Bitcoin Spot Market is “Smaller” and “More Efficient” Than Generally Perceived

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Bitwise Asset Management says that there are misconceptions about the bitcoin spot market, which it says is considerably “smaller” and “more efficient” contrary to the general public perception.

Bitwise’ comments are part of a white paper the firm presented to the U.S. Securities and Exchange Commission (SEC) last Friday.

According to the crypto asset fund manager, the bitcoin spot market has seen dramatic improvements in terms of the strength of arbitrage since the beginning of 2018.

The company notes that the current bitcoin market does not have wide deviations in its average price as indicated on 10 “real” bitcoin (BTC) exchanges. Bitwise contends that there is a clear downward trend when BTC prices on these exchanges are measured against the cryptocurrency’s consolidated price.

Per the filing, Bitwise maintains that as opposed to perception, the downward trend is an indicator that arbitrage between these exchanges is progressively becoming more efficient.

It adds that the growing efficiency in arbitrage “comes despite high volatility” as well as occasional declines in overall trading volume. Bitwise says that growth in the bitcoin spot market is benefiting from a confluence of factors that combine to “reflect the growing maturity” within the crypto space.

The firm also reiterated its earlier call that most (almost 95%) of BTC’s reported trading volume is fake, or it involves wash-trading.

Bitwise also notes that bitcoin’s volume information displayed by CoinMarketCap and many other crypto data aggregators are “wrong.”

According to the firm, these volumes are “wildly inflated.”  Nonetheless, Bitwise acknowledges that CoinMarketCap is working on an initiative that should see it become more transparent and accurate.

Bitcoin’s “real” market consists of what is left after you leave out the fake volume and forged data, Bitwise says. It is an orderly market that is very efficient, and “backstopped by a regulated derivatives market of significant size.”

But this appears not to be the way the public perceives the bitcoin market, of which Bitwise states:

“Public perception, however, holds nearly the opposite point-of-view, believing the bitcoin market to be uniquely disorderly and inefficient.”

The filing identifies the ten cryptocurrency exchanges that have real trading volumes as Binance, Coinbase, Bitfinex, Kraken, Gemini, Bitstamp, BitFlyer, itBit, Bittrex, and Poloniex.

As per the paper, data on trading on these exchanges aligns more with real-world statistics like the gross domestic product (GDP), wealth indexes, and web traffic among others.

Bitwise summarizes its comment to the SEC by noting that there is an attendant “vestigial anchoring” that sees people view the market in line with what happened or is true of the past.

For the firm, this becomes worse when the public access get exposed to vastly inaccurate and poor quality data that pervades the bitcoin ecosystem.

It is this scenario that continues to give the public the perception that bitcoin’s market is “inefficient, chaotic and issue-prone.”

It concludes:

“In times of rapid change, people’s perceptions often anchor in the past. People who read about bitcoin today still think about Mt. Gox, when they should be thinking about Fidelity; they think about Silk Road when they should be thinking about Whole Foods.”

The comments come barely a month after the SEC postponed a decision on the Bitwise ETF proposal as well as that of VanEck.


Disclaimer: This is not investment advice. Cryptocurrencies are highly volatile assets and are very risky investments. Do your research and consult an investment professional before investing. Never invest more than you can afford to lose. Never borrow money to invest in cryptocurrencies.

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