- The SEC makes its verdict on a bitcoin-futures linked ETF by ProShares on Thursday.
- Some market observers say that the fact that the product is based on futures, not bitcoin itself, could help its case.
- But market experts say the opaqueness of the crypto markets and possible manipulation still make an approval unlikely.
Bart Smith, head of digital assets at Susquehanna International Group, is used to taking risks.
As a trader, "You never say no chance," he said.
But Smith thinks there's just a 1% likelihood that the Securities and Exchange Commission will on Thursday approve an exchange-traded fund linked to bitcoin for the first time. The funds, proposed by asset manager ProShares, were first filed with regulators last September and are linked to Cboe Global Markets' bitcoin future contracts, not bitcoin itself.
A bitcoin ETF has long been viewed as a next step in bitcoin's maturation as an asset class and a way to breath new life into the crypto which has struggled to break through $10,000 for much of 2018.
Some market observers think that the fund's connection to the futures markets, which are regulated by the Commodity Futures Trading Commission, would make its approval more likely than past proposals, including one earlier this month by VanEck which was delayed by regulators.
Smith isn't so sure.
"You're literally shifting deck chairs on the Titanic," he said.
A representative for ProShares could not be reached for comment.
Issues in the market
Even though a futures-based ETF would trade on Cboe, the price of those contracts are still tied to unregulated bitcoin venues in international markets, according to Richard Johnson, a market structure specialist at Greenwich Associates.
A slew of asset managers, including Bitwise Asset Management, GraniteShares, and Direxion have filed for a bitcoin ETF, and are all waiting in limbo for a verdict from the SEC.
The SEC itself said after it denied a Winklevoss brothers' bitcoin ETF in July for the second time that it could not "conclude that bitcoin markets are uniquely resistant to manipulation."
Not much has been done since to address those concerns or prove that they are unwarranted, experts say.
Notably, Bloomberg published a report examining more than 50,000 trades on Kraken's market that experts said raised red flags. Elsewhere, academics at the University of Texas published a paper alleging that Tether was last year used to manipulate the price of bitcoin, propping up its run to $20,000 in December.
Some steps have been taken to improve the surveillance of the market, Johnson said. Several cryptocurrency exchanges including the Winklevoss brothers' Gemini are teaming up to form a new working group to create new standards to stamp out manipulation and address the opaqueness of the market. Still, the group excludes Coinbase — the largest crypto exchange in the US — and foreign exchanges in Asia, which command a large percentage of the market.
Proponents for a bitcoin ETF counter that bitcoin markets are difficult to manipulate since they are very fragmented. Others point to the liquidity of the market, which sees turnover in the multi-billions, as another sign that market is ready for an ETF.
But John Hyland, global head of exchange traded funds at Bitwise, says it's unlikely the SEC will be convinced by that argument.
"They're not going to be swayed by what sounds plausible and what might be true," he said.
For that reason, it's likely the ProShares filing will either get denied by the SEC or the firm with withdraw the proposal, Hyland said.
Crypto exchanges need to cooperate
For a bitcoin ETF to get approved, whether it's based on futures or bitcoin itself, crypto exchanges will need to start cooperating more with each other to make the market more transparent, said Dave Weisberger, the chief executive of crypto data company CoinRoutes.
Weisberger, who argues that bitcoin markets are robust enough to support a derivative product like an ETF, thinks such a product would have a better chance of getting off the ground if crypto exchanges allowed market data to be made public. That would help investors find the best venues to execute crypto trades, he said.
"Simply put, these exchanges have taken a legal approach that doesn't allow the public to comparison shop for 'best execution,'" Weisberger said.
If crypto exchanges were to adopt these policies and robustly address cross-exchange manipulation, then the SEC's stance on a crypto ETF could change, he added.
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Some market observers say that the fact that the product is based […]