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22nd December 2023 > > Argentina & spot BTC ETFs.

Updated: Dec 23, 2023


BTC used to be oh-so-cheap. Argentina embraces cryptos. A technical note on the background to spot BTC ETFs.

Market Snap

Market Wrap

I got a little concerned last night about that $500 drop in mere minutes. Here comes that long squeeze was my first thought. However, we have seen a huge reduction in perpetual futures funding rates at little cost to the price of BTC. On the 10th of December I made the startling claim that perhaps elevated rates were sustainable considering a strong ETF bid, a claim that was demonstrated to be wrong in all respects in short order.

After the resilience and robustness of price action in the last twelve hours, I repeat that proposition, though the market gods will probably not look kindly on me.

Occasional Series – The Milk Road

Curious Cryptos’ Commentary – The first sale of BTC

The first known sale of BTC can be seen here:

That’s 5,050 BTC for a grand total of … $5.02 on 12th October 2009.

Nice trade for the buyer.

Curious Cryptos’ Commentary – Argentina

Recently elected President Javier Milei has proposed a number of headline grabbing initiatives including dollarisation and closing the central bank. It is true that outsourcing domestic monetary policy takes away one of the modern world’s functions of a central bank – the preposterous idea that interest rates are set independently of the governing party – but that does not justify closing the central bank altogether. The key function of a central bank is to act as a lender of last resort. One can argue about whether that is possible when using someone else's currency, but it is an important safeguard, nonetheless.

The thing is – being the lender of last resort is the only activity over which a central bank should have control. Everything else is politics. Always has been, always will be.

So, though Javier has yet to learn this lesson and is probably making a huge mistake on this issue, he is making great strides elsewhere.

Financial and commercial contracts can now be denominated in BTC.

Curious Cryptos’ Commentary – Update on cash creates and redemptions

All the proposers of spot BTC ETFs have been told to include a cash creation and redemption model rather than in-kind or face a delay of unspecified length in gaining approval by the SEC.

ETFs closely track the underlying security or securities because of market-makers’ ability to create or destroy new units by delivering the underlying to the ETF provider or receiving the underlying from the ETF provider. This is the “in-kind” model.

A simple example should suffice to explain this wonder of capital markets, known as arbitrage.

Take a spot gold ETF. If we assume that gold is trading at $100 and the ETF is at $110, a market-maker will sell the ETF to the market at $110, buy $100 of gold from the market, and deliver that gold to the ETF provider in exchange for one new unit of the ETF. Net cash flow to the market maker is +$10.

Now let’s assume that gold is trading at $110, and the ETF is at $100. The market maker will sell gold to the market at $110, buy the ETF from the market at $100, and deliver that ETF to the ETF provider in exchange for gold. Net cash to the market maker is +$10.

The difference in price between the ETF and the underlying would never get as high as 10%. Market-makers with efficient systems (IT for the arbitrage which is a lot more complicated for multi-security ETFs, a dominant repo desk, STP, and a risk management department whose function is to help not hinder the business) would execute this arbitrage for 10bps or less over and above the cost of the underlying bid-offers. In this way, the price performance of the ETF is guaranteed to closely track that of the underlying. It is this mechanism executed by third-party firms that has made BlackRock the financial behemoth it is today.

The SEC has denied this to the spot BTC ETF market due to concerns about money laundering.

Money laundering concerns are at the top of every bank’s list, though with $40bn of fines in two decades or so, TradFi firms such as J.P. Morgan don’t seem to care that much about money laundering in more traditional investments.

If allowed to use in-kind creations and redemptions, market-makers would only deal with reputable sources. The likes of Coinbase, other banks’ crypto market-marking desk, hedge funds, family funds, and anyone else who has been through an exhaustive KYC process. Insisting on cash creation and redemption makes no difference to the risk of money-laundering (see the comment about J.P. Morgan above) but it makes a crucial difference to investors in a spot BTC ETF. It makes the returns from that ETF less attractive than they would otherwise be.

It is hard to escape the conclusion that the SEC continues to act in an “arbitrary and capricious manner”.

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