Is this a dagger which I see before me,
The handle toward my hand? Come, let me clutch thee.
I have thee not, and yet I see thee still.
Art thou not, fatal vision, sensible
To feeling as to sight? or art thou but
A dagger of the mind, a false creation,
Proceeding from the heat-oppressed brain?
- “The Tragedy of Macbeth”
Act II, Scene I
‘Tis not often that William Shakespeare and cryptocurrency are mentioned in the same sentence, let alone the same article or thought process. Shakespeare, the Bard of Avon, is thought to have authored The Tragedie of Macbeth in 1605 or 1606, just over 400 years prior to the advent of Bitcoin.
Some Shakespearean scholars assert that Macbeth was written after the failed Gunpowder Plot of November 1605 in which a group of English Catholics sought to assassinate King James I – one of Shakespeare’s most important patrons – by blowing up the House of Lords during the State Opening of Parliament. The failure of the plot is why it is still common to see bonfires around parts of Great Britain every 5 November, representing the burning of effigies of Guy Fawkes, a conspirator in the failed plot who was hanged, drawn, and quartered less than three months after the failed assassination attempt. The mask of Guy Fawkes has since become associated with the so-called Anonymous movement, hacktivists, and anarchists alike. It’s quite possible we know what type of Halloween masks are donned by Monero, Zcash, Dash, and PIVX enthusiasts.
In case you haven’t read Macbeth since your secondary education years – or since the crypto revolution started – a quick refresher may be in order: Macbeth is a Shakespearean tragedy that is very much about equivocation, personified by Macbeth’s conflicted vacillation between ambition and guilt as a protagonist who lacks consistency of character after having committed regicide.
In an opening scene, a trio of witches prophetically predict that Macbeth, then a battlefield general, will ascend to the throne and become the King of Scotland. While they do not explicitly tell Macbeth that he will kill reigning King Duncan, they inform Macbeth that he is destined to become the monarch, planting a seed in his mind that leads to his eventual dastardly deed, downfall, and destruction. While he is a very ambitious character at first, self-doubt and a crisis of conscience soon see Macbeth’s actions bend to the ominous portending of evil by the witches.
I suggest to you that the cryptocurrency industry is at a point of inflection becoming a Shakespearean play; the only question is whether this current crossroads will result in a tragedy or a comedy.
In the latest kiss-up to the coven of crypto crusading credentialers – also known as the SEC’s Office of Market Supervision, Division of Trading and Markets – San Francisco-based Bitwise Asset Management published a mainstream media headline-grabbing analysis about the real state of Bitcoin affairs pertaining to trading volume, liquidity, and exchanges. For those of you who may have skirted through your “English Literature 301” syllabus only with the assistance of CliffsNotes or SparkNotes, I have combed through the entire 226-slide presentation Bitwise presented to the SEC pursuant to the firm’s pursuit of launching a Bitcoin ETF. Here are some salient conclusions in the tome that Bitwise submitted to Uncle Sam after analysing trading activity at 81 exchanges during a four-day period this March:
- Approximately 95.5% of all reported Bitcoin trading is artificially generated by largely unregulated exchanges, meaning bona fide daily volume is more like USD 273 million, and not the reported aggregate daily volume of USD 6 billion
- The “real market” for Bitcoin is “significantly smaller, more orderly, and more regulated than is commonly understood”
- “Real exchanges” have spreads as tight as USD 0.01, among the “tightest quoted spread of any financial instrument in the world”
- Certain “suspicious” exchanges like CoinBene have most of their BTC trades print between the prevailing Bid and Ask
- CoinBene claims 18x more BTC volume than Coinbase Pro, but has a BTC spread that is 3400x larger than Coinbase Pro’s
- Only ten exchanges have “Actual Volume” including Binance, BitFinex, Kraken, Bitstamp, Coinbase, bitFlyer, Gemini, itBit, Bittrex, and Poloniex
- Bitcoin futures volume on the CME (~USD 85 million) and CBOE (~ USD 6 million) are not far below the Average Daily Volume of the largest spot BTC exchange, Binance (~USD 110 million)
- The launch of Bitcoin futures markets in December 2017 and introduction of institutional market-making in 2018 have diminished price deviation and arbitrage opportunities
- Regulated, insured, third-party custodians can service the Bitcoin ETF market
- Bitcoin exchange-traded products (ETPs) on major foreign markets consistently trade with tight spreads and near fair value
In contrast to Bitwise Asset Management’s ETF application, recent attempts by other ETF applicants have evidenced equivocation that would have made Shakespearean thespians at the Globe Theatre envious.
In August 2017, VanEck portfolio manager and strategist Joseph Foster of the firm’s flagship International Investors Gold Fund characterised “Bitcoin and other digitial currencies” as a “fad” that could “become a failed experiment that ends in tears.” One day later, VanEck filed an application with the SEC to establish a VanEck Vectors Bitcoin Strategy ETF that would principally invest in Bitcoin futures contracts and trade on the NASDAQ. VanEck subsequently twice withdrew their ETF applications at the request of the SEC.
In 2018, the Bats BZX Exchange, Inc. and the Winkelvoss twins appealed the SEC’s first denial of their ETF application but the SEC upheld its decision, citing the possibility that Bitcoin could be manipulated and stating the exchange lacked ample resources to guarantee investor protection. SEC Commissioner Hester Peirce was the lone dissenter and published an open letter where she suggested Bats’ appeal satisfied the Exchange Act.
In August 2018, the SEC simultaneously rejected nine ETF proposals submitted by Proshares, Direxion, and GraniteShares – proposals that would have seen some of the shares traded on NYSE Arca and Chicago Board Options Exchange. In a volte face the next day, the SEC published a statement indicating it would review its decision on all nine ETF proposals.
Two months earlier, VanEck announced it would team up with SolidX to list an insured and regulated physically-backed Bitcoin ETF to trade on the CBOE BZX Equities Exchange. The SEC subsequently postponed its decision on approving or denying the VanEck-SolidX-CBOE ETF application, leading to a massive USD 40 billion plunge across the crypto complex that saw prices weaken to their then-lowest level in 2018.
Just last week, Cboe Global Markets Inc., the first US exchange company to launch Bitcoin futures in 2017, effectively ended its participation by reporting it “does not currently intend to list additional XBT futures contracts for trading.” This decision comes at a time when firms like Bitwise Asset Management need to convince the SEC that there is a “reasonable likelihood” that a surveillance sharing agreement with a significant derivatives market would assist in detecting and deterring an attempt to manipulate the Bitcoin market.
Equivocation abounds, both on the part of institutional players seeking regulatory approval, and also on the part of regulators seeking to conform decades-old securities regulations to a controversial, nascent industry.
Bitwise’s ETF application contains an arsenal of market and industry research that may go a long way to disabusing the SEC of its biases about this new asset class.
If the intransigence of US regulators over the past couple of years results in little more than kicking the crypto can down the road, ETF applicants may need more than gunpowder or a Shakespearean dagger to bring crypto to the retail masses.
Just ask the witches.