Bitcoin Ain’t so Bad in Light of the Oil Market Debacle

Volatile, illiquid, manipulated. No criticism of Bitcoin appears to be complete without touching these recurring topics. On this basis, various proposals for a Bitcoin ETF have been rejected by the US regulators for years. Is the criticism worth it?

Although events in the oil market last month weren't designed to defend Bitcoin at the first sign of an attack, it brought cognitive dissonance to a level that was too great to bear.

In many ways, the Bitcoin market is now more robust than the listed oil market.

Bitcoin's much mocked volatility is now fading compared to that of oil. Daily movements of more than 25% are rare – even in crypto. I count seven of them in April on the NYMEX WTI front contract, one of the two global benchmarks for oil.

What about manipulation? Uninformed investors are cannon fodder for the oil market, an opaque one that's exposed to global realpolitik and backroom deals, while the Bitcoin spot price is available to everyone on countless free platforms at the push of a button. There is no CEO of Bitcoin Inc. who has the power to move the market by 10% with a mere tweet.

Despite the dubious record of oil as an asset class, any retail investor can access this market by buying an oil ETF through their brokerage account – one that is likely to open in days, if not hours, to newcomers like Robinhood.

An investor in USO, the most popular fund of this kind, could track oil prices relatively well in a good year. In April 2020 alone, USO lost more than 40%, while oil closed around 10% according to various benchmarks. The reason is simple: USO has no oil, but buys the WTI futures contracts listed on NYMEX. The difficult imbalance between overproduction and storage capacity at this time of the pandemic means that USO's strategy of continuously buying and extending the first month's future is guaranteed to lose 30% per month, as did the dramatic expiry of the May contract on May 20 was the caseth April, although the NYMEX price remained largely unchanged even in the reporting period. At the time of writing, the same strategy still loses a few percent a month.

Robinhood provides insightful data. On 21st In April, USO was the top-selling stock among the broker's 10 million users. The size of the fund more than doubled this month. Such massive inflows of uninformed retailers forced USO, already a massive market participant, to buy even more futures, which corresponds to a third of the open positions. Consider the irony: The SEC argued that "having concentrated holdings of an asset poses a significant risk of manipulation" when it rejected one of the Bitcoin ETF proposals last October ( In addition, the purchase was undone so that the ETF closed with a 36% premium on the value that its holdings implied on that fateful day. As a result, if you held USO from the close on the 21stst From April to the end of the month, despite double-digit profits in the NYMEX future, you yourself lost another 15% of your investment (and who did the other side of this shift? Professional traders). Concerns regarding the calculation of the net asset value were also addressed in the SEC's decision.

Put back in a corner at this point, the bitcoin skeptic would argue that however manipulated or volatile it may be liquidity one of the most important commodities in the world must surpass that of bitcoin. But does it do it?

The bid offer spread for trading in oil futures and USO is wider than that of Bitcoin even for professional traders. At the time of writing, the spread for trading in a WTI contract (approximately $ 25,000) was 0.04%. Before USO's stock split, the same size was offered with a 0.4% spread. Compare this to a spread of less than 0.01% to trade $ 25,000 Bitcoin on the largest U.S. exchange.

The available depth gives a similar picture: Bitcoin exceeds the book size of USO and WTI futures, where the spread is 0.04%. There are usually about five contracts at the beginning of the WTI book, or a value of $ 125,000. USO typically has around 2,000 shares or $ 50,000 on a particular U.S. exchange. Bitcoin does better: The most liquid venue can display a million dollars with the same spread.

If you're surprised by the numbers above, you shouldn't be. Bill Gates once said:We always overestimate the changes that will occur in the next two years and underestimate the changes that will occur in the next ten years.“Bitcoin would never become a large asset class at lightning speed. However, ten years later, some of his critics live in a world that no longer exists. While there may be other reasons why a Bitcoin ETF shouldn't see the light of day, the reasoning offered so far will remain intellectually inconsistent as long as funds like USO are available to the public. It is time for the Bitcoin market to be recognized for its robustness, resilience and transparency.

The pioneering book Market Wizards contains an interview with Richard Dennis, a legendary trader, who says that "T.The worst thing you can do is miss a chance to win. (…) And rigid long-term views are most likely to lead to this mistake.In the same book, another major retailer remembers the strong impression an article about Dennis made on him. His name? Paul Tudor Jones II

The best of us update our opinions when the facts change. Who can't change their mind today?

– –Max Boonen is the founder and CEO of the leading cryptocurrency liquidity provider B2C2


The views expressed in this comment are those of the author and do not reflect the opinion of Traders Magazine, Markets Media Group or its employees. Traders Magazine welcomes readers' feedback on this column and on all issues relevant to the institutional trading community.

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