I usually post on Fridays but I saw some news that’s so significant I had to push something out today.
In support of its bitcoin ETF application, Bitwise Asset Management shared data with the U.S. Securities and Exchange Commission (SEC).
That data showed 95% of all reported trading in bitcoin is fake. This meshes with a Crypto Integrity report that 88% of all trading in February was fake. The TIE, another cryptocurrency researcher, on Monday estimated that 75% of exchanges had some form of suspicious activity.
Fake volume on unregulated bitcoin exchanges? Shocking.
All kidding aside, this is good news for anybody who wants to see a bitcoin ETF. Not the fake trading—that’s simply one more reason to stick with regulated exchanges when you’re trying to make money off the changes in bitcoin’s price. No, the fake trading sucks, that needs to end.
The good news is bitcoin markets are becoming more transparent.
Transparency is good.
As I explained in Why the SEC Will Approve a Bitcoin ETF, SEC needs a way to assess what’s going on in bitcoin markets. Now three different organizations published independent, fact-based analysis of what’s going on in bitcoin markets. The cryptocurrency industry is meeting SEC’s needs.
Is it good that only $273 million of the $6 billion daily trading volume is real? Probably not. But when you look at that $273 million of real activity, you see that bitcoin markets are legit and operating properly. I’ll pull out some facts from Bitwise’s analysis:
- When you exclude exchanges that show fraudulent trading, bitcoin’s actual trade volume is reasonable when compared to other ETF commodities like gold—in fact, total real daily trade volume is roughly equal for both (as a percent of the total market value of each asset).
- The ten regulated exchanges* show almost identical trading patterns, near-identical price, and no evidence of fraudulent activity.
- All indexes for all crypto-related financial products pull their data from regulated exchanges.
- Data shows trading activities have shifted from “retail” investors to institutional market makers—in other words, people trading bitcoin are better educated and better informed than they were before.
Here’s Bitwise’s case in a nutshell:
Because the Bitwise ETF draws its price data from only regulated exchanges, SEC doesn’t have to worry about fraud and manipulation. Activity on regulated exchanges looks similar to other commodities that have ETFs. Fraudulent activity should not have any bearing on the ETF’s price and manipulators would have to go through a lot of effort and take a lot of risk to sway the ETF price. If they do, Bitwise will have enough data to identify bad actors and suss out culprits—and Bitwise will share that data with SEC.
Bitwise also makes a technical point about SEC’s previous rejection of the Gemini ETF proposal, where SEC claimed the bitcoin futures market was too small to use as a reliable indicator of price. Bitwise argues SEC and Gemini used bad data when assessing bitcoin futures as a pricing mechanism. Because actual bitcoin trading volume is much smaller than previously thought, bitcoin futures make up a much larger portion of bitcoin activity than previously thought. Therefore, SEC should reconsider its assessment.
Is any of this enough to settle SEC’s concerns about market manipulation, poor custody, low liquidity, and shoddy pricing?
We shall see.
As I wrote a month ago, “financial professionals continue working to make the bitcoin markets more transparent and orderly. They’re building the case for a bitcoin ETF and they will succeed eventually.”
I stand by those comments and this is further evidence that I’m right.
Could that change? Yes, of course.
For now, though, relax. Negative headlines always get clicks. Truthful analysis usually gets ignored.
Fortunately for you, the SEC prefers truthful analysis.
(NB—after following up with the team at Crypto Integrity, I discovered Bitwise’s 95% figure may differ from the “true” number because it excludes all of the exchanges that show any fake trading, even though those exchanges certainly have some real trading. But the conclusion—lots of fake trading—matches their own research.)
Mark Helfman is a cryptocurrency commentator and author of Consensusland, a novel about a country that runs on cryptocurrency.