Bitwise Asset Management, a San Francisco crypto investment firm, has applied to the SEC for a Bitcoin ETF. In preparation for their application, they conducted a study of 80 exchanges, mostly unregulated. Their findings are worse than most: they found that almost 95% of all unregulated exchanges report fake volume. As such, their ETF will be based only on the 5% that is legitimate.
Bitwise’s findings are worse than most reports to date. Earlier this week, we reported on findings by the TIE, which found that around 75% of all trading was fraudulent.
Prospects for an ETF seem bleak, with more and more unregulated exchanges coming online, competing for a market much smaller than widely believed. Multiple studies have concluded that most exchanges report fake volume. When they don’t overtly report fake trading, many exchanges engage in internal trading, occasionally boosting the price of assets that otherwise wouldn’t see any demand. The most notable case of this, of course, is Bithumb, who despite reporting high volumes recently announced serious layoffs.
There is a case to be made that unregulated exchanges will have higher volume because their listings are wider. The more markets you have, the more volume will you do. Coinbase has far fewer listings than most altcoin exchanges, which could explain why, although it is one of the most recognizable brands in crypto exchanges, it has a lower reported volume than many exchanges. But some sites which receive very little traffic report astronomically high volume.
According to Bitwise, the actual trading patterns make no sense. Consistent amounts of trading will happen throughout the 24 hour period, and trades will be placed that neutralize each other. Human traders are far less predictable than this, and even using bots, some variation is expected based on the inputs. However, trading at places like Coinbase will be consistent with human work hours and round figure trades are common.
With all this fake volume flying around, the actual value of cryptocurrencies as a whole risks being called into question. Can we truly claim there is $100 billion in demand, if the majority of all reported trading never actually happens?
The inconvenient truth is that the crypto market might not be ready for an exchange traded fund, as bad as some folks want it to be so. Unlike regular securities, global regulation of cryptocurrencies is all over the place, with some jurisdictions having full out bans in place and others having advanced frameworks.
We can’t blame Bitwise and others for trying. Whoever does successfully convince the SEC to allow a Bitcoin ETF will
be rewarded handsomely. But the most likely outcome of the application is a slow response followed by a reluctant but hard “no.”