Why Does the SEC Keep Denying Spot Bitcoin ETF Applications?

This isn’t the first time the US Securities and Exchange Commission (SEC) has rejected proposals for a spot Bitcoin exchange-traded product (ETP), but various financial institutions are continuing their efforts. Most recently, the attempt by Cboe BZX Exchange to list Fidelity Wise Origin Bitcoin Trust as a Bitcoin ETP on January 25 failed.

The letter from the SEC is announced 8 said the exchange could not show the fund was designed “to prevent fraud and manipulation” and “to protect investors and the public interest.”

While proposals for a spot bitcoin ETP have never been approved by the SEC and these products are not licensed to operate in the US market, they do exist in the European market. By examining the prices of ETPs traded on the European market, people can gain insight into whether fraud and manipulation are possible.

To examine whether the SEC’s fraud and manipulation concerns are valid, this article compares the price action of three European-listed ETPs and the spot price action of Bitcoin from 18 exchanges to determine if there are significant price differences that could lead to market manipulation .

The main concern of the SEC

From a technical standpoint, there are two major concerns the SEC has raised regarding the BZX exchange’s proposal:

(1) No data or analysis is provided to support the argument that arbitrage on bitcoin platforms helps keep global BTC prices in line, preventing manipulation and eliminating any price discrepancies between markets. There is no indication of how closely the bitcoin price is linked across different bitcoin exchanges or how quickly price differences can be processed.

(2) The exchange’s failure to demonstrate the methodology used to calculate the indicators, making the ETP proposal resilient to fraud or manipulation. In particular, the exchange has not evaluated the possible impact on the bitcoin price used to form the indicator, since the Spot platform is not among the bitcoin platforms used to calculate the indicator.

To see if the above issues exist and if manipulations can take place on ETPs listed on the European market, historical data (from Google Finance) is available for the three listed ETPs. Bitcoin listed on the SIX Swiss Exchange was compared to spot bitcoin prices from exchanges (data from Cryptowatch).

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

The correlation between Bitcoin ETP and the spot price shows that price arbitrage exists

As described in the BZX exchange proposal, the calculation of the indicator is based on the average volume price (VWMP) for the last 5 minutes of the five exchanges Bitstamp, Coinbase, Gemini, itBit and Kraken with daily spot prices from four of the five exchanges, Bitstamp, Coinbase , Gemini and Kraken.

Since the Bitcoin ETP price scale often differs from the spot Bitcoin price, daily percentage change (or daily return) is used on all charts to easily compare spreads.

The charts below show a comparison of the daily returns between the three ETPs and the Bitcoin spot price, calculated by four exchanges using the VWMP methodology.

The chart on the left shows how closely the ETP price aligns with the spot price. If both are perfectly aligned, all points will fall on the blue dashed line. The chart on the right compares the daily win percentages.

Comparing WisdomTree ETP and Spot, although most points in the histogram cluster fall within a +/- 5% radius, there is definitely a significant price difference outside of that radius. There was 1 day in a 3 month period when the daily ETP to Spot rate spread (blue dashed line) exceeded 10%.

Comparison of Spot Bitcoin from 4 exchanges and WidsdomTree ETP (% change) | Source: Cryptowatch

Note that the percentage change volatility of ETP prices tends to be higher than spot prices. The chart below compares Coinbase physical bitcoin (blue line) and spot bitcoin (pink line) and shows that the percentage change of Coinbase physical bitcoin could be closer to 15%, while spot bitcoin is just above the 10% region.

Find Bitcoin from 4 Exchanges vs. Coinbase Physical Bitcoin (% Change) | Source: Cryptowatch

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

Find Bitcoin from 4 Exchanges vs. 21Shares ETP (% Change) | Source: Cryptowatch

The price comparisons shown above show that the market price difference between ETP and spot bitcoin prices from exchanges still exists. Arbitrage was not cleared quickly enough to prevent manipulation.

However, it is important to emphasize that this comparison with daily data is very preliminary. The price difference could be due to the different cutoffs each ETP uses to calculate the end-of-day price, meaning ETP products do not trade for 24 hours like spot crypto prices. They trade during the regular trading hours of the exchanges from 9:30 a.m. to 4:00 p.m.

In practice, a higher frequency is also used to calculate the indicator price. BZX Exchange proposes to calculate the indicator price using the last 5 minutes of data from five exchanges and update the Indication Intraday Value (IIV) every 15 seconds per share. The analysis performed here uses only aggregated daily data to determine the indicator price and may not reflect the actual value of the indicator using high frequency data.

It is worth noting that although the price difference between ETP and spot price can be observed, the price difference between ETPs is much smaller as shown in the figure in the chart below when using daily data.

Spread chart of price difference between ETPs | Source: Cryptowatch

Most likely these ETPs are listed on the same exchange and use the same frequency and last minute to calculate their prices; Therefore, the price difference between them will be smaller. This shows that the price difference between the Bitcoin ETP and the spot Bitcoin price can come from the frequency and the last hour used in the calculation of the ETP indicator, so this analysis does not reflect the full accuracy of the ETP indicator .

The spot price difference between the exchanges is very small

In the SEC’s first thesis, the agency also asked how closely linked the price of bitcoin is across different bitcoin exchanges.

Based on cross-platform BTC/USD data collected from 18 exchanges, the price difference is minimal. Data from Coinbase, Gemini and Bitstamp versus Kraken shows that the correlation between each pair is very close to the 100% region.

The SEC is also concerned about the potential for influence and price manipulation by other spot platforms not included in the indicator. If bitcoin price strays too far from the four that make up the indicator from other platforms, market manipulators Bitstamp, Coinbase, Gemini and Kraken might find a way to exploit arbitrage to turn a profit.

To analyze if there is a price difference between these four platforms and others, the chart below compares the aggregated average price by volume from the four platforms to the aggregated price from all 18 exchanges. The almost perfect line shows almost no difference between them. Spot platforms do not have large price ranges and prices are tightly regulated at various bitcoin trading sites.

Scatterplot for price difference between exchanges | Source: Cryptowatch

Due to the similarity of the daily prices, manipulations on stock exchanges are very unlikely. However, price manipulation is still possible during the day but is not included in this analysis due to the lack of high-frequency intraday data.

Based on analysis from three SIX Swiss Exchange exchanges listing ETP and spot bitcoin prices from 18 exchanges, it appears that price differences between ETP and spot still exist. This can lead to manipulation of the ETP price index, although claimants regularly claim that complex index calculation methods prevent these practices.

The SEC’s concerns about fraud and manipulation seem justified by the price difference between ETPs listed in Europe and spot prices. However, the difference may be due to the fact that the frequency of the daily data used in this analysis differs from the high-frequency data used in practice.

In contrast, there is no significant price difference between different bitcoin exchanges. While the spot markets in these locations are more decentralized and less regulated than traditional exchanges, price manipulation is still very difficult on these platforms.

With the large number of regulated and unregulated centralized and decentralized cryptocurrency exchanges, it is difficult to prove price efficiency and similarities between all of them. ETP applicants in the United States will still have a long way to go before convincing the SEC.

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