July 16, 2019
I had previously submitted some comments on April 18th raising the issue that Bitwise's analysis dated March 20th would have the crypto exchange world consist of either exchanges that have 100% fake volume or a much smaller number that have 100% real volume, but nothing in between. I was gratified to see that Bitwise specifically addressed my concerns in their comment filed May 24th.
However, I am not sure their answer is complete enough for the needs of the SEC if the Staff wishes to allow a firm like Bitwise to move forward. Their response essentially focused on just three large exchanges that they feel have mostly fake volume and conclude that the real portion of their claimed volume is too small to matter. This seems a bit too pat an answer and ignores the hundreds of smaller exchanges that might actually have real volume, whose customers might actually have real money invested, and who in aggregate might be a notable portion of total volume and assets.
A different way to view the issue is to consider that this year alone three small exchanges, none apparently part of the initial exchange analysis done for Bitwise's submission dated March 20th, have managed to lose over $200 million dollars of investor's coins (Bitsane in Ireland, Bitpoint in Japan, and QuadrigaCX in Canada). This raises several interesting questions (including how is this still going on in the crypto world after 10 years and a large number of hacks, scams, and failures), but one in particular is if the vast majority of exchanges have either totally fake volume, or too little volume to matter, how did these three get over $200+ million in client's money to lose or steal in the first place?
Another filing done by Bitwise dated June 11th, 2019 relates to their dropping Bitfinex as an exchange that would be used by their firm to help develop their consolidated bitcoin price. Their reasoning for dropping Bitfinance is sound, and outlined in their index procedures, but this does raise a flag. Bitfinex, a non-US based exchange, has long had questions raised about its operations. A question can be asked as to why Bitwise included it in the first place given these issues. The same question could be asked about their inclusion of Binance, another non-US domiciled exchange with a colorful past.
Plus of course the issue of Tether, and Bitfinex's connections to it, are just too painful to even write about at this time.
So that this does not appear to be a case of my jumping all over Bitwise I would say that I think they are doing the public, and the SEC staff, a great service. In an area where real data and real analysis is mostly absent they are actually attempting to do the sort of work that needs to be done before the SEC can see its way clear to approve (or disapprove) their filing. This is in marked contrast to the filings of other potential issuers like Van Eck or the Winklevoss twins whose filings seemed to mostly be of the "We are not showing you and real data but trust us, we know what we are doing" variety. However I still think Bitwise has a long way to go to make their case and the case for any other similar issuer.
As a result I would encourage the SEC staff to actually keep Bitwise working away on their analysis and not, at this time, approve their product filing. They seem to enjoy the challenge and, after all, somebody has to do this work if the SEC is to feel comfortable at some point in saying yes to the notion of a bitcoin ETF. In the mean time I think there is a very real chance that more reliable crypto exchanges will emerge in the market place. Either as some of the exchanges that Bitwise is using for pricing step up and become "real" exchanges or because a real exchange, like ICE, moves into offering trading of crypto.