Let analyst Matt Hougan at Bitwise explain
BREAKERMAG
March 29, 2019
By Robert Stowe England
Matt Hougan is global head of research for Bitwise Asset Management, a San Francisco company that manages four crypto index funds. Bitwise has filed an application with the SEC for a bitcoin exchange-traded fund (ETF), several of which have previously been rejected by the regulator. Nothing particularly novel there, except that its filing included perhaps the most comprehensive analysis of bitcoin trading ever assembled (it runs to 226 pages). Among the conclusions of the report was this startling factoid: across 81 exchanges that Bitwise analyzed, 95 percent of trading appeared to be fake (or, in technical parlance, “non-economic wash trading”).
To some this points to bitcoin’s fundamental untrustworthiness. To others, including SEC Commissioner Hester Peirce, the report has a more positive message. Five percent of bitcoin trading (or $273 million in daily volume) is real, transparent, and well-organized, on par with the trading of any comparable financial asset. At an NYU event this week, Peirce called the analysis evidence that bitcoin trading occurs in “effective, well-functioning markets,” possibly pointing to a more optimistic outlook for future ETF applications. (In rejecting ETFs previously, the SEC said it lacked the ability to look inside bitcoin markets, thereby potentially putting investors at risk.) We caught up with Hougan to discuss Bitwise’s findings, how it conducted the study, and to talk about the way ahead for ETFs.
Your analysis has generated a lot of press and public comment. What do you think of that attention?
We’ve got an amazing response from the ecosystem. We’ve already seen aggregators changing their practices in the data they report and we feel really good about that.
The headline of 95 percent fake trading volume is shocking to anyone who hasn’t followed closely crypto exchanges.
It is a shocking headline. It’s interesting to walk into a regulator and say in your first sentence that 95 percent of the volume is fake. And in the second sentence we say we’d like you to approve our ETF which tracks bitcoin. From a lay person’s perspective, that’s a confusing juxtaposition. But the reality for those inside the industry is there’s been rumors and a general understating that a large amount volume is fake for a long time. This is the first time someone has combed through data to prove it systemically, to quantify it.
The real news from your study is not the fake volume, right?
The real news is that if you ignore the echo chambers of fake numbers, the real market is very healthy. One fact is that 95 percent of the volume is fake. The countervailing fact is that the real market is extraordinarily efficient and well developed.
What did you find that makes you believe the market is healthy?
There’s a near perfect arbitrage in the real bitcoin market. For example, bitcoin trades on Coinbase with a spread of only one penny. That’s a penny on a $4,000 asset. That’s tighter than the spreads for the SPDR Gold Shares ETF (GLD) and the SPDR S&P 500 ETF (SPY), as well as for crude oil futures and S&P 500 futures. Those are all extraordinarily tight markets. It’s just also the case that the real market for bitcoin fits right in line with those kinds of markets.
Read more at this link.
