Many of you know that in my banking days I was an Exchange Traded Funds (ETF) market maker on the Hong Kong and Singapore exchange. I also advised fund managers on how to structure ETFs, and what types of ETFs would be appealing to investors.
I along with many other Bitcoin and digital currency business owners are rooting for the Winklevoss twins to succeed in listing the world’s first Bitcoin ETF. I preface this article with the statement that I have no inside knowledge on the Winklevoss’ plans surrounding the ETF, nor information on whether or not the SEC will grant approval to them.
While the ETF’s final home has been switched from Nasdaq to BATS, no new information has been offered as to the likelihood of the SEC approving the ETF. They have been waiting for approval for 3 years. The SEC obviously feels that the application is deficient in some areas, or they just don’t want a Bitcoin ETF on the market at the current time.
I can imagine one possible hurdle is on-exchange liquidity. When ETF units are created or redeemed by authorised participants, the fund manager must purchase or sell Bitcoin in the open market. One of the biggest criticisms around certain types of ETFs is whether or not the underlying can be acquired and sold without unduly impacting the market. Just take a look at some of the VIX ETFs and the concerns around how the underlying volatility is bought and sold.
There are currently 3 “regulated” (no one really knows whether they are completely compliant) Bitcoin exchanges in America. If the ETF is approved, the fund manager will have restrictions on which exchanges they can trade. While globally Bitcoin is liquid enough for the current demand, trading on American exchanges is not. The combined volumes of Coinbase, Gemini (the Winklevoss’ exchange), and itBit does not come close to that of Bitfinex, the most liquid Bitcoin / USD exchange.
The SEC does not want retail investors trading 20% below or above the global average price because of exchange connectivity issues, or a few market makers pulling out suddenly. A daily USD Bitcoin auction would solve the liquidity problems of American Bitcoin exchanges.
Each day at an appointed time, large and small traders would place buy and sell orders for Bitcoin. At the auction uncross time, the equilibrium price level for the day would be reached. By focusing trading to one time, the overall liquidity will be stronger, and the orderbook will be healthier.
Once the auction is created, the Winklevoss twins can amend their ETF application such that the end of day Net Asset Value (NAV) references the daily auction price. Primary dealers when executing creation and redemption orders, would place their orders into the auction to match the ETF’s NAV.
If the three leading American exchange cooperated on a daily auction, it would help all of their businesses tremendously. Even though American banking is cumbersome and expensive, individuals can still send their money to offshore exchanges. An auction would give them a reason to keep their money onshore.