0/ The SEC's final deadline to approve or deny the two ProShares Bitcoin ETFs is next Thursday, August 23 (sec.gov/rules/sro/nyse…). My thoughts on two questions:
- How will the SEC make its decision?
- Would these ETFs even be good for bitcoin?
Thread.
- How will the SEC make its decision?
- Would these ETFs even be good for bitcoin?
Thread.
1/ In December 2017, the NYSE Arca exchange filed a proposal with the SEC to list and trade two ETFs issued by ProShares:
- ProShares Bitcoin ETF
- ProShares Bitcoin Short ETF
Both would use derivatives (futures, options, and swaps) to track bitcoin's daily price movements.
- ProShares Bitcoin ETF
- ProShares Bitcoin Short ETF
Both would use derivatives (futures, options, and swaps) to track bitcoin's daily price movements.
2/ These ETFs are important: they're the first ones that the SEC will approve or deny in 2018 & will set the stage for others in coming months.
Of course, nobody knows what the SEC will decide, but we can use their recent statements to figure out what factors they'll consider.
Of course, nobody knows what the SEC will decide, but we can use their recent statements to figure out what factors they'll consider.
3/ Let's start in January, when the SEC published a letter saying there were too many "investor protection issues" to approve a bitcoin ETF.
The letter asked for all bitcoin ETF proposals to be withdrawn. Many were, but these two from ProShares were not.
coindesk.com/sec-outlines-r…
The letter asked for all bitcoin ETF proposals to be withdrawn. Many were, but these two from ProShares were not.
coindesk.com/sec-outlines-r…
4/ The SEC's letter identified five concerns for bitcoin ETFs:
(i) valuation: how is fair value assessed & how are forks/airdrops handled?
(ii) liquidity: are assets sufficiently liquid to meet daily redemptions?
(iii) custody: how are assets obtained, secured & validated?
(i) valuation: how is fair value assessed & how are forks/airdrops handled?
(ii) liquidity: are assets sufficiently liquid to meet daily redemptions?
(iii) custody: how are assets obtained, secured & validated?
5/ (continued)
(iv) arbitrage: how is market price kept in line with net asset value?
(v) manipulation: are unregulated spot markets too exposed to manipulation?
One big question for ProShares is whether the markets have improved enough since January to satisfy these concerns.
(iv) arbitrage: how is market price kept in line with net asset value?
(v) manipulation: are unregulated spot markets too exposed to manipulation?
One big question for ProShares is whether the markets have improved enough since January to satisfy these concerns.
6/ The Winklevoss ETF decision last month wasn't encouraging.
Winklevoss was originally denied by the SEC's Division of Trading & Markets (which handles initial ETF applications) in March 2017. Three weeks ago, the SEC Commissioners denied the appeal.
coindesk.com/winklevoss-bro…
Winklevoss was originally denied by the SEC's Division of Trading & Markets (which handles initial ETF applications) in March 2017. Three weeks ago, the SEC Commissioners denied the appeal.
coindesk.com/winklevoss-bro…
7/ A majority of Commissioners found that bitcoin markets:
- are not inherently resistant to manipulation
- can't adequately deter manipulation without being regulated
- aren't liquid enough to protect market integrity
- don't allow efficient arbitrage between ETF shares & spot
- are not inherently resistant to manipulation
- can't adequately deter manipulation without being regulated
- aren't liquid enough to protect market integrity
- don't allow efficient arbitrage between ETF shares & spot
8/ However, those findings were based on old & stale information. On appeal, the SEC only looks at evidence from the initial decision, not the current reality.
The markets have changed a lot since early 2017, perhaps enough to satisfy the SEC's concerns.
The markets have changed a lot since early 2017, perhaps enough to satisfy the SEC's concerns.
9/ ProShares also fixes some problems that the SEC had with Winklevoss.
For example, Winklevoss would have used only the Gemini exchange to buy & price bitcoin, while ProShares would use the well-established & regulated CME & CBOE futures exchanges.
For example, Winklevoss would have used only the Gemini exchange to buy & price bitcoin, while ProShares would use the well-established & regulated CME & CBOE futures exchanges.
10/ However, don't forget the political aspect of this decision.
The SEC has little reason to approve an ETF right now. The bear market is strong, the finance world is crypto-skeptical, and there were few comments in favor of approval. Denial may be the safest & easiest option.
The SEC has little reason to approve an ETF right now. The bear market is strong, the finance world is crypto-skeptical, and there were few comments in favor of approval. Denial may be the safest & easiest option.
11/ Okay, so what if the ProShares ETFs are approved? Would that be good for bitcoin?
I don't discuss price dynamics on Twitter (not my area of expertise), so don't take this as market analysis or financial advice. I only want to highlight the differences between types of ETFs.
I don't discuss price dynamics on Twitter (not my area of expertise), so don't take this as market analysis or financial advice. I only want to highlight the differences between types of ETFs.
12/ As I mentioned above, the ProShares ETFs are entirely derivative-backed. That means they wouldn't buy, sell, or hold any actual bitcoin.
The bull theory is that an ETF would make bitcoin available for institutional investors, but does it help if they only buy derivatives?
The bull theory is that an ETF would make bitcoin available for institutional investors, but does it help if they only buy derivatives?
13/ I strongly recommend reading & listening to @CaitlinLong_ on "good" vs. "bad" financialization. Basically:
- good: making an asset investable by more people & institutions
- bad: diluting investors by creating paper claims to assets that don't exist
forbes.com/sites/caitlinl…
- good: making an asset investable by more people & institutions
- bad: diluting investors by creating paper claims to assets that don't exist
forbes.com/sites/caitlinl…
14/ This is why most of the excitement for a bitcoin ETF centers on the VanEck/SolidX commodity-backed proposal, which would buy and custody actual bitcoin (maybe "good" financialization).
Point is, even if you're pro-ETF, you might not want just *anything* approved.
Point is, even if you're pro-ETF, you might not want just *anything* approved.
15/ If you're waiting for VanEck/SolidX, the SEC's decision on ProShares will be informative.
However, VanEck/SolidX poses the additional problem of custody, which the SEC likely won't address now. That means ProShares could be approved while VanEck/SolidX is denied.
We'll see.
However, VanEck/SolidX poses the additional problem of custody, which the SEC likely won't address now. That means ProShares could be approved while VanEck/SolidX is denied.
We'll see.
16/ Update, with three days to the deadline: here's another take from mandatory cryptotwitter follow @Crypto_Macro. He doesn't mess around with his analysis: "In short, odds of approval are close to zero."
The decision could come before Thursday, FYI.
The decision could come before Thursday, FYI.
