Thursday, October 19, 2023

The Invisible Hand Of The Market

In Not "Sufficiently Decentralized I explained how the SEC's William Hinman kneecapped his agency's ability to regulate Bitcoin and Ethereum, handing the baton to the CFTC. Matt Levine explains the result:
The regulatory situation in the US is that there are exchange-traded funds that allow people to speculate on Bitcoin (and Ether), but those funds hold Bitcoin (or Ether) futures, not actual Bitcoins. The US Securities and Exchange Commission has, so far, declined to approve spot Bitcoin ETFs (funds that just hold Bitcoins). It has said that this is because the spot Bitcoin market is largely unregulated and so there is a risk of manipulation, whereas Bitcoin futures trade on regulated US exchanges and so are safer. This has always struck me as incoherent (manipulating the spot market also manipulates the futures), and in August a federal appeals court ruled that it was “arbitrary and capricious,” which probably means that the SEC will have to approve spot Bitcoin ETFs pretty soon.
Below the fold I discuss an $80M demonstration of the "risk of manipulation".

The prospect of Bitcoin ETFs sucking retail dollars into the cryptocurrency void and thereby rescuing the exchanges and miners from the collapse of liquidity has the crypto-bros panting with anticipation. So it was inevitable that someone would exploit this opportunity to manipulate the market and liquidate the shorts. And boy, did they ever! Vildana Hajric's Bitcoin Whipsawed by False Report Claiming SEC Approval of ETF explains how they did it:
After months of declining volatility, Bitcoin traders experienced some of the wildest price swings they’ve seen in a while when a false report circulated saying that the US had approved a long-awaited exchange-traded fund.

The largest digital asset jump more than 10% to $30,000 around 9:30 a.m. in New York, only to cut the gain by more than half a few minutes later after BlackRock said that its application for an ETF that invests directly in the cryptocurrency is still under review. The intraday move was the largest since March.

Data from tracker Coinglass shows that more than $80 million worth of trading positions — mostly from traders who were betting on lower prices — were liquidated during the spate of volatility.
Hajric is careful not to suggest anyone planted the rumor:
The episode suggests that there remains a lot of excitement and hope for a spot-Bitcoin product in the US, which regulators have in the past refused to allow. The US Securities and Exchange Commission previously cited market manipulation, among other reasons, for not granting an endorsement. However, the incident also serves as a reminder that Bitcoin’s price can easily be moved by gossip or hearsay.
So the SEC was right that there is a "risk of manipulation", but no-one actually did a manipulation? How seriously market participants take their responsibilities for investor protection in the unregulated market was illustrated by Hajric's closing quote:
“That was a good 30 minutes of fun and games,” Teong Hng, chief executive officer of crypto investment firm Satori Research, said of Monday’s roundabout.
Matt Levine gets it:
I am not that sympathetic to the SEC’s objections to a spot Bitcoin ETF. But this story makes me a little more sympathetic? The price of Bitcoin jumped by 10% because people on social media were saying, falsely, that BlackRock’s spot Bitcoin ETF was approved. Seems like the sort of thing that could be manipulated!

Obviously the Chicago Mercantile Exchange front-month Bitcoin futures also briefly jumped above $30,000 today. If you want to move the price of Bitcoin futures with gossip and hearsay, that is pretty much exactly as easy as moving the price of spot Bitcoin with gossip and hearsay, because they are kind of the same price.
Exactly. The Bitcoin futures market may be regulated, but the price is based on an unregulated market which is notoriously manipulated. Planting the rumor on social media with the news that all the crypto-bros were expecting would goose the price was (a) free and trivially easy to do, and (b) trivially easy to predict. And it worked like an $80M charm! Why anyone takes the "price" of Bitcoin seriously is a mystery.

In another section of the same piece, Levine provides another example of the insanity of the cryptocurrency market:
Crypto banking is purely financial, a levered bet on the size of the crypto market. There are crypto firms, quasi-banks, that hold people’s cryptocurrency for them and pay them interest, and they use that crypto to invest in more crypto. They lend out crypto to hedge funds that want to make levered bets on crypto, and as long as crypto prices generally go up those hedge funds will make enough money to pay back the loans with interest and get rich themselves. But nothing productive is happening with these money flows; people are buying tokens but not doing any activity that makes anyone better off in the real world. Crypto prices go up because people speculate on crypto, so there is more money in crypto, so it is easier to borrow more money to make more levered bets on crypto, so prices keep going up, etc., until a slight breeze blows it all over and there’s nothing left.
Some people would claim that staking is a productive investment, earning rewards for validating transactions. Of course, this only happens in Ethereum and other Proof-of-Stake systems, not in Bitcoin. But both for staking and for mining, the real question is where the rewards are coming from? They are coming from increasing the number of coins or, in other words, inflating the currency. Even if you are lending coins to a staking pool, you aren't actually doing anything that earns real money in the real economy, you are just benefiting from the inflation of your currency.


David. said...

They keep doing it. Matt Levine writes:

"if you want to set up an exchange-traded fund that will offer retail investors an easy way to invest in some cryptocurrency, there are many steps, but one of them — one of the first public steps — is to file paperwork with the Delaware Department of State to set up the trust for the ETF. If you want to pretend to set up a crypto ETF, you can just do that — again, you probably pay about a three-digit filing fee — and not do the rest.

If you file for “Matt’s Ripple ETF Trust,” no one will care, though. Pretending that you will set up a crypto ETF is worthless. The move is to pretend that BlackRock will set up a crypto ETF."

Vildana Hajric's Fake BlackRock Fund Filing Triggers a Brief Rally in XRP Cryptocurrency provides the details:

"A filing for a BlackRock Inc. fund based on the cryptocurrency XRP showed up on the official Delaware website that registers investment trusts incorporated in the state, triggering a brief rally in the token. The only problem is that BlackRock wasn’t the one who submitted it.
XRP briefly spiked almost 13% as news about the fake filing made its rounds on X, the social-media platform formerly known as Twitter. It gave back those gains to trade lower on the day."

That was a quick little 13% earner for someone.

David. said...

For more details see also Alexandra Scaggs' An almost convincing Delaware-crypto-filing scam:

"Ah, Delaware . . . along with decent beaches and the fading glamour of the DuPont dynasty, the state is known for being a cheap and cheerful venue for registering companies in relative privacy.

It isn’t so private that someone can register a company under false pretences without getting referred to federal prosecutors, however. A spokesperson for the Delaware Department of State said Tuesday that it has referred what appears to be a faked iShares filing to the state’s Department of Justice."