CFTC report endorses tokenizing trading collateral

November 23, 2024 Coin Telegraph

Bitcoin Santa Claus rally unlikely, according to on-chain and derivatives data

December 15, 2022 Coin Telegraph

Data suggests that BTC’s rally to $18,300 is the only Santa Claus rally Bitcoin will see before the year ends.

As the coldest days of the crypto winter set in, investors’ speculative interest in the crypto market has fallen to pre-2021 levels, impairing the chance of a substantial directional price move. However, there’s a possibility of a bear market rally akin to the July through August 2022 uptrend.

The market enters a state of limbo

The FTX implosion impacted over 5 million users globally and adversely affected numerous crypto companies that were exposed to it. The industry is currently in a recovery mode and Cumberland, a U.S.-based crypto market broker, recently echoed this narrative in a tweet. The firm noted that "dozens of crypto companies are either severely curtailed or out of business, and the industry's future is as cloudy as ever."

Data suggests that building a sustainable bullish move will be challenging because the market is pushed back to a low liquidity and volatility regime.

Crypto analytics firm, Glassnode, reported “depressing” futures volumes for Bitcoin and Ethereum, tracing back to pre-2021 levels when Bitcoin’s price surpassed $20,000 for the first time.

*Bitcoin (orange) and Ethereum (blue) futures trading volume. Source: Glassnode*

The open interest volume of Bitcoin and Ethereum futures has dropped significantly toward mid-2022 levels, which was after the collapse of Luna-UST. The BTC and ETH leverage ratio indicator, which measures the ratio between open interest volume, is currently down to 2.5% and 3.1%.

Bitcoin’s spot trading volumes on crypto exchanges have also dipped significantly toward 2020 lows. Data from Blockchain.com shows that the 7-day moving average of exchange trading volume has dropped to $67 million, compared to $1.4 billion near the peak of the 2021 bull market.

*Bitcoin spot exchange trading volume. Source: Blockchain.com*

Due to low liquidity and a cloud of uncertainty over the market, there’s a strong possibility that the bear market is far from over. The realized volatility of Bitcoin has also dropped toward two-year lows of 22% (1-week), and 28% (2-weeks).

Moving forward, volatility may remain dull, with more sideways or slow downside price action. However, there’s still a chance of a short-term bear market rally.

Is a Bitcoin price pump and dump in play?

November’s FTX-induced shakeout was similar to the LUNA-UST implosion seen in June and these events usually cause panic selling and make an asset attractive to bargain hunters looking to buy into a capitulation.

Consequently, a short-term bull rally takes effect that may last a few days or weeks, which is precisely what happened in July through August when Bitcoin's price surged toward $25,000. Based on the shakeout levels from November and signs of institutional buying, Bitcoin might be undergoing a similar bear market rally.

The realized profit and loss metric of long-term holders dropped toward all-time lows, indicating possible oversold conditions. The long-term holder realized losses had reached comparable levels only during the 2015 and 2018 bottom.

*Profit and loss by return bands. Source: Glassnode*

Additionally, the futures market is currently in backwardation, meaning there are more open short positions than long. Throughout Bitcoin’s history, similar conditions have lasted for short periods only and ended up in a short-term pump to squeeze the short orders.

*BTC futures market swaps vs. 3 month rolling basis. Source: Glassnode*

The accumulation trend among institutions and whales, which had been negative for most of this year, turned positive in mid-November. An Increase in holdings of these investor cohorts provided a tailwind for the bear market rally in the third quarter of this year.

CoinShares reported that Institutional Bitcoin investment vehicles saw inflows totaling $108 million after the FTX implosion, with $17 million added last week. Notably, the present inflows are significantly lower than weeks 25 and 35 this year, which caused the uptrend toward $25,000.

*Weekly asset flow metrics from institutional BTC investment products. Source: Coin Shares*

On-chain data from Glassnode also shows positive accumulation among Bitcoin whales, identified as addresses holding greater than or equal to 100 BTC (worth around $1.7 million at current prices).

While the holdings of these whales has increased from its yearly lows in a similar fashion seen in July to August, BTC price has yet to reflect this positive addition.

*Holdings of BTC addresses with greater or equal to 100 BTC. Source: Glassnode*

Technically, the support and resistance levels of the previous trading range between $18,700 and $22,000 could form the local top levels of the current rally. Conversely, if BTC builds support above $22,000, the bear market rally could become more meaningful with a continued uptrend.

*BTC/USD 1-day chart. Source: TradingView*

However, the chances of a bullish rally above $22,000 are feeble due to low liquidity and the cloud of uncertainty that will motivate selling as prices rise. Still, discounting a short-term bear market rally can punish late sellers.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

CTFC looks at expanded authority to regulate crypto, for less than a 10% budget increase

March 29, 2022 Coin Telegraph

bitcoin regulation

The agency’s $365 million proposed FY2023 budget includes significant allocation for CPAs and whistleblowers.

The U.S. Commodity Futures Trading Commission, or CFTC, has released its Fiscal Year 2023 (FY2023) budget request, seeking $365 million. This marks a 9.9% increase over the previous year and 20% over FY2021. The commission regulates the country’s derivatives market and has been increasingly active in recent years in policing financial products that incorporate cryptocurrencies.

According to the agency’s request document, the CTFC focuses on digital asset custodian risk, ensuring secure storage, as well as on accounting. The agency has its own staff of certified public accountants due to the lack of guidance on digital asset accounting from sectoral oversight bodies. In addition, the agency ensures derivative clearing organizations “employ strong segregation of duty processes and procedures to safeguard against theft of the collateral from [their] employees,” and it has extensive plans to increase educational efforts.

The request was more modest than what commissioner Rostin Behnam had been angling for. He told the Senate Agriculture Committee in February that his agency needed an additional $100 million and additional authority to regulate Bitcoin (BTC) and Ethereum (ETH), the cryptocurrencies the government treats as commodities.

The CFTC now depends heavily on whistleblowers in its enforcement efforts. Behnam told a Futures Industry Association audience this month that the agency had received over 600 tips since October, of which “a large number allege cryptocurrency fraud, such as pump-and-dump schemes, refusals to honor requests to withdraw money, and romance scams.” The agency announced a $10 million whistleblower award on March 18.

It seems likely the agency will receive more authority in the arena of digital assets. Senators Cynthia Lummis and Kristen Gillibrand have indicated that their bill on cryptocurrency regulation, when it is introduced, will include a prominent role for the CFTC, and a recent Government Accountability Office (GAO) report commented on the agency’s limited authority.

The president’s FY2023 budget, announced Monday, foresees generating $11 billion in revenue over the next decade by modernizing therules relating to digital assets.

Waiting on the executive order: how users and financial professionals may benefit from it

March 29, 2022 Coin Telegraph

Coin Telegraph

The fruits of President Biden’s EO will not materialize until months from now, but the need for regulatory change is far-reaching.

United States President Joe Biden’s Executive Order on Ensuring Responsible Development of Digital Assets was widely praised for acknowledging cryptocurrency and blockchain technology’s place in the world and setting the U.S. on a path toward more comprehensive regulation of the sector. The order, or EO, sets a research agenda that encompasses consumer protection, financial stability, crime and national security, U.S. leadership, servicing the underbanked and responsible development.

With a number of reports being commissioned for delivery over the course of months and no specific actions prescribed, it is impossible to gauge the effect the order will ultimately have on the sector, or even foresee how its goals will be met. However, that does not prevent some conclusions from being drawn from other things that are not in the text of the EO.

Tangible effects

Senator Cynthia Lummis, a highly visible proponent of crypto, commented, “I think his executive order misses the fact that the overwhelming majority of digital asset users are law-abiding and trying to make our financial system better.”

Lummis’ comment points to the emphasis in the EO on crime-stopping, with three reports coming out related to that area. Market building received far less explicit attention. Consumer protection was brought to the front and center with the demand for input from the Consumer Financial Protection Bureau. The Commodity Futures Trading Commission was seemingly given a more prominent place in the EO than the Securities and Exchange Commission.

Aaron Cutler, partner at Hogan Lovells and former senior adviser to majority leader Eric Cantor, did not read much meaning into the relative amounts of ink devoted to the various regulatory agencies. Cutler told Cointelegraph:

“The executive order spreads potential regulation around, acknowledging that a lot of agencies have a role here, possibly to the chagrin of [SEC] Chairman Gensler.”

He added that Gensler “has a lot on his plate” already.

The need for regulation is immediate. An editorial in Traders Magazine said the EO “was a meaningful step forward, but the markets need tangible further development for financial institutions to commit more to the space.”

Futures Industry Association president and CEO Walt Lukken spoke in a similar vein at the organization’s annual conference shortly after the release of the EO, saying:

“Several major crypto exchanges have purchased regulated futures exchanges, identifying our markets and its regulatory framework as strategically important. […] We have a resilient and thriving industry because of well-crafted regulation.”

Lukken went on to highlight a non-intermediated derivatives clearing model under consideration by the CFTC that his organization “welcomes.”

Regulators vs. legislators

The current legislative environment — with the Senate closely divided along partisan lines and the Democratic party split internally over its position on crypto — dampens hopes of regulation through legislation. Senator Lummis is expected to introduce a bipartisan bill that will offer regulatory clarity and consumer protections. Representative Don Beyer introduced the Digital Asset Market Structure and Investor Protection Act last summer that will do the same things if it emerges from the committee. Apparently, the agencies called upon in the EO will produce similar results in due course.

A rare piece of bipartisan crypto legislation was the “fix” last year to the section of the Infrastructure Investment and Jobs Law that instituted reporting requirements for certain crypto transactions, beginning in 2026. This provision contributes to compliance and gives clarity to tax requirements. The EO could have addressed implementing the existing tax legislation from the infrastructure law, although historically, EOs have not provided tax legislation. Instead, presidents submit tax proposals to Congress with a budget for tax legislation.

Tax guidance is another gap in the crypto playbook. “What we have now is guidance in the form of notices and FAQs on the IRS website, while we wait for future judicial decisions and code sections to establish formal tax guidance,” Jesse Rodriguez, a certified public accountant at Kaufman Rossin, told Cointelegraph. “There is no timeline available on the expected formal guidance.”

Treasury to IRS

The Treasury Department is one of the busiest agencies under the EO, taking the lead on five reports, including one on regulatory gaps, and providing support for many of the other eight, including central bank digital currency research. So, more complete Internal Revenue Service guidance might be in the works as well.

Rodriguez was stoic about tax guidance. “I don’t find it incredibly challenging to follow the reporting requirements and navigate the income reporting issues,” he said. “The general framework of tax principles that apply to property can be applied in this current environment of uncertainty.”

Things can be tougher for crypto users. The use of cryptocurrency in retail will remain “an overwhelming administrative burden on brokers until there is clarity provided through legislation,” Rodriguez said. But “crypto tracker software applications are a great approach to the basis tracking and reporting requirements for customers.”

Here’s why the SEC keeps rejecting spot Bitcoin ETF applications

February 15, 2022 Coin Telegraph

Bitcoin Price

Crypto investors still hope that the SEC will approve a spot-based BTC ETF one day, but data shows it has good reason not to.

It is not the first time the U.S. Securities and Exchange Commission (SEC) rejected proposals for a Bitcoin spot exchange-traded product (ETP), but efforts continue to be made by different financial institutions. The recent attempt made by Cboe BZX Exchange on Jan. 25 to list the Fidelity Wise Origin Bitcoin Trust as a Bitcoin ETP has also failed.

The SEC letter published on Feb. 8 pointed out that the exchange has not met its burden to demonstrate the fund is “designed to prevent fraudulent and manipulative acts” and “to protect investors and the public interest.”

Although proposals of Bitcoin spot ETPs have never been approved by the SEC and such products are not available in the U.S. market, they do exist in the European market. By investigating the prices of ETPs traded in the European market, one could gain a good insight into whether fraudulent and manipulative acts are possible.

To investigate whether the SEC’s concerns of fraudulent and manipulative acts are justifiable, this article will compare the historic prices of three European listed ETPs and the Bitcoin spot price history from 18 exchanges to see if there are any significant price disparities that could induce market manipulation.

The SEC's primary concerns

There were two major concerns raised by the SEC from a technical perspective towards BZX Exchange’s proposal:

(1) No data or analysis was provided to support the argument that arbitrage across the Bitcoin platforms helps to keep global Bitcoin prices aligned with one another, thus hindering manipulation and eliminating any cross-market pricing differences. There is no indication of how closely Bitcoin prices are aligned across different Bitcoin trading venues or how quickly price disparities may be arbitraged away.

(2) The exchange does not demonstrate the proposed methodology for calculating the index would make the proposed ETP resistant to fraud or manipulation. Specifically, the exchange has not assessed the possible influence that spot platforms not included among the index’s constituent Bitcoin platforms would have on Bitcoin prices used to calculate the index.

To see if the above issues exist and whether manipulative acts are possible within the ETPs listed in the European markets, historic data (from Google Finance) of the following three ETPs listed in SIX Swiss Exchange are compared with Bitcoin spot price from exchanges (data from Cryptowatch).

WisdomTree Bitcoin ETP (BTCW-USD)
21Shares Bitcoin ETP (SWX:ABTC-USD)
Coinbase Physical BTC ETP (SWX:BITC-USD)

Correlation between Bitcoin ETPs and spot price suggest price disparities exist

As described in the proposal by BZX Exchange, the index calculation will be based on the volume-weighted median price (VWMP) in the previous five minutes from five exchanges — Bitstamp, Coinbase, Gemini, itBit, and Kraken.

In a very simple and basic attempt to replicate the index calculation with best efforts, the daily spot prices from four out of the five aforementioned exchanges — Bitstamp, Coinbase, Gemini and Kraken — are used.

Since the Bitcoin ETP price scale is often different from the Bitcoin spot price, the daily percentage change (or daily return) is used in all charts for easy comparison of price disparities.

The graphs below show the daily return comparison between each of the three ETPs and the aggregated Bitcoin spot price, calculated from the four exchanges using the volume-weighted median method.

The left-hand-side scatter plot shows how closely the ETP price is aligned to the spot price. If the two are perfectly aligned, all the points should fall onto the blue dash line. The right-hand-side plot compares the daily percentage return and also plots the difference between the two.

Comparing WisdomTree ETP and the spot, although most of the points in the scatter plot cluster within the +/-5% radius, there are certainly some significant price disparities outside this radius. One day during the three-month period had the daily return difference (blue dash line) between the ETP and spot price reached above 10%.

*Bitcoin spot from 4 exchanges vs. WidsdomTree ETP (in % change). Source:* *Cryptowatch*

It is also interesting to note that the volatility of ETP price percentage change tends to be higher than the spot. The graph below comparing Coinbase Physical Bitcoin (blue line) and Bitcoin spot (pink line) shows the percentage change of the former could reach nearly 15% whereas the latter only went past 10%.

*Bitcoin spot from 4 exchanges vs. Coinbase Physical Bitcoin (in % change).* *Source:* *Cryptowatch*

Similarly, 21Shares Bitcoin ETP price is also more volatile than the spot and the correlation with the spot is lower (62%) than that of WisdomTree (67%) and Coinbase Physical Bitcoin (66%).

*Bitcoin spot from 4 exchanges vs. 21Shares ETP (in % change). Source:* *Cryptowatch*

The price comparisons shown above suggest cross-market pricing differences between the ETP price and the Bitcoin spot price from exchanges exist. The price disparities have not been arbitraged away quickly enough to prevent manipulative acts.

However, it is important to highlight that this is only a very rough comparison using the daily data. The difference in prices might be due to the different cut-off times each ETP uses to calculate the end-of-day price, i.e., exchange-traded products do not trade 24-hours like the crypto spot price; they trade during the Exchange’s regular trading hours from 9:30 am to 4:00 pm.

Also, in practice, a much higher frequency will be used to calculate the index price, i.e., the BZX Exchange proposal suggests calculating the index price using the previous five minutes data from five exchanges and updating the Intraday Indicative Value (IIV) per share every 15 seconds. The analysis done here is using only daily aggregated data to proxy the index price and might not reflect the actual index price using high-frequency data.

It is worth pointing out that although price disparities can be observed between ETPs and spot price using daily data, price discrepancies between the ETPs, themselves, are much smaller as shown in the graphs below.

*Scatter plot for price disparities between ETPs. Source:* *Cryptowatch*

It is very likely that these ETPs listed in the same exchange all use the same frequency and cut-off time to calculate their prices; hence, the price differences are smaller among themselves. This reinforces the point that the price disparities between the Bitcoin ETP and Bitcoin spot price might come from the frequency and the cut-off time used in the methodology of ETP index calculation, which can not be replicated exactly the same in this analysis.

Spot price disparities between exchanges are minimal

In the first point of concern mentioned at the beginning of the article, the SEC also asked how closely Bitcoin prices are aligned across different Bitcoin trading venues.

Based on the cross-platform BTC/USD data collected from 18 exchanges from Cryptowatch, the exchange price disparities are very small. As an example to show how closely the prices align to each other, Coinbase, Gemini and Bitstamp are compared against Kraken and the correlation between each pair is very close to 100%.

The SEC is also concerned about the possibility of price influence and manipulation from spot platforms that are not included among the index’s constituents. If Bitcoin prices from other platforms are very different from the four constituent platforms, Bitstamp, Coinbase Gemini and Kraken market manipulators might seek to exploit the disparities for profit.

To see if price disparities exist between the four platforms and others, the bottom right graph below compares the aggregated volume-weighted median price from the four platforms with the aggregated price from all 18 exchanges. The nearly perfectly aligned line shows there is almost no difference between the two. The spot platforms do not have large price disparities and the prices are closely aligned across different Bitcoin trading venues.

*Scatter plot for price disparities between exchanges. Source:* *Cryptowatch*

With such great similarity in daily prices, manipulative acts will be very difficult across exchanges. However, price manipulation could still happen intraday but it’s beyond the reach of this analysis due to lack of high-frequency intraday data.

Based on the analysis from the three SIX Swiss Exchange listed ETPs prices and the Bitcoin spot prices from 18 exchanges, it seems price disparities do exist between ETP and spot. This could potentially lead to manipulative acts towards ETP index price, even though the applicants frequently claimed the sophisticated index calculation methodology prevents such acts.

The SEC’s concerns about fraud and manipulation seems to be justified based on the price disparities between these European listed ETPs and the spot price. That said, the difference could be caused by the daily data frequency used in this analysis, which is different from the high-frequency data used in practice.

On the contrary, no significant price disparities can be found among different Bitcoin trading venues. Although the spot markets from these venues are more decentralied and less regulated than traditional stock exchanges, malicious price manipulation across these platforms could still be very difficult.

Given the large number of centralized and decentralized, regulated and unregulated crypto exchanges out there, it is extremely hard to prove price efficiency and similarity across all of them. The U.S. ETP applicants still have a long way to go to convince the SEC.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.

Coinbase tokenized shares seem to be in free fall on FTX

April 14, 2021 Coin Telegraph

Coin Telegraph

The "Coinbase pre-IPO contract" has seen extreme volatility on FTX derivatives exchange.

Investors with tokenized exposure to Coinbase (COIN) shares experienced extreme volatility Tuesday, as the value of their holdings plummeted in a matter of minutes.

The selloff took place on FTX, a leading derivatives exchange, where the COIN-USD stablecoin exchange rate fell from a high above $640 all the way to around $420. Three huge red candles highlighted the selloff, as per a screenshot from Bloomberg podcaster Joe Weisenthal.

Coinbase tokenized shares are crashing on FTX https://t.co/PygqsjSpWQ pic.twitter.com/cl8k5hHEPX
— Joe Weisenthal (@TheStalwart) April 14, 2021

At the time of writing, tokenized Coinbase shares were valued at $445 on FTX. Despite the extreme volatility, the tokenized shares were valued considerably higher than COIN’s reference price of $250 from Nasdaq ahead of the direct listing.

As Cointelegraph recently reported, FTX joined Binance in listing Coinbase stock tokens on Tuesday ahead of COIN’s Nasdaq debut. Described as a “pre-IPO contract,” the FTX listing “tracks Coinbase’s market cap divided by 261,300,000.”

The exchange explained:

“CBSE balances will convert into the equivalent amount of Coinbase Fractional Stock tokens at the end of Coinbase’s first public trading day.”

Tokenized stocks are synthetic versions of real equities. On FTX, tokenized stocks serve as spot tokens that can also be used as collateral for futures trading.

The Coinbase public offering, which has come by way of direct listing as opposed to an IPO, has been described as a “watershed” moment by the cryptocurrency community. The listing gives traditional investors direct exposure to the cryptocurrency market without owning digital assets, which are considered much more volatile than stocks.

Financial Derivatives