Can HODL5 help the SEC reverse the 9 denials of BTC ETFs?


Last week was the launch party of HODL5 at the Swiss SIX exchange. Deborah Fuhr, CEO of ETFGI, a leading independent research and consultancy firm on trends in the global ETF/ETP ecosystem, flew over from London and top management of the Amun Group, was on stage.

We will all be watching how HODL5 trades, as it has the potential to become a retail darling and or an institutional darling. The first day of trading – Friday 23rd of November – saw 27,244shares ($400k) of volume. Flow Traders is the official market maker and a leading liquidity provider of ETPs.

#HODL5 is NOT an ETF – Exchange Traded Fund. It is a kind of ETP – Exchange Traded Product. With over $5 trillion in assets in ETF/ETP markets, we don’t pay attention anymore to details, do we?

Highlights ETFGI reports assets invested in ETFs and ETPs listed globally reached a new high of $5.12 trillion at the end of July 2018

  • Total Assets in ETFs and ETPs listed globally reached a record $5.12 Tn at the end of July
  • Net new assets gathered by ETFs/ETPs listed globally were $41.1 Bn in July
  • 4 ½ years or 54 consecutive months of net inflows into ETFs/ETPs listed globally  

Warning, ETFs are ETPs but not the other way around. I am sure you don’t confuse IPOs with ICOs. No need to highlight the differences between those.

ETPs are not ETFs and the reason you should care is that even a very successful #HODL5 exchange-listed product, won’t budge the SEC to approve any of the Crypto ETFs that have been rejected nine times already.

HODL5 is an exchange-listed product. It is a tracker which derives its value from an underlying basket of cryptocurrencies, the Top 5 by market capitalization, which is actively rebalanced on a monthly basis. These digital assets are held in custody (so HODL5 buyers don’t have to deal with that) and every time HODL5 shares are bought or sold, the underlying basket is adjusted.

The Amun Cryptobasket (HODL5 ticker) tracks five major cryptocurrencies: Bitcoin (BTC), Ripple (XRP), Ethereum (ETH), Bitcoin Cash (BCH), and Litecoin (LTC). Amun AG, is a Swiss startup and Amun Crypto Index is managed by VanEck, the German index unit of investment management firm. VanEck is also involved in the new Bitcoin OTC Index called as MVIS Bitcoin US OTC Spot Index.

“The new index is called the MVIS Bitcoin US OTC Spot Index (MVBTCO) and leverages price inputs from OTC desks at Genesis Trading, Cumberland, and Circle Trade. MVBTCO gives institutions a reputable benchmark to reference, rather than having to individually ping each OTC desk to receive price information before deciding which counterparty to transact with.” Excerpt from my subscription of Anthony Pompliano’s OffTheChain.

HODL5 is the 4th tracker listed on a traditional exchange. The first two are Grayscale Investment’s crypto-indices and Coinshares’ Bitcoin and Ether trackers, both of which rely on different legal structures. HODL5 is the first “Crypto-ETP” fully backed by digital assets. Despite the fact that HODL5 gives broader exposure to the crypto market, since it is a basket, and is fully backed by the underlying assets; I don’t think it will help alleviate the SEC reservations about Bitcoin ETFs.

After nine iterations and public feedback, which has now been closed, the SEC’s refusal to approve any Bitcoin ETF is based on the fact that the crypto market is plagued by fraudulent practices and price manipulation and investor protection is tricky.

ETFs have proven to be great financial structures and have become so ubiquitous that we forget what is happening behind the scenes in order to for these products to work their wonders. Two years ago, I wrote a post around this topic – which was not at all triggered by crypto asset trackers – Are ETFs Trackers that Fintech can turn into Trucks with No Brakes? – in which I go through the Creation/Redemption process that is vital for ETFs.

In summary, for each ETF, one has to think of the Issuer (e.g. Vanguard, Blackrock), the Authorized Participant AP (DTCC reports that there are currently 50 AP firms) and the Market Maker, and the Custodian (e.g. JP Morgan, State Street). The Authorized Participants (APs) are the entities that create and redeem ETF shares and are sometimes the same as market makers; but not always. They are the usual suspects (large broker dealers) and have signed AP agreements with the ETF issuers.

ETPs don’t involve Authorised Participants who are those that make the “magic” Creation/Redemption process of ETFs happen. ETPs are “subordinate” in the liquidity hierarchy to ETFs.

I always remind myself that a derivate structure cannot be more liquid than its underlying asset. Corporate Bond ETFs are the simplest and greatest examples in conventional markets of this. Since the Subprime crisis, corporate bonds have been plagued with illiquidity despite several noteworthy Fintech attempts to solve this fixed income conundrum. Even for equity ETFs, don’t forget that they become illiquid and mispriced in incidents like the surprising Brexit election results. Betterment, the largest standalone robo-advisor, had to suspended trading on Friday of the Brexit result for almost 3 hours[1] because ETFs became misprices

The growth of a basket derivative cannot improve largely the liquidity and mispricing of the underlying assets? Even though, derivatives do add to the maturity of a market (futures, options, structured products) trackers have never actually led a recovery of a distressed market.

The SEC’s concerns will not be alleviated even if HODL5 volumes show strong natural demand. The SEC is watching rigging, insider trading and any kind of 51% attack. A crypto ETF not only needs several market makers to play the roles of the APs but also to convince the SEC that insider trading is less feasible, price manipulation is naturally arbitraged away. Four crypto trackers are not enough to move those needles.

[1] The Betterment/Brexit incident

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Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer.

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  1. What will it take for the SEC to approve the first bitcoin ETF?

    • Better custody solutions and negligble price manipulation opportunities; are two basic ones.

      • Thank you. Does the possibility of Baakt opening up trading bitcoin end of January, presumably, help? Would SEC need to see what happens there first for some period of time? Or, will perhaps the Van Eck ETF application in process with SEC potentially satisfy both the basic points you make?

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