Thread by @CaitlinLong_

1/ I'VE BEEN THINKING MORE abt the #bitcoin ETF. For yrs, I've said ETFs are a double-edged sword for bitcoin (bc ETF mkt makers are permitted by law to create more claims to the underlying asset than the quantity of the underlying, which distorts the price of the underlying).

2/ But, as I wrote in @Newsweek this week, the SEC's decisions to reject spot #bitcoin ETFs don't exist in a vacuum. They must be viewed in context of the SEC's decisions in 2015 to approve 1 (& only 1) fund structure for bitcoin--& not another until 2021.
newsweek.com/crypto-crash-w…

3/ The decisions from 2015-21 + the inherent structure of closed-end funds (which can trade at very different prices than their underlying asset) created a massive market distortion, as detailed in my @Newsweek post. That market distortion brought in the fast-money #WallSt crowd.

4/ With them came huge leverage that, using Hoover's analogy, was like a loose cannon on the ship of #bitcoin mkts in a tempest-tossed era. Leverage games began w/ arbitraging GBTC's premium, then moved to futures mkts (not 2.5x leverage on regulated exchanges but 125x offshore!)

5/ & then ping-ponged to Anchor etc. The leverage unwind was inevitable, has been epic & is healthy.

But I keep thinking abt the impact of the SEC's decision to approve only 1 way for US investors to gain exposure to #bitcoin in brokerage accts for ~6yrs (in a closed-end fund!)

6/ Again, that created a huge mkt distortion (the big GBTC premium), which attracted the #WallSt boyz. The SEC analysis in rejecting spot #bitcoin ETFs points to manipulation in bitcoin spot trading mkts. It's not wrong! But such probs existed in 2015 too, when it approved GBTC.

7/ The SEC's analysis points out such manipulation has gotten worse, not better. But to what extent was the SEC's own decisions since 2015 (both to approve only 1 fund & then to reject all others until 2021) a big contributing factor??

8/ There's path-dependence to the SEC's regulatory decisions (ie, the mkt impact of rejecting spot #bitcoin ETFs isn't independent of SEC's 2015 decision to approve only 1 fund (a closed-end fund) which went on to trade at a huge premium that finally collapsed to a big discount).

9/ My big point is that the whole episode is not a free-market failure. It has nothing to do with #Bitcoin itself (which just keeps on adding blocks & doesn't care about mkt structure issues in its trading mkts).

But it raises an important policy question.

10/ Here's the important policy question: If an SEC decision has the impact of creating a big mkt distortion (especially one that hurts retail investors, as this one did), what is the SEC's obligation to address it??

Remember, the SEC's mission is investor protection.

11/ Related: when #WallSt hedge funds can arbitrage retail investors due to the inherent structure of closed-end funds in a market where a huge supply/demand imbalance develops (which causes the closed-end fund to trade at a big premium), what is the SEC's obligation??🤔🤔🤔

12/ I suspect there will be a big retrospective on all this at some point, as well there should be. Some will argue the SEC had no obligation to fix the problem its 2015-21 decisions helped create. Others will argue the SEC should have approved ETFs to prick that premium bubble.

13/ I take no position on those policy questions--I'm just raising them for discussion bc I've been thinking a lot about them. 🤔🤔🤔