One of the patterns that existed in the digital asset markets across 2018 and 2019 is the failure of multiple Bitcoin ETF (Exchange Traded Fund) application to gain its clearance from the United States of America and Exchange Commission. Every new application was met with renewed enthusiasm but only to be rejected again for a specific reason. The concern which led to the rejection was how its price would be derived, or whether this price could be manipulated, and if the listing exchange adequately meet section 6(b)(5) of the Exchange Act. According to the rule, the exchanges are designed in such a way as to prevent fraudulent and manipulative acts and practices and promote fairness and equality.

The common link that existed between all these applications was a plan to create the reference price. This was the price at which assets are valued and benchmarked from retail exchange data. For example, the Winklevoss Bitcoin’s ETF reference was connected to the results of the Gemini daily auction for spot Bitcoin. In case of Bitwise, the reference price was based on data that was collected from various retail touch points. Most of the previous application that the United States Securities and Exchange Commission had rejected was because most of them failed to meet the requirements of Section 6(b)(5).

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The first such reason why the applications did not meet the standards was because it contains mainly of inexperienced traders. As in case of inexperienced trader’s amateur investor trade in small sizes and in these markets the price fluctuation occurs because investors are likely to over react to small disturbance in price. The second point the applications are not registered is because there are many Bitcoin exchanges that are there in the world. And markets that are so numerous in numbers are prone to manipulation and changes. The last point is that these exchanges are vulnerable to threats of hacking which have cost investors hundreds of billions of dollar. Only last year many of the renowned Crypto exchange fell prey to these threats. While some of the exchanges are very good at protecting their exchanges most of them are not. Unless this issue is dealt in the forthcoming applications, it is extremely unlikely that any Bitcoin ETF will be given the go ahead.

Most of the people who do not invest in the Cryptocurrency or the institutional crypto market believe that the majority of the retail exchanges comprise of the majority of the Bitcoin market, but this is not the case. Besides the retail exchanges there also exists a vibrant liquid over the counter (OTC) market for spot Bitcoin. Most of the investor that invest in the market are primarily institutional investors and professional market making firms. While there is no official estimate of the size of the over the counter market as no market participants reveal the data. According to the study conducted by the Tabb Group in 2018, the size of the OTC market is likely three to four times the size of the retail market. Moreover, this larger volume is spread across an estimated 30 to 40 active market makers rather than several hundred retail exchanges.

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When it comes to other domain of finance the trade sizes vary significantly between the institutional and retail markets. Most of the trades that are carried on these exchanges most traders are for a fraction of a Bitcoin. In the OTC market, the minimum contract size is between $100,000 and $200,000. The OTC market has the ability to provide the pricing of the Bitcoin ETF, one that will also satisfy regulators and governments.

Source: Coin Telegraph

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