Bitwise’s Recent Report on Exchange Volume May Be True, But Bitcoin’s Value is Real

By Kapil Gauhar

The mainstream reaction to Bitwise’s latest report showing 95% of total reported bitcoin trading is fake was to see it as further proof of the scammy nature of the cryptosphere.

Within its presentation seeking approval from the SEC for a bitcoin-focused ETF, Bitwise included one slide with a screenshot from Coinbase Pro that shows a mere 0.0003% bid/offer price spread and stated that it needed to be “among the tightest quoted spread of any financial instrument in the world.”

This is something that supports the arguments in favour of digital currencies –

“By cutting out the many financial intermediaries needed to execute trades in the traditional financial system, this technology achieves impressive efficiency and cost reduction for market participants.”

More than a critique of the price manipulation rife throughout the bitcoin markets, then, the Bitwise report acts as a demonstration of digital currencies’ great potential.

Also, it convincingly makes the point that for achieving that potential, there needs to be greater regulation of the cryptocurrency trading.

High Efficiency with Thin Liquidity

The thin liquidity is particularly remarkable when you think that authentic BTC trading represents a drop in the ocean in comparison with those conventional markets where price spreads tend to be tight.

For instance,

Daily turnover in the US Treasurys market tends to range between $550 bln and $1 tln, whereas Bitwise measure worldwide daily authentic bitcoin trading to be simply $273 mln. Also, consider that bitcoin trades are generally open to retail investors, whereas Treasurys are nearly traded by institutional investors moving huge amounts of money.

In traditional markets, it is the size that dictates liquidity, which determines price efficiency in turn. However, this data shows that bitcoin is capable of highly efficient results at a much lower scale.

All of those efficiency gains take place because Bitcoin evacuates the fee-charging trusted intermediaries who carry out a variety of back-office settlement processes inside the legacy financial system. But, what’s the catch?

The Bitwise report represents that traders, for enjoying those payoffs, must depend on trustworthy entities to carry out the front-end function of searching for buyers and sellers.

Regulated Pricing

In such context, it’s explicit that the key selling point which the Intercontinental Exchange uses for promoting its bitcoin trading platform, Bakkt, is that it will offer financial institutions the peace of mind of “federally regulated pricing.”

Bakkt says –

“Only with the full backstop of federal oversight can large institutions be assured of reliable prices and thus maintain the fiduciary duty they owe their customers.”

Exchanges, including Coinbase, are competing with Bakkt for the potentially huge institutional market. Sure, they will disagree with this assessment. They will argue that their regulatory system will sufficiently protect investors. Bitwise’s report perhaps will help them make that argument.

Well, far from showing another damaging blow to BTC’s reputation in public, Bitwise’s damning report on scammy exchanges need to be viewed as a big boost to BTC’s bid for legitimacy in the wider world.