The SEC Approval of a Bitcoin ETF is Unlikely. Here’s Why:

The SEC Approval of a Bitcoin ETF is Unlikely. Here’s Why:

Quick note: I wrote this article with a focus on exchange data, not on the underlying tech enabling bitcoin. If you are interested in learning more about the underlying technology of blockchain, or maybe just want a quick refresher, this website is an excellent place to start!

After a few years of educating myself on the crypto-asset space, I consider myself less ignorant than the general population about how the bitcoin market works. Throughout my deep-dive learning process, there have always been moments where I was surprised to find that something I assumed to be true was, in fact, false. As I’ve advanced in my understanding of the crypto asset and blockchain space, this surprise arises less often. After all, most things are just shades of things that have happened prior.

As I watched a webinar recently, I experienced a jolt back to reality. CEO Clay Collins presents “Crypto Market Data 101: Fake Volume, Exchange Spam, and How The Seedy Crypto Data Underworld Actually Works” and walks me through the existing layout of the crypto space as a whole. Clay depicts certain pieces as a part of the market environment. To progressively mature the crypto and blockchain space, these are the pieces that market participants need to rectify. Clay also demonstrates why his API platform at www.nomics.com is vastly superior to CoinMarketCap’s representation of reality.

I realize, embarrassed, that this is what I have been doing for a long, long time. CoinMarketCap is quick, it’s easy, and who knows what the real numbers are, right? What difference could it make, where you get your pricing data? The answers to these questions (usually thought of rhetorically) gets into the uncomfortable truth of the crypto markets: almost none of the information, or data, is accurately created, organized, submitted, and presented for consumption.

As Clay works his way through the slides, he makes it explicitly clear that inflating the volume is as simple as editing a text file. The text file contains the ticker volume, equivalent to a number in an Excel spreadsheet. The entities collecting these reports have limited opportunity to verify the information, due to the lack of historical raw trade data.

• Modifying the ticker volume is the simplest way to manipulate the volume reported; just apply a ten times multiplier on all of the reported trade volumes, and it becomes uniformly larger.
• Benefits the exchanges because of how they are enabled to get more visitor traffic on their website from CoinMarketCap due to the CoinMarketCap ranked by volume. The exchanges can charge listing fees in a self-reinforcing cycle and finally run an Initial Exchange Offering (IEO).

Well, faked volume negatively impacts the end-user by giving you incorrect data. This inaccurate data leads to false assumptions, such as:

• The liquidity for an exchange’s order book, and therefore, the reliability and cost of trade execution.
• The security about their operations and processes. I fell victim to wanting to believe in the safety and protocols for these exchanges. For any given exchange, I based my assumption about the quality of security linearly on the reported volume. In other words, I naturally assume that larger volume = better security.
• The actual maturity level of the market in terms of volume and market caps. Typically, investors assume they should use volume to understand the composition of market participants. Lower volumes reveal just how few players, and therefore depth, the market indeed contains.
• Trading, and any technical analysis, becomes much more challenging to do correctly, as it typically requires accurate volume readings.

• Compare the exchange’s search traffic results with something like Alexarankchecker. By looking up the exchange’s web traffic, you can get a more realistic understanding of their traffic relative to other exchanges. You can use this relative website ranking as a proxy for their order book depth relative to other exchanges.
• Use the Nomics’ exchange Transparency Ranking system and execute trades on the highest-rated exchanges wherever possible.

1. The crypto asset/blockchain industry has a lot of maturing to do, but companies like Nomics and Bitwise are leading the charge. Bitwise is pushing for an ETF approval, while Nomics is sifting through mountains of exchange data to determine the quality of market participants and actors. Although these are different end objectives, they are closely intertwined. You cannot have an ETF without some sort of data reporting standardization. In theory, standardized data reporting is as simple as saying to exchange operators: “provide us with all of your raw, historical trade data, and we will construct the market history of prices and volume by ourselves”. In reality, exchange operators’ incentives line up with secrecy and shadows. To keep their profits high, they have to control the data.
2. The aggregate volume reporting (and all metrics that incorporate volume readings from CoinMarketCap) on CoinMarketCap is invalid. I now know to disregard entirely any and all information presented there, before validating through the prior listed methods.
3. Do not make any investment decisions without analyzing the quality of the data provider.
4. Collusion between whales and exchange owners to manipulate volume and price is wildly simple to accomplish, with almost no punitive damages expected.
5. No ETF will exist until a resolution of these problems appears, in a conclusive manner that determines the regulatory framework.
6. Blockchain and crypto adoption has real, albeit early stage, potential. Four more states in the US are adopting the crypto asset regulatory framework and blockchain incentivization laid out by Wyoming: California, Texas, Ohio, and Colorado.

1. I’m focusing my analysis on on-chain data for a subsection of specific wallets. Instead of attempting to parse tens of thousands of pseudonymous digital wallets, I have identified particular wallets that are likely to represent individual, active market (trading) participants. I am in the process of building them into an analytical framework.
2. As the bear market has developed, I decreased my time exposure to cryptocurrency and sought other avenues to grow professionally. I learned to code in Python & SQL to vastly improve my ability to analyze and improve systems. I seek the outcome of creating a means of signaling buy and sell orders for BTC with levels of certainty for each trade signal. I believe that by automating this process, I will be able to add effectiveness, or Alpha, to my investing strategy and eventual portfolio.
3. I still believe BTC will be one of, if not the outright, top-performing asset over the next 5, 10, and 50 years. I’ve previously written on the core elements that make up my perspective on BTC’s viability as an investment vehicle. Those elements have not changed, but I will list them again.

Long Investment Thesis for Crypto:

A. Bitcoin is a (soon to be “the”) global vehicle for speculation and gambling. Trading and investing in bitcoin is analogous to a casino with one game. Admittedly unimpressive, until you add that it is available 24/7/365 for all of the people in the world to play and watch others play. Combined with our 24/7 news cycles and constant internet immersion, the hype cycle tends to create booms and busts. These cycles are much harder and occur more frequently than traditional market cycles.

B. The ledger-based digital currency projects have the potential to be superior to our current digital fiat money and the current system of double-entry accounting in general. If only for the nihilistic reasoning being: anything that can systematically improve the govt’s power and precise application of power will be adopted as soon as it is understood. For example, bitcoin goes out to eight decimal places, as opposed to my US bank account only to the two decimal places in cents out of a dollar. The critical takeaway is as follows: the digital currency projects are something that ironically will benefit the sovereign nations, which are HEAVILY centralized, by giving them even more visibility into the workings of citizens.

C. With each boom and bust, more people will learn about the concept of bitcoin. The “greater fool theory” will be relevant for speculators as new market participants enter.

D. Inherent inflexibility. The crystallized and theoretically unchangeable structure of the chain is a key element for blockchain proponents. The combination of crystallized data structures and adaptable code makes this a resilient and robust asset. With the democratic option to evolve and add elements through a 51% quorum, Bitcoin remains flexible enough. In the face of quantum computing threats, Bitcoin could adopt quantum-resistant features for the encryption mechanism.

There are a handful of firms jockeying for the right in an attempt to get the lion’s share of fees from feeding the risk appetite of Main Street. These firms will undoubtedly put out a healthy amount of positive news that may be biased, as Bitwise did in their own recent benchmark reporting.

If there is something that you think I should be aware of, or if you have comments or questions, feel free to drop me a message or comment with your email address.

Side note: I fully recognize that I am viewing the ecosystem from the lofty heights of the developed western hemisphere, where we readily take our institutional structures for granted. There is a real opportunity for blockchain on the backend of many institutionally deficient areas of the world- I’m personally keeping my eyes open for developments on the continent of Africa. Uganda, Rwanda, Kenya, South Africa, Nigeria, and Ghana have already taken the first steps towards incorporating the technology into their nations’ underdeveloped sectors.

INVESTMENT DISCLAIMER: I am bullish on crypto for the long term with the lion’s share in BTC and very limited alt exposure.

Published at Tue, 28 Jan 2020 18:58:49 +0000

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