Here’s why the SEC keeps rejecting spot Bitcoin ETF applications

This is not the first time that the U.S. Securities and Exchange Commission has rejected proposals for a Bitcoin spot-exchange-traded product (ETP). However, different financial institutions continue to make efforts. Cboe BZX Exchange failed to list Fidelity Wise Origin Bitcoin Trust on January 25th as a Bitcoin ETP.

SEC published a Feb. 8 letter pointing out that the exchange had not demonstrated the fund’s “designed to prevent fraud and manipulative acts” and “to safeguard investors and the public interests.”

While proposals for Bitcoin spot ETPs were not approved by the SEC, and they are not available on the U.S. Market, such products do exist on the European market. One could get a good idea of whether fraud and manipulation are possible by looking at the European ETPs prices.

This article compares the historical prices of three European-listed ETPs with the Bitcoin spot price history of 18 exchanges in order to determine if there are significant price differences that could lead to market manipulation.

The primary concern of the SEC

The SEC raised two main concerns from a technical standpoint regarding the proposal of BZX Exchange.

(1) There was no data or analysis to support the claim that arbitrage across Bitcoin platforms keeps global Bitcoin prices in line with one another. This prevents manipulation and eliminates cross-market pricing differences. It is not clear how close Bitcoin prices align across Bitcoin trading venues, or how fast price differences can be arbitraged away.

(2) The proposed method of calculating the index is not demonstrated by the exchange. It does not prove that the proposed ETP would be resistant to manipulation or fraud. The exchange has not evaluated the potential impact that spot platforms, which are not part of the index’s constituent Bitcoin platforms, might have on the Bitcoin prices used in calculation of the index.

Historical data (from Google Finance), comparing the three ETPs listed on SIX Swiss Exchange with Bitcoin spot prices from exchanges (data source Cryptowatch) allows us to determine if these issues are present and whether manipulation is possible.

WisdomTree Bitcoin ETP (BTCW-USD)21Shares Bitcoin ETP (SWX:ABTC-USD)Coinbase Physical BTC ETP (SWX:BITC-USD)

The correlation between spot price and Bitcoin ETPs suggests that there are price disparities

According to the BZX Exchange proposal, the index calculation will use the volume-weighted median (VWMP), in the last five minutes, from five exchanges — Bitstamp. Coinbase. Gemini. itBit.

The daily spot prices of four of the five mentioned exchanges — Bitstamp Coinbase Gemini and Kraken — were used to create the index calculation.

To make it easy to compare price disparities, all charts use the daily percentage change (or daily returns) because the Bitcoin ETP price range is often different from that of the Bitcoin spot price.

Below are graphs that show the daily returns of each ETP and the aggregate Bitcoin spot price. These were calculated using the volume-weighted median methodology.

The scatter plot on the left shows how closely ETP prices are aligned with spot prices. If they are perfectly aligned all points should fall on the blue dash line. The right-hand side plot plots the daily percentage returns and the difference between them.

WisdomTree ETP and spot comparisons show that although most points in the scatterplot cluster within the +/-55% range, there are still significant price differences beyond this radius. The daily return difference (blue dash) between ETP and spot prices was above 10% on one day in the three-month period.

Bitcoin spot on 4 exchanges vs. WidsdomTree Exchange ETP (in percent change). Source: Cryptowatch

It is interesting to also note that ETP price volatility percentage change tends be higher than spot. Below is a graph comparing Coinbase Physical Bitcoin (blue lines) and Bitcoin spot. The percentage change of the former could reach almost 15%, while the latter barely surpassed 10%.

Bitcoin spot on 4 exchanges vs. Coinbase Physical Bitcoin. (in %change). Source: Cryptowatch

Similar to the spot, 21Shares Bitcoin ETP is more volatile than the spot. The correlation with the spot is lower (62%) than WisdomTree (67%), and Coinbase Physical Bitcoin (66%).

Bitcoin spot on 4 exchanges vs.21Shares ETP (in.% change). Source: Cryptowatch

These price comparisons show that there are cross-market pricing differences between ETP and Bitcoin spot prices from exchanges. These price differences have not been resolved quickly enough to stop manipulative acts.

It is important to note that this comparison is only rough based on daily data. This could be due to the fact that ETPs use different cut-off times to calculate the end of the day price. For example, exchange-traded products don’t trade 24 hours like crypto spot prices; instead, they trade during regular trading hours between 9:30 AM and 4:00 PM.

In practice, however, an even higher frequency is used to calculate the index prices. The BZX Exchange proposal proposes that the index price be calculated using five minutes of data from five exchanges, and updating the Intraday IIV per share every fifteen seconds. This analysis uses daily aggregated data as a proxy for the index price. It might not reflect the actual index prices if high-frequency data is used.

It is important to note that while price differences can be seen between ETPs (and spot price using daily data), price discrepancies among the ETPs themselves are smaller, as shown in the graphs.

Scatter plot to show price differences between ETPs. Source: Cryptowatch

These ETPs that are listed on the same exchange use the same frequency, cut-off time and method of calculating their prices. This is why the price differences between them may be smaller. This confirms that price differences between Bitcoin ETP and Bitcoin spot prices could be due to the frequency and cut-off times used in ETP index calculation. These calculations are not possible to replicate.

Spot price differences between exchanges are very minimal

The SEC asked about the alignment of Bitcoin prices across different trading venues in the first concern at the beginning.

The exchange price differences are small based on cross-platform BTC/USD data from Cryptowatch’s 18 exchanges. To illustrate how closely prices are aligned, Coinbase, Gemini, and Bitstamp were compared against Kraken. The correlation between each pair is close to 100%.

SEC is also concerned by price manipulation and influence from spot platforms not included in the index. Bitstamp and Coinbase Gemini might attempt to profit from Bitcoin prices that are different from those on the four constituent platforms.

The graph at the bottom right compares the volume-weighted median prices from the four platforms to the average price from all 18 exchanges. This allows you to see whether price differences exist. The line is nearly straight and shows that there is little difference between them. Spot platforms don’t have large price differences and prices are almost identical across all Bitcoin trading venues.

Scatter plot to show price differences between exchanges. Source: Cryptowatch

Manipulative acts across exchanges will be difficult due to the high degree of similarity in daily price movements. However, intraday price manipulation is possible but this analysis is not able to detect it due to the lack of high-frequency intraday information.

The analysis of the SIX Swiss Exchange listed ETPs price and the Bitcoin spot price from 18 exchanges shows that there are price differences between ETPs and spot. This could lead to manipulation of the ETP index price. However, applicants often claimed that the advanced index calculation methodology does not allow for such acts.

Based on price differences between the European-listed ETPs and spot prices, the SEC seems to have valid concerns about fraud and manipulation. However, this difference could be due to the daily data frequency that is used in this analysis which may differ from the high-frequency data used for practice.

There are no significant price differences between different Bitcoin trading venues. These spot markets are less regulated and decentralized than traditional stock exchanges. However, it is possible for malicious price manipulation to occur across these platforms.

It is difficult to prove price efficiency or similarity across all the crypto exchanges, regardless of how many they are, because there are so many. To convince the SEC, U.S. ETP applicants have much to do.

com. You should do your research before making any investment or trading decision.

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