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Derivatives in Crypto, Explained

From mitigating risks to gaining on price difference: A multifaceted world of financial derivatives and their application in crypto, reviewed.

Are there any downsides of trading crypto derivatives?

All trading strategies related to price fluctuations imply a certain level of risk, especially combined with the lack of relevant regulation for the crypto derivatives sector. 

When it comes to crypto derivatives, the biggest risk that traders face is volatility. Prices can rise and fall at speeds that make your head spin, and losses can be amplified substantially whenever someone is trading on margin.

To better help mitigate these risks, a tiered maintenance margin ratio system has been adopted by OKEx to avoid the liquidation of large positions, events that can have a huge impact on market liquidity. During a recent “flash crash,” when Bitcoin suddenly plunged from $7,800 to $6,100 in just five minutes, OKEx’s risk management system managed to stabilize the quarterly contract price from a fierce fluctuation — at about $7,000 — while other crypto exchanges offering derivatives experienced a nosedive, as shown in the graph involving other market players such as BitMEX derivatives prices.

This market is a complex beast, and it can be difficult to navigate for inexperienced users. Rookie mistakes can be extremely costly, and the unpredictability of crypto derivatives greatly amplifies the likelihood of something going wrong. As a result, it’s important to fully understand the features that a trading platform can offer, follow the tutorials and make sure you have a solid strategy in place.

It’s also worth paying close attention to regulation. Regulators in different countries are cautious about crypto futures and other types of such contracts — as well as with cryptocurrencies themselves. The U.S. Securities and Exchange Commission (SEC) is closely monitoring the area and has already filed charges against an international dealer, who was illegally offering Bitcoin-funded, security-based swaps in the country. At the same time, the European Economic Area has not yet elaborated clear guidelines on how to treat crypto derivatives and how they should be regulated.

The article was co-authored by Connor Blenkinsop.

Where can I trade crypto derivatives?

Crypto derivatives of different kinds can be traded officially both on traditional exchanges and regulated crypto exchanges. 

As per traditional exchanges, Bitcoin futures are currently offered by CME Group, as CBOE stopped adding new contracts in March. Meanwhile, in December 2018, Nasdaq stated it was considering launching Bitcoin futures in the first half of 2019. As cryptocurrencies are expected to gain more mainstream and institutional adoption, it is highly likely that more traditional players will trade crypto derivatives soon. 

Institutional exchanges are also offering these types of contracts. Institutional crypto derivatives provider LedgerX started trading regulated swaps and options contracts in October 2017, shortly after receiving approval from the U.S. Commodity Futures Trading Commission (CFTC). Another institutional crypto platform, Bakkt, delayed the launch of its Bitcoin futures trading several times but has finally scheduled the testing of the product for July 2019.

Major crypto exchanges are also actively involved in crypto derivatives trading. Malta-based OKEx offers futures and perpetual swaps trading, which is a contract with no expiration, with 100x leverage, and delivers them through an optimized and scaling engine. A range of popular crypto assets such as Bitcoin, Ether and EOS are supported — and USDK, a newly launched stablecoin, is also listed.

How are derivatives used in crypto trading?

Cryptocurrencies are increasingly gaining popularity, and there are more traders who want to benefit from price fluctuations. 

Bitcoin’s rate has had a wild ride over the past two years — surging to its all-time high around $19,800 and then losing one-third of its value in just a few days, continuing to drop throughout 2018 to as low as $3,200. However, in April 2019, things started to change again, and the current price of Bitcoin — over $12,171, as of press time — is far from pessimistic. 

Bitcoin futures trading was launched by the Chicago Board Options Exchange (CBOE) and the Chicago Mercantile Exchange (CME) during the peak of the crypto bull market in December 2017. The move was a huge milestone for the whole crypto industry, as a futures contract allows investors to hedge positions and reduce the risk of the unknown, which is quite relevant for cryptocurrencies. In other words, trading Bitcoin and altcoin futures enables major traders to mitigate their risks by signing a contract that settles directly to an underlying auction price of a particular cryptocurrency. 

Moreover, there are, obviously, many traders who want to benefit from those drastic changes by trading derivative contracts for Bitcoin and major altcoins. To make a profit from a sudden change in the underlying asset’s price, the trader can buy a cryptocurrency at a low price and sell it at a higher price later. However, this strategy is only relevant during a bull market and is quite risky, as are all other attempts to speculate on the price of the underlying asset.

Another strategy is called shorting, which is a way to profit even from a crypto bear market or a market that is currently experiencing a downtrend. To short, the traders usually borrow the assets from a third party — whether it be an exchange or broker — and sell them on the market when they expect the price to decrease. As the coin’s price goes down, the trader purchases the same amount of assets back for a lower price and profits from the price movement, while the exchange or the broker gets paid a commission.

What are the common forms of derivatives?

There are four major types of derivatives: futures, forwards, swaps and options. 

Futures and forwards are similar types of contracts with only slight differences. Thus, futures oblige the buyer (or buyers) to purchase the asset at a previously agreed-upon price on a specific date in the future. These futures are traded on exchanges, and the contracts, therefore, are similar and standardized. As for forwards, this type of contract is more flexible and customizable for the needs of both traders. As forwards are normally traded on over-the-counter (OTC) exchanges, counterparty risks should always be taken into account. 

Options grant the buyer the right to purchase or sell the underlying asset at a certain price. However, according to the terms of the contract, the trader is not necessarily obliged to buy the asset, which is a key difference between options and futures.

Swaps are derivative contracts that are often used between two parties to exchange one type of cash flow for another. The most popular types of swaps are related to interest rates, commodities and currencies. Normally, swaps imply the exchange of a fixed cash flow for a floating cash flow. That is, a trader can choose an interest rate swap to switch from a variable interest rate loan to a fixed interest rate loan, or vice versa.

Why would a trader use derivatives?

Derivatives are generally used to hedge risk or to speculate on the price of the underlying asset in case it changes. 

Derivatives are used in many areas but mainly for hedging purposes, namely when investors want to protect themselves from price fluctuations. In this case, signing a contract to buy an asset for a fixed price would help mitigate related risks. Another way to take advantage of derivative trading is speculation, when traders are trying to predict how the asset’s price might change over time. That is the reason why high-profile American investor Warren Buffet once called derivatives “financial weapons of mass destruction,” sharing a commonly held view that they were to blame for the 2007-2008 global financial crisis.

There are many ways in which derivatives can be applied in real life. For instance, prior to the aforementioned crisis, major United States holding company Berkshire Hathaway started selling put options on four equity indexes, including the S&P 500 and FTSE 100. A put option is a form of derivative that gives the owner the right, but not the obligation, to sell an underlying asset to the seller of the put at a specified price by a predetermined date. In this case, Berkshire Hathaway offered investors the chance to purchase an option premium and therefore buy the ability to sell their stocks at an agreed-upon price and date. When the date finally came, they could earn money by selling a stock whose price had visibly decreased. However, if the price has been rising through that period of time, the company received the option premium. In this particular case, Berkshire Hathaway took the risk and earned around $4.8 billion as a result. 

Another interesting example of using derivatives comes from the airline business. As airlines are heavily dependent on jet fuel, the price of which continually sees ups and downs, it is very useful for the business to implement appropriate derivative hedging strategies. The world’s largest low-cost carrier, Southwest Airlines, which operates in the U.S., is a well-known example of success in this area. Because of its well-designed hedging program, the airline managed to lock crude oil prices at a very low rate and has therefore been paying between 25% and 40% less for its jet fuel than its competitors for years. 

Some use cases are nowhere near traditional finance systems. For example, there is a whole segment of weather derivatives aimed to protect farmers, commodity providers and others from weather-related losses, such as frost or hurricanes.

What is a derivative?

A derivative is a financial contract between two or more parties based on the future price of an underlying asset. 

Financial derivatives are discussed a lot when it comes to the crypto industry, especially concerning futures contracts for Bitcoin or altcoins. It is worth noting that the derivative is one of the oldest forms of a financial contract that exists on the market. The history of this type of deal can be traced to antiquity: In medieval times, derivatives were used to facilitate trades among merchants who traded all over Europe and participated in periodical fairs, an early form of markets in the Middle Ages.

Derivatives have evolved for centuries to become one of the most popular financial tools. Nowadays, a derivative is understood as a security that derives its value from an underlying asset or benchmark. The contract can be signed between two or more parties that want to buy or sell a particular asset for a specific price in the future. The value of the contract will therefore be determined by changes or fluctuations in the price of the benchmark it derives its value from.

Normally, the underlying assets used in derivatives are currencies (or cryptocurrencies), commodities, bonds, stocks, market indexes and interest rates. Derivatives can either be traded on exchanges or customer-to-customer (C2C), which is quite different in terms of regulation and manner of trading. Normally, however, active traders use both methods.

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Is Facebook’s Libra Coin The First Crypto ETF In All But Name?

facebook

Forget about waiting for a bitcoin exchange traded fund (ETF) to come along – Facebook has just listed a crypto ETF.

So says Dave Nadig, the managing director of ETF.com. Libra is essentially a currency ETF in all but name he claims in a thought-provoking article titled: Most Interesting ETF Filing Ever: Libra

Nadig knows a thing or two about ETFs but by his own
admission has only a “tangential” take on crypto.

His interest piqued by Facebook’s audacious move,  upon closer inspection of Libra, he concludes
it is remarkably similar to an ETF.

After all what is an ETF other than a vehicle for tracking
the price of a basket of underlying assets.

This is the part of the Libra whitepaper that has got him excited:

“Users will not directly interface with the reserve. Rather,
to support higher efficiency, there will be authorized resellers who will be
the only entities authorized by the association to transact large amounts of
fiat and Libra in and out of the reserve. These authorized resellers will
integrate with exchanges and other institutions that buy and sell
cryptocurrencies to users, and will provide these entities with liquidity for
users who wish to convert from cash to Libra and back again.”

“That sounds a lot like creation and redemption in an ETF!”
says Nadig.

To be precise, he thinks it resembles an actively managed ETF invested in a basket of currencies, likening it to the WidsomTree Emerging Currency Strategy Fund (CEW), although with Libra there are no fat fees charged by the fund manager, the interest goes to the Libra Association not the holder of the underlying instrument and of course ETFs are regulated as opposed to the unreleased Libra which, as yet, no one is clear how to regulate it.

And borrowing from the work of David Weisberger, he says he would not be at all surprised if the US Securities and Exchange Commission (SEC) does not come to the conclusion that Libra should be under its purview.

Nadig sees that as a deliberate ploy on Facebook’s part.

He concludes that filing Libra as an ETF, if that were required by the SEC, would be easy to comply with.

Discovering a brave new tokenised world

What has got him even more excited is the trading aspect, which would be the tricky part re. an ETF filing. Nadig is really talking about tokenisation without using the word:

“Libra envisions making these transactions seamless and
registered on the blockchain. So for example, right now, I don’t have a way to
hand Amazon a share of the SPDR S&P 500 ETF Trust (SPY) in exchange for a
bunch of books and sunscreen and groceries. Libra envisions a world where I can
directly do just that.”

Nadig has just discovered tokenisation – and so likely are many others in the ETF and mainstream financial world.

As Nadig puts it himself, it is a radically improved way of “moving
a security from pocket A to pocket B”.

He’s actually agnostic on where Libra ends up from a regulatory perspective and it is irrelevant to his discussion whether it is actually listed as an ETF. It’s the debate its has opened up that matters most.

What Libra is not

In trying to define what Libra is, he dismisses the notion that it is analogous with the IMF’s special drawing rights (SDRs) instruments because, unlike Libra, they are not transactional.

It’s not strictly a stablecoin or debt instrument either,
says Nadig – the interest is paid to the Libra Association members not holders
of the Libra coin per se.

In fact, it’s closer to M-Pesa, although ultimately that is
a mobile banking system and not a global digital asset transactional platform
as envisioned by Libra/Facebook.

Whatever the regulators and politicians do, something like Libra coming to fruition is only a matter of time:

“This may make Libra seems like a far-fetched, not-gonna-happen idea, but I don’t think so. I really think it’s just a matter of timing, not feasibility.”

He sees the advent of Libra opening up a “conversation about
the role of money in the modern world”.

He concludes: “For that reason, as much as I’m wary of
Facebook, in this case, I for one welcome our new crypto overlords.”

Put that another way, the financial supervisors and
politicians in Washington DC and elsewhere are behind the curve.

You can read the full illuminating article here.

Thanks to a colleague at Money Observer (Tom Bailey https://twitter.com/tBaileyBailey ) for bringing Nadig’s article to my attention.

The post Is Facebook’s Libra Coin The First Crypto ETF In All But Name? appeared first on Ethereum World News.

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SEC Chairman: Other Market Protections Needed Before Bitcoin ETF Approval

SEC Chairman Jay Clayton said that the regulator needs to deal with crypto custody and market manipulation before approving a crypto ETF.

United States Securities and Exchange Commission (SEC) Chairman Jay Clayton said that the regulator needs to feel comfortable with cryptocurrency custody and ensure no market manipulation can take place before approving a crypto exchange-traded fund (ETF). Clayton made his remarks during an interview with CNBC on June 6.

When Clayton was asked whether an ETF based on a bundle of cryptocurrencies could be released in the U.S., Clayton said that the SEC is currently working on making that possible.

Still, he also noted that various issues have to be resolved before a cryptocurrency ETF will be approved, starting with custody:

“We’re engaging on this, but there are a couple of things about it that we need to feel comfortable with. The first is custody: custody is a long-standing requirement in our markets, and if you say you have something you really have it.”

Another major concern for the SEC is the alleged absence of robust preventative measures for market manipulation. Clayton said:

“The other thing that is important is […] we have sophisticated rules and surveillance to ensure that people are not manipulating the stock market, those cryptocurrency markets by large do not have that; And we’re working hard to see if we can get there, but I’m not just going to flip a switch and say this is just like stocks and bonds, because it’s not.”

Clayton’s views are seemingly in stark contrast with those expressed earlier this week by SEC commissioner Hester Peirce, who has urged for a less cautious approach toward innovation in the ETF space on the regulator’s part.

Yesterday, the SEC also filed fraud charges against supposed cryptocurrency firm Longfin Corp. and its CEO Venkata S. Meenavalli.

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SEC Commissioner Hester Peirce Encourages Less Caution Toward ETF Innovation

SEC commissioner Hester Peirce urged for a less cautious approach towards innovation in the ETF space.

Hester Peirce, commissioner at the United States securities regulator, has urged for a less cautious approach towards innovation in the exchange-traded funds (ETFs) space on the regulator’s part. The Financial Times reported on her remarks on June 2.

Per the report, the Security and Exchange Commission’s (SEC) Peirce called on her co-commissioners to allow for innovation in the ETF space by lessening their caution.

She reportedly commented on the SEC’s approach towards this category of highly regulated financial derivatives, noting that the SEC is “still smothering ETFs with personalised attention as if they were infants.”

Peirce also noted that she believes the regulator was wrong in its decision to reject the bitcoin (BTC)-based ETF application introduced by the Winklevoss twins, who are also founders of the Gemini cryptocurrency exchange. According to Peirce, an ETF would encourage institutional investors to participate in the cryptocurrency market.

The CEO of world’s third-largest asset manager, State Street Global Advisers, Cyrus Taraporevala commented to the Financial Times:

“If something does go awry with them, then the whole industry gets painted with the same brush. […] We do not do inverse ETFs or leveraged ETFs. That will be the case as long as I am in my role.”

In 2010, the SEC reportedly banned leveraged and inverse ETFs, presumably because they can produce particularly large losses, the Financial Times notes. Still, Peirce noted that other types of mutual funds also use derivatives to amplify their exposure, and it was clear that unsophisticated retail investors are not the target for leveraged ETFs. She reportedly commented:

“The unwillingness to allow more competitors to offer geared ETFs seems to be another example of denying or curtailing access to a product that would be useful to some investors.”

The Financial Times further notes that the U.S. regulator in question is also expected to introduce new ETF regulation, which is expected to speed up innovation in the space.

As Cointelegraph reported at the end of May, the Japanese Financial Services Agency has also showed a cautious approach towards cryptocurrency-based ETFs, according to comments from the finance committee of the upper house of the National Diet.

A recently released Cointelegraph analysis writes that part of the crypto community believes bitcoin’s volatility could render the odds of an ETF based on the coin being approved significantly lower.

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Bitwise Calls Out to SEC: 95% of Bitcoin Trade Volume Is Fake, Real Market Is Or

The size of the legitimate BTC trade volume is just as large as the bitcoin futures market, Bitwise tells the SEC.

At the 1997 edition of the annual Worldwide Developers Conference — an event put together by iPhone-maker Apple Inc. to communicate directly with its community of developers and users — a participant asked founder and then-CEO Steve Jobs the following question:

“What do we do about the press? Wall Street Journal reporters get up in the morning, sell Apple short and then go write stories about us. And, it’s clear that it’s perception versus reality. They don’t know s— about operating systems. They don’t know anything about tools. They don’t know what’s going on in the future. They don’t know that we’re building icebergs, and building from the bottom up.”

The bitcoin (BTC) market is in a somewhat similar position. The mainstream media has published quite a handful of negative headlines. A considerable population of traditional finance folks, who can’t wrap their heads around the need and use of bitcoin, are happy to point at inconsistencies in the market to back their “I told you so” declarations about how they believe bitcoin is a farce.

Jobs replied by comparing the way the press treats new developments to how people tend to treat a child whom they saw as an infant, disregarding the fact that the child might have matured considerably since then.

In the case of bitcoin, the lag time is not only true for the press, but also for regulators and traditional finance professionals. Additionally, it appears that the crypto community is accepting and following the notion — perhaps unintentionally — by educating the public about how bitcoin and the crypto space at large are evolving. There have been scads of reports with the aim of doing just that. The latest is from Bitwise Asset Management, an American crypto asset fund manager.

Bitwise has recently prepared a 104-page white paper. In it, the fund manager argued that the bitcoin market still has inconsistencies regarding trading data, but the legitimate part of the market has a “remarkable efficiency.”

The report builds on a presentation Bitwise had made to the United States Security Exchange Commission (SEC) in March of 2018 to back up its cryptocurrency exchange-traded fund (ETF) application filing.

Here’s are the most important points, with some perspective, from the report.

Approximately 95% of reported BTC trading volume is fake

As part of the research, Bitwise analyzed trading data of some 83 exchanges. Researchers said they looked at the trade size histograms, volume spike alignment and spread patterns of these exchanges. They concluded that there are only 10 exchanges with 100% real trading volumes, and these 10 exchanges collectively account for 5% of the reported trading volume.

Bitwise classifies the 10 exchanges as real volume exchanges or reference exchanges. The 10 exchanges include Binance, Bitfinex, bitFlyer, Bitstamp, Bittrex, Coinbase Pro, Gemini, itBit, Kraken and Poloniex. Among the 73 exchanges that Bitwise condemned as displaying fake volumes are OKEx, HitBTC and Huobi.

As expected, there were questions raised about the reliability of the Bitwise study considering that these popular exchanges aren’t regarded as real volume exchanges. Bitwise pointed out that the trading data of the three exchanges doesn’t follow that of Bitwise’s real volume exchanges. It also referenced existing research that found similar patterns with the three exchanges to support its findings.

Fake Transaction Volumes Estimated by Different Researchers

Using the data above, the average daily volume of these three exchanges would have increased the volume of legitimate trading in the Bitwise study from $554 million to $622 million. But the researchers said that it wouldn’t have materially changed their conclusion.

HitBTC published a blog post in response to Bitwise’s report in which it says it that it has a different customer profile compared to other exchanges, particularly those that the report branded as legitimate. That’s because the exchange supports algorithmic trading, whose pattern is likely to noticeably differ from human trading. HitBTC wrote:

“Different exchanges have different customer profile. HitBTC is among the first crypto exchanges to offer low-latency institutional grade (FIX) trading API. This is why the client profile of HitBTC differs from that of unmentioned but implied ‘reference exchanges’.”

Low-latency trading simply means strategies that respond to market events in milliseconds, and algorithmic trading is one of those strategies. 

Bitwise did recognize the use of algorithms in crypto trading by pointing out that the average price deviation of 0.12% across its real volume exchanges is within the arbitrage band, adding that the trend “suggests that institutional-quality arbitrageurs and algorithmic programs are in place that monitor the system and identify and capitalize on any pricing discrepancies to constantly keep the prices closely together.”

OKEx, on the other hand, admitted that some traders engage in wash trading on its platform to quickly build their trading volume so they could enjoy a lower fee structure.

The remaining 5% makes up for a highly regulated and efficient market

With six of the 10 legitimate volume exchanges in the report based in the U.S., Bitwise argues that the crypto space is more regulated than presumed. Of the 10 exchanges, only Binance isn’t a money services business (MSB), while only the four non-U.S.-based exchanges don’t possess a BitLicense, which is issued by the New York State Department of Financial Services. This level of oversight only breads transparency.

The crypto market is maturing thanks to developments since December 2017

The year 2017, marked the time when bitcoin attracted the most attention from the mainstream world, thanks to the wild bull run that saw the crypto go from just under $1,000 per BTC to nearly $20,000 by the end of the year. But, the following 12 months saw the price drop to as low as nearly $3,000 during a period that is widely regarded as the crypto winter.

Bitwise research suggests that the bitcoin market has significantly matured over the period. First of all, pointing to a downward trend in the average deviation of bitcoin’s price on its 10 reference exchanges from the consolidated price in the broader market, research claims that the quality of the bitcoin spot market has improved.

The Aggregate Average Deviation of Bitcoin's Price from Consolidated Price

According to the chart, the price of bitcoin on the 10 exchanges deviated by as much as 0.25% to 0.4% between January and March 2018. The trend, however, levels out as of April 2018. Bitwise suggests that this trend shows the growing competitiveness of bitcoin arbitraging.

Also, the introduction of bitcoin futures in December 2017 has attracted bigger traditional market players to the crypto space and has so far made the market more organized, according to Bitwise. The cryptocurrency space has seen the entrance of one of the world’s largest asset managers, Fidelity Investments, which has built a custodianship solution.

Algorithmic market makers including Jane Street, which traded more than $8 trillion across all financial products in 2018, also started offering bitcoin trading in 2018. Other large algorithmic market makers that have entered the space include Susquehanna International Group, FlowTraders and Jump Trading LCC.

These developments, according to Bitwise, have allowed the bitcoin market to sizeably grow in efficiency. The paper points at trends on how deviations in price are being rapidly wiped off the market as proof that institutional-grade tools are being deployed.

Nail-biting moments in anticipation of Bitwise ETF ruling

Bitwise is currently awaiting a decision to be made on its ETF filing with the SEC. With this report, the crypto asset manager aims to alleviate the SEC’s fears and show the commission that the market has matured to a level where it can sustain an ETF product.

When the SEC rejected an ETF application by the Winklevoss brothers last year, it expressed concerns that regulated derivatives markets such as the bitcoin futures market are small relative to the spot market. In turn, this would make it difficult to see through the unregulated, and possibly fraudulent, nature of the bitcoin market.

By showing that the spot market is significantly smaller than often reported, Bitwise pointed out that the size of the bitcoin futures market is almost as large as the bitcoin spot market. Through this, the fund manager hopes to persuade the SEC to finally ease up on its concerns regarding cryptocurrencies.

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Japanese Financial Services Agency Approaches Crypto ETFs With Caution, Cites Volatility

The Japanese Financial Services Agency showed a cautious approach towards cryptocurrency-based ETFs.

The Japanese Financial Services Agency (FSA) showed a cautious approach towards cryptocurrency-based exchange-traded funds (ETFs) in comments at the finance committee of the upper house of the National Diet on May 30. Cointelegraph Japan reported on the comments earlier today.

Per the report, local politician Takeshi Fujimaki noted during the meeting that he expects a crypto-based ETF to be approved in the United States, citing both positive and negative statements released by United States Securities and Exchange Commission commissioner Hester Peirce. He then noted that such a product would be an important development and that Japan should not be left behind other countries in this regard.

Fujimaki also reportedly addressed hacking, stating that — in the case of ETFs — crypto assets would be entrusted to banks and kept by custodians. Furthermore, he claimed that the introduction of such an asset would result in growth for the market by making institutional investment easier, resulting in lower volatility.

However, an FSA representative reportedly showed opposing views during the meeting, claiming that cryptocurrencies such as bitcoin (BTC) lack intrinsic value, which could result in unbearable price volatility. Fujimaki answered, reiterating his idea that an ETF would diminish the volatility of cryptocurrencies and make it easier to invest in an asset that he deems desirable and necessary.

As Cointelegraph recently reported, the Japanese House of Representatives has passed new crypto regulation in the upper house of the National Diet.

In April, Japan’s Minister of Finance and deputy prime minister Taro Aso urged reporters to stop using the term virtual currencies and switch to the newly-proposed legal name crypto assets.

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Abra Allows Bitcoin Holders to Fractionally Invest in Stocks and ETF with Zero Fees in 2019

Bitcoin Abra

Abra,
a crypto investment app with its headquarters in San Francisco, USA, is
allowing its non-US users to invest in exchange-traded funds (ETFs) and stocks
with Bitcoin as collateral.

In
a tweet, Abra
said:

“It’s finally here! Abra is offering (non-US users) the ability to invest in stocks ETFs, and commodities in over 150 countries. Starting today, investors can use Bitcoin to make fractional investments in stocks and ETFs with $0 trading fees for 2019.”

Solving Access and Affordability

Notably, Abra is the first company in the United States to unveil such services. The app’s founder and CEO, Bill Barhydt, noted that although people in the US are exposed to investments in the financial sector, the world’s population outside the US “is not invested in financial assets or markets.” For Barhydt, this is caused by not having access to these assets and or affordability.

As of the time of writing, Abra was allowing users to invest in several high profile companies such as Uber, Tesla, Google, and Amazon. Additionally, with Bitcoin, the app enables investments in gold and oil trusts. Luckily, it does not end there. Abra has a reward system in place where users earn $25 for bringing their friends on board. To help more users to take advantage of the new revolutionary service, trading on Abra will be free till the end of this year.

It’s Already in Use

Abra
is already in use outside the United States. On May 27,
the Abra founder tweeted:

“Venezuelans are using Abra Global to buy Bitcoin and other cryptos as well as invest in US stocks and ETFs via Bitcoin.”

However, Venezuela-being among the first countries to embrace Abra, does not come as a surprise. The country’s government issued fiat currency, Bolivar, is suffering from massive inflation which has already spiraled out of control. Therefore, Bitcoin and other virtual currencies come as a savior for Venezuelans.

The
crypto investing app expanded its offering in February this year, where it
added 50 new investment opportunities. But, since things like stocks are not on
the same platform as Bitcoin or crypto – blockchain- Abra brings in
cryptocurrency collateralized contracts. This means that Abra isn’t tokenizing
stocks and other traditional investments.

How Does The Collateralized Contract Work?

Instead,
according
to the Abra CEO:

“If you use Abra right now to hold euros, or Monero, or ZCash in the Abra app, what you’re actually getting is what we call a crypto collateralized contract. It basically takes Bitcoin and pegs it to the value of whatever asset you want investment exposure to[…].  Meaning if you buy $1,000 worth of Apple [shares] and you’re using Bitcoin to actually make the contract, if the price of Apple [shares] goes up you end up with more Bitcoin, if the price of Apple [shares] goes down you end up with less Bitcoin.”

Financial
markets are believed to be a critical pillar to those seeking to build personal
wealth. However, apart from only helping its users along this path, Abra is
also helping interface crypto with traditional markets, thus driving crypto adoption
and expanding use cases.

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Will Bitcoin’s Volatility This Month Hinder the Future of an ETF?

There exists a possibility the abrupt fall of bitcoin to $6,400 could hinder the chances of an ETF approval.

On May 17, bitcoin’s (BTC) price experienced a “flash crash,” dropping to $6,400 within minutes, which was triggered by a 5,000 BTC sell-off — equivalent to around $35 million at the time.

An individual investor, speculated to be a whale — an investor holding a significant amount of bitcoin — is said to have placed a massive sell order on Bitstamp, a major bitcoin exchange based in Europe.

BTC/USD Crypto Chart on Bitstamp on May 17

The sell order caused the price of bitcoin on Bitstamp to briefly drop to $6,400, which then led contracts on BitMEX, popular bitcoin margin trading platform internationally, to be liquidated in a short time frame.

BitMEX contracts were liquidated by the “flash crash” on Bitstamp because the bitcoin index of BitMEX heavily relied on Bitstamp’s feed prior to May 20.

Before the mass liquidation of contracts on BitMEX, the exchange’s bitcoin index was only dependent on Coinbase Pro and Bitstamp, and as the bitcoin price on Bitstamp plummeted, it consequently led the price of bitcoin on BitMEX to abruptly drop.

Following the incident and the initiation of an investigation by Bitstamp, BitMEX added Kraken to its index to reduce the chances of manipulation.

BitMEX includes Kraken to its bitcoin index

“Effective 22 May 2019 at 04:00 UTC, Kraken will be reintroduced into several of BitMEX’s Altcoin and Bitcoin Indices. This update is a reflection of a change in our Kraken market data feed handler from using Kraken’s REST API to their new Websocket API,” the BitMEX team said.

Could the incident hinder a bitcoin ETF approval?

Subsequent to the unforeseen 18% drop in the bitcoin’s price, researchers in the crypto industry — including Gnosis product developer Eric Conner — said that the incident could hurt the probability of an exchange-traded fund (ETF) gaining approval by the United States Securities and Exchange Commission (SEC) in the near term.

Conner added that, “For reference someone put a 5,000 BTC sell on BitMEX, which BitMEX uses for 50% of its feed and it appears to have tripped some algorithms which made a cascade on BitMEX.”

He also added that every rejection of an ETF proposal included the concerns of the SEC regarding market manipulation on unregulated exchanges:

“Every single ETF rejection has cited market manipulation on unregulated exchanges as the #1 reason for rejection.”

The SEC’s rejection of a bitcoin ETF in July 2018 that was filed by the Winklevoss twins, for instance, explicitly stated that the ETF did not meet the SEC’s requirements concerning the prevention of fraudulent and manipulative acts and practices.

Citing the ETF proposal’s reliance on a crypto asset exchange and the lack of regulations in overseas markets, the SEC said:

“Although the Commission is disapproving this proposed rule change, the Commission emphasizes that its disapproval does not rest on an evaluation of whether bitcoin, or blockchain technology more generally, has utility or value as an innovation or an investment. Rather, the Commission is disapproving this proposed rule change because, as discussed in detail below, BZX has not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with the requirements of the Exchange Act Section 6(b)(5), in particular the requirement that its rules be designed to prevent fraudulent and manipulative acts and practices.”

The SEC, however, emphasized that the disapproval of the ETF proposal was not an evaluation of bitcoin or blockchain technology, clarifying that the rejection explicitly concerns the ETF filing.

Other ETF rejections by the SEC, including the disapproval of nine ETFs by the SEC in August 2018 similarly cited the relatively small size of the bitcoin futures market and the spot exchange market, which could leave the ETF vulnerable to manipulation. The SEC ruling published on Aug. 22 read:

“And where the Commission has considered a proposed ETP based on futures that had only recently begun trading,38 the Commission specifically addressed whether the futures on which the ETP was based — which were futures on an index of well-established commodity futures — were illiquid or susceptible to manipulation.”

What a VanEck director thinks about the argument

Speaking to Cointelegraph in an exclusive interview, Gabor Gurbacs, the director of digital asset strategy at VanEck, an investment management firm based in New York with $47 billion in assets under management, said that the volatility of bitcoin will likely have no effect on the prospect of an ETF.

Gurbacs said that millions of U.S. citizens trade and hold bitcoin on an exchange, and a strictly regulated ETF would offer more protection to retail investors.

“The current rise and decline in Bitcoin price have no barring on the prospects of an ETF. Millions of Americans hold Bitcoin on an exchange, in OTC products and other forms. Bitcoin is already mainstream. An ETF would add extra customer protections and liquidity as highlighted earlier.”

On May 2, Gurbacs said that a bitcoin ETF brings better protection measures for investors than existing investment vehicles, which would allow investors to commit to the crypto market in a safer and more secure environment:

“ETFs offer: daily proof of reserves (NAV), transparent holdings, transparent prices, high liquidity, proper tax documents, and investor protections. Bitcoin and crypto need transparent, liquid and regulated ETFs. Investors deserve fair and orderly markets and better protections.”

He further added that in recent months, well-regulated over-the-counter (OTC) platforms and trading platforms have emerged to serve accredited investors and institutions, which can provide accurate market data.

The New York Stock Exchange’s parent company, the Intercontinental Exchange (ICE) is preparing to debut Bakkt in July with a test operation, and Fidelity — the fourth-largest asset manager in the global market — is set to launch a bitcoin custodial service in the near term through Fidelity Digital Assets.

“What’s the benefit of leaving millions of people in/on unprotected and substandard vehicles and platforms? The free market should decide their preference. Right now everyone is pushed toward lesser alternatives/product,” Gurbacs said, adding that “there are a good number of highly regulated Authorized Participants(APs), OTC platforms, broker-dealers and trading platforms that are appropriate.”

ETF expert says don’t wait on a bitcoin ETF

On CNBC’s ETF Edge, ETF.com Managing Director Dave Nadig said that it is quite clear the SEC is in a phase wherein it is focusing on gathering as much information as possible about ETF proposals surrounding bitcoin and potentially other crypto assets.

“Well certainly everybody who has filed an ETF has put hundreds of pages of documents back to the SEC trying to close some of these gaps. But, based on the comments we’ve seen last week around one of these filings, it is clear to the SEC is information gathering mode.”

As such, considering the tendency of the SEC to be cautious about the approval of new ETFs and investment vehicles, former Kobre & Kim LLP litigator and U.S.-based attorney Jake Chervinsky said he does not expect the highly anticipated bitcoin ETF proposal of VanEck to be approved. That would mean ETF proposals that are expected by the public to have the best chances of being approved are likely to be rejected.

“First, I’d be shocked if the SEC approved the first ever bitcoin ETF after six years of denials without taking all the time allowed by law. Moving slowly makes the SEC appear thoughtful & thorough. VanEck’s final deadline is October 18. An early decision likely means denial.

“Second, market conditions don’t support early approval. Bitcoin has been very volatile recently & investigations related to fraud & manipulation have ramped up (like NYAG & Bitfinex). The SEC has no reason or incentive to come out in favor of bitcoin in this environment.”

On April 25, the Office of the New York Attorney General (NYAG) filed a lawsuit against iFinex, the parent company of Bitfinex and Tether, for allegedly misusing $900 million of Tether’s cash reserves.

The NYAG alleged Bitfinex had lost $850 million in a dealing with Crypto Capital Corp., a “bank” based in Panama that had processed transactions for crypto exchanges in the past, and covertly received a loan worth $900 million from Tether without alerting investors.

Given the ongoing legal dispute between iFinex and the NYAG, Chervinsky suggested that the SEC does not have an incentive to essentially go out of its way to support the crypto industry with an early decision to approve an ETF proposal, which the SEC does not typically do.

What would it take for the SEC to approve an ETF?

Overall, as ETF expert Nadig said, things are seemingly heading in the right direction for bitcoin investors.

“I think things are pointing towards a positive resolution for bitcoin bulls but I don’t think it is imminent,” Nadig said. And when asked whether he thought something would eventually happen, he said, “I do.”

While there exists a possibility that the SEC will continue to delay ETF proposals for years until the commission feels comfortable approving an investment vehicle, experts generally foresee an ETF being introduced to the U.S. market in the long term.

If the rate in which the infrastructure surrounding the crypto market, particularly the institutional side, continues to increase in the short to medium term, with both companies within the crypto market and in the traditional finance sector vamping up efforts to build better custodial solutions, it could contribute to the approval of the first bitcoin ETF.

The launch of Bakkt, an ICE-backed bitcoin futures market, and other strictly regulated platforms may also raise the confidence of the commission in the structure of the crypto market, as that would decrease the probability of market manipulation.

At its peak in May, the CME bitcoin futures market recorded a daily volume of over $1 billion, which is four times larger than the daily spot volume of bitcoin in early March.

For regulators, the increase in the market share of regulated players like futures markets and strictly compliant exchanges — such as Gemini, Coinbase and Kraken — would create a more favorable market to regulate and to introduce to the broader mainstream investor base.

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SEC Postpones VanEck Bitcoin ETF, Yet Again. Should We Expect an Approval in 2019?

The SEC delays its decision on the VanEck SolidX bitcoin ETF proposal yet again.

Yesterday, the United States Securities and Exchange Commission (SEC) postponed its decision on the VanEck/SolidX bitcoin (BTC) exchange-traded fund (ETF) proposal, signaling that the regulator is still not ready to see crypto-based funds being traded on regulated exchanges.

However, while the general sentiment is that the agency will continue to push back, there’s a slight chance that a crypto ETF might come as soon as later this year.   

What’s an ETF and how can it affect the crypto market?   

In short, an ETF is a type of an investment fund that is tied to the price of an underlying asset — a commodity, an index, bonds or a basket of assets — like an index fund and is traded on exchanges, available to both retail and institutional investors.

A bitcoin ETF, in turn, would track BTC as the underlying asset. It is an indirect way of purchasing BTC, where the investor only holds the corresponding security without having to store the actual coins. If listed on a regulated U.S. exchange, an ETF could pave the way for large institutional investors, and hence push bitcoin — and cryptocurrencies in general — toward a broader recognition by the Wall Street.

Indeed, that’s what the investment firm VanEck and a blockchain development company SolidX have been trying to achieve for almost a year now — listing a bitcoin ETF on the Chicago Board of Exchange’s (CBOE) BZX Equities Exchange, the second-largest equities market operator in the U.S.

Both VanEck and SolidX had tried to register their ETF separately beforehand — in August 2017 and in July 2016 respectively — but the SEC shut down their attempts.

After the parties had teamed up in June last year, their collaborative effort has been generally considered to be one of the industry’s strongest bets to secure a bitcoin ETF. More specifically, the fund is tied to VanEck’s subsidiary index, MVIS. The index will calculate the real-time price of BTC derived from the information that will be collected from the U.S.-based crypto over-the-counter (OTC) markets, and not the conventional crypto exchanges.

Unlike the Winklevoss Brothers’ ETF attempt (and many other ETFs that the SEC has rejected in the past), the VanEck/SolidX fund puts additional emphasis on insurance: It is reportedly derivative-backed, which means that the firms will actually hold BTC. This will allegedly protect investors against the loss or theft of the digital assets.

Each share of the VanEck/SolidX bitcoin trust is set to cost $200,000. As SolidX CEO Daniel H. Gallancy has explained to CNBC in the past, the price is set at a higher rate to attract more institutional, rather than retail investors.

Delay streak: history of VanEck/SolidX’s ETF filings with the SEC

VanEck/SolidX’s ETF originally filed a bid to the SEC on June 6, 2018 by CBOE. On Aug. 7, the agency postponed the case until Sept. 30. In the accompanying notice, the SEC revealed that it had received more than 1,300 comments on the application at the time.

Then, on Sept. 20, the SEC requested further comments regarding its decision on the VanEck/SolidX ETF. The agency explained that it had not “reached any conclusions with respect to any of the issues involved,” and hence was seeking comments on 18 key issues, including commenters’ opinion on BZX’s assertions that BTC “is arguably less susceptible to manipulation than other commodities that underlie exchange-traded products (ETPs),” as well as SolidX’s assertion that “the OTC desks have a better measure of the market than any exchange-specific reference price,” among others.

In October, newly appointed SEC Commissioner Elad Roisman, who stepped into office a month earlier, met with representatives from VanEck, SolidX and CBOE to discuss the prospect of having a bitcoin-based ETF on the market, according to the agency’s documents.

Nevertheless, on Dec. 6, the SEC delayed its decision yet again, pushing the deadline to February 2019. This marked the watchdog’s last opportunity to delay the application as per its own rules. Available postponements are served in two increments: one six-month delay, and a further and final three-month delay, which makes nine months in total, meaning that the application would have to be either rejected or approved by that time.

However, on Jan. 22, 2019, CBOE temporarily withdrew the proposition, citing the U.S. government shutdown, which froze the SEC’s activity while the end of the review period was approaching. The application was resubmitted by the end of the same month.

On May 20, the SEC delayed its decision yet again. Specifically, the watchdog added a 35-day period for gathering more information and opinions on the proposal and asked the public to weigh in on 14 questions, which will allegedly help the governing body reach a verdict:

“The Commission is instituting proceedings to allow for additional analysis of the proposed rule change’s consistency with Section 6(b)(5) of the Act, which requires, among other things, that the rules of a national securities exchange be ‘designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade,’ and ‘to protect investors and the public interest.’”

Was another delay to be expected?

The SEC — being the agency that gets to decide if the industry is ready for a bitcoin ETF — has been rejecting and postponing crypto ETFs since 2017, when it first turned down the fund proposed by the Winklevoss brothers, after taking as many as four years.

While there is always a possibility that the agency will finally agree to grant a crypto ETF, the odds seem to be against such a decision. As the history of SEC rejections shows, one of the regulator’s main concerns has been market manipulation, and the recent Tether scandal would hardly seem as a convincing argument that the crypto market is fully transparent.  

Thus, securities lawyer Jake Chervinsky, who has been actively covering bitcoin ETF proposals on his Twitter, argued that there was a 0.1% chance that the VanEck/SolidX ETF would get approved on May 20.

“I’d be shocked if the SEC approved the first ever bitcoin ETF after six years of denials without taking all the time allowed by law,” Chervinsky wrote. “Moving slowly makes the SEC appear thoughtful & thorough.”

Market reaction

Notably, the SEC’s decisions on crypto ETFs has correlated with price movement of crypto in the past. For instance, when the regulatory body postponed its decision on VanEck/SolidX ETF in August last year, the market took a major swing: After solid growth to break above the $7,000 earlier that day, BTC value shed around $500 in just six hours, while Ripple-developed XRP, for instance, lost as much as 23% of its value.

This time, however, the market has responded in a calm fashion: As of press time, the majority of cryptocurrencies have moved no more than 1-2% in either direction, although some market analysts predicted a pull back.

Is there hope for a bitcoin ETF in 2019?

The SEC’s position on bitcoin ETFs is not radical by any means. Notably, the winds turned in July 2018, when the SEC’s regular rejection of the Winklevoss brothers’ application for a bitcoin ETF came with a silver lining.

Soon after the agency announced its decision, SEC Commissioner Hester M. Peirce issued a statement in which she argued that the agency’s move “sends a strong signal that innovation is unwelcome in our markets, a signal that may have effects far beyond the fate of Bitcoin ETPs.” Further, she claimed that the agency overstepped “its limited role” because it focused on the nature of the underlying BTC market instead of the derivative itself.

A further wave of hope was delivered in February this year, when a supposedly leaked interview with SEC Commissioner Robert J. Jackson Jr. surfaced on Twitter. In it, Jackson allegedly stated that he expects his agency to license a bitcoin ETF sooner or later:

“Eventually, do I think someone will satisfy the standards we’ve laid out there? I hope so, yes, and I think so.”

Later in February, Brian Quintenz, a commissioner at the Commodities and Futures Trading Commission (CFTC), criticized the SEC for having dismissed previous ETFs on the grounds of potential price manipulation. Speaking at the BiPartisan Policy Center in Washington, D.C., Quintenz declared:

“There are mathematical ways through a settlement index to design a contract where even if there isn’t a lot of liquidity on one exchange referenced, the index itself is not readily susceptible to manipulation.”

Nevertheless, the SEC’s most recent decision shows that the agency is not ready for bitcoin ETFs. “It is clear the SEC is still in information-gathering mode,” Dave Nadig, the managing director of ETF.com, a leading authority on ETFs, told CNBC yesterday. “Technically, there are deadlines, but honestly they [the SEC] can do what they want, they can kick this down the road until they are comfortable, it is clear from what we are hearing.”

Thus, the new deadline for a VanEck/SolidX ETF decision is August 19 — however, as Chervinsky notes, the SEC “can & likely will delay one more time for a final deadline of October 18.”

The crypto industry is not giving up, however. Recent documents released by the SEC show that the watchdog is currently reviewing another ETF proposal that includes both bitcoin and ether (ETH). Meanwhile, time might actually be on crypto industry’s side, given the market’s ongoing recovery from a crypto winter and highly desirable mainstream adoption.

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Expert: SEC Still In Information-Gathering Mode Regarding Bitcoin ETF

ETF.com’s Dave Nadig says that the U.S. SEC is “still in information-gathering mode” regarding a bitcoin ETF.

The United States Securities and Exchange Commission (SEC) is “still in information-gathering mode” regarding a bitcoin (BTC) exchange-traded fund (ETF), the managing director of ETF.com told CNBC on May 20.

Dave Nadig, managing director of а leading authority on ETFs, delivered his comments on the issue during an interview with the ETF Edge show. Nadig said:

“It is clear the SEC is still in information gathering mode. […] Technically, there are deadlines, but honestly they [SEC] can do what they want, they can kick this down the road until they are comfortable, it is clear from what we are hearing.”

While Nadig argued that an ETF will eventually be approved, he does not think it is imminent, and could take at least a quarter. He added that regulators will get more comfortable as the market matures.

Earlier today, the SEC announced that it would delay its decision on a proposed VanEck bitcoin ETF, as it gathers more information from the public. As previously reported, the SEC has also delayed its decision on whether to approve or disapprove Bitwise’s ETF, and requested for comments from interested parties.

In December of last year, SEC commissioner Hester Peirce, dubbed “Crypto Mom” by the community for her dissent with the SEC’s decision to reject a bitcoin ETF proposed by Cameron and Tyler Winklevoss, said that a cryptocurrency or bitcoin ETF is “definitely possible,” but it could be years away.

In early May, former chairman of the Commodity Futures Trading Commission (CFTC) Gary Gensler said that for the cryptocurrency market to prosper and potentially grow, investors should know that they have both investor and consumer protection embodied in the law in case of market manipulation or losing of private keys, among other issues.