoin wallet , and this scares off investors. Cryptocurrency space is completely new, there are many changes in it.

A novice investor can also be frightened off by the need to understand how the cryptocurrency market functions. The learning curve here is very steep, but with the ETF-approved problem will disappear, as investors are familiar with this investment mechanism. As of September 2019, the global ETF market is valued at a whopping $ 3.9 trillion, which is why Bitcoin ETF approval could introduce Bitcoin to a wider audience.

As of September 2019, the U.S. Securities and Exchange Commission (SEC) did not approve the Bitcoin ETF, citing a number of factors, from insignificant futures trading volumes to the possible risk of manipulation and fraud, since most cryptocurrency exchanges are unregulated.

There are three reasons why it can be assumed that the world is ready for Bitcoin ETFs. Please note that all motivations are borrowed from a public presentation provided by the Bitwise Asset Management for SEC. It is noteworthy that on October 13, the deadline expires during which the SEC either approves or rejects the Bitcoin ETF Bitwise.

Reason # 1: Bitcoin spot market has become more efficient

A presentation presented by Bitwise to the SEC shows how the spot market for bitcoin has developed over the past 18 months. Here is a screenshot from the presentation.

At the beginning of 2018, a number of key events occurred related to the launch of CME Bitcoin futures . BitLicense added requirements for market surveillance for crypto exchanges, the institutional market for bitcoin landing was launched, and public access to such institutional market makers as Jane Street was opened. These events dramatically increased efficiency by first creating a “dynamic, two-way market for institutional quality,” the report said.

The average spread (spread) for major exchanges with real volumes is in the range from 0.01 to 0.1%. In addition, arbitration among the leading exchanges is almost perfect, without persistent deviations. This means that the spot market of bitcoin is currently working with much greater efficiency than most other large markets.

Reason # 2: the Bitcoin market is more resistant to market manipulation

Despite the fact that Bitcoin was created as a P2P payment protocol, it is the first real digital product in the world, and its inherent characteristics such as interchangeability, ease of transfer and the ability to trade on the exchange make it unique compared to traditional products.

In the history of finance, there have been instances of market manipulation as a result of coordinated pricing. However, the price of bitcoin is set in the open market.

In addition, the interchangeability of bitcoin provides an almost perfect arbitrage between different areas of trade. Perhaps this leads to the fact that it is incredibly difficult to manipulate the market, since any attempt requires superiority over most of the world's liquidity.

Reason # 3: The bictoin futures market is quite significant

The Bitcoin CME futures market is much more significant than previously thought. The misconception about it is due to the fact that, according to the Bitwise study, 95% of the total spot trading volume of bitcoin is fake.

According to the report, the spot trading volume of bitcoin is approximately $ 17 billion (as of August 2019), and the actual trading volume is approximately $ 1 billion. The futures trading volume is 1/4 of the spot trading volume. In addition, since the beginning of 2019, the futures market has been a significant part of the real bitcoin market.

Reason # 4: Bitcoin storage has become institutionalized

The main obstacle to investing in bitcoin is the reliable storage of private keys due to the anonymous and unchanged nature of the bitcoin network. If a hacker gains access to someone’s private keys and transfers bitcoin somewhere, it will be impossible to return it, unless most of the network agrees to cancel the transaction (which is almost impossible). Custody services are especially useful here.

Over the past two years, most Bitgo vaults have become regulated and insured at renowned insurance companies like Llyod's of London. The amount of insurance coverage is $ 100 million and is provided to customers free of charge.

These are the reasons why the world is ready for Bitcoin ETFs, so most of the SEC concerns have already been removed by themselves.

Publication date 09/29/2019
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