A Stronger Foundation for Bitcoin ETF Applications

One of the recurring themes in the digital asset markets across 2018 and 2019 has been the failure of multiple Bitcoin exchange-traded fund applications to gain the approval of the United States Securities and Exchange Commission.

The retail Bitcoin market is just that: predominantly retail.

Any market with a heavy volume of inexperienced investors trading very small sizes is much easier to manipulate largely because these participants are much more likely to overreact to perceived market pressures.

Unless this is addressed in forthcoming applications, we believe that it is extremely unlikely that any Bitcoin ETF that relies on the retail exchange market for a reference price will be approved anytime soon.

Many people, especially those outside of the institutional crypto market, believe that retail exchanges represent the majority of the Bitcoin market.

While no one has come up with a precise measure of the size of the OTC market - most market makers do not publicly release trading volumes - a major study conducted by the Tabb Group in 2018 found that the OTC market is likely three to four times the size of the retail market.

In the OTC market, market makers have minimum trade size requirements that are typically in the $100,000-to-$200,000 range.

Market manipulation typically depends on strategies involving the placement of multiple bids and/or offers into order books, which "Paint a picture" that there is real market interest at certain pricing levels when there is none.

Beyond the manipulability of the underlying market itself, it will also be critical in any ETF applications to show that the reference price is resistant to manipulation.

A pricing mechanism sourced through OTC markets are far more resistant to market manipulation and may give regulators the confidence needed to take an application forward.