Nomics on Exchanges, the Real 10 and the Bitwise ETF
|Apr 26||Public post|| 1|
The story that’s gotten the most reaction from you, our readers is the Bitwise Report of the Real 10 exchanges. I am happy to see the requests for more, better, and transparent information coming from the professional and industry insiders as well as the public.
Today’s story is a not quite refutation of the Bitwise report but a couple critiques of that report. Let’s take a look.
Story #1: Nomics Questions Easy Acceptance by Bitcoin Community of Bitwise Report
Nomics, who is in the information and API business for cryptocurrencies, asked some interesting questions in their critique of the Bitwise Real 10 report. You can see the entire post, where they examine the report and announce their transparency rating system HERE.
The questions ask us about our collective confirmation bias we might have in the industry. We want to be right about certain issues like Decentralization or Scam projects.
Here are their 7 critiques listed in their blog (with our take mixed in):
Critique #1 is that the report’s primary purpose is to persuade the SEC to allow a Bitwise ETF. And for this reason, it has an inherent bias. That is, the document is a marketing document first, and a research document second. And as a research document, it was not subject to a formal peer review system that academic research papers are subject to.
Our CNON Take: We agree with this criticism and noted in our post that the entire presentation by Bitwise to the SEC is 226 pages. Yet only 86, and more importantly the first 86 are on this idea of the Real 10. They are trying to prove that the real 10 have trackable data that can make price discovery (getting to a true market price) for Bitcoin possible, something necessary for ETF approval.
Critique #2 is our most superficial criticism. And it’s that the report seems to have a base 10 bias. The number 10 seems very curious: why not 9 or 11? This appears to embody “base 10 bias.”
CNON: They state that this criticism is superficial and I agree. While Shapeshift is very transparent in their practices, I think they are not on the Real 10 list because they are a crypto to crypto exchange and not crypto to USD, not due to a preference to base 10. After all, the ETF Bitwise is trying to get approved for will be priced in USD or settled in USD or both so they don’t care about the trading pair between Ethereum and DASH.
Critique #3 is that their conclusions are not falsifiable, which means that they are not trustless. When the Bitwise team says that only 10 exchanges have actual volume, the determination about which exchanges pass muster vs. not appears to be a qualitative call. That is, someone at Bitwise is looking at the data and giving individual exchanges a thumbs up or thumbs down and there is no stated independent test that stands apart from Bitwise, that a third party can independently apply. You either have to trust their conclusions or not. (Note: Bitwise’s report is a presentation, which is an inherently non-falsifiable form of evidence. It’s my understanding that Bitwise will be sharing a more thorough analysis that will be falsifiable in nature).
CNON: It is true that there is some qualitative-ness to determining which exchanges are most legitimate. I also think using volume spikes and site visits as they did are good early indicators of an exchange’s transparency.
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Critique #4 is related to critique #3, and it’s that the cryptosphere has generally responded to the report as if its conclusions are stuck in time; there is far too much over-extrapolation happening on Twitter. Bitwise does not state a formal methodology that can be used to independently rate an exchange so a 3rd party cannot update the list. So today, some of the exchanges identified by Bitwise as being good actors might have flipped and be engaging in wash trading. And exchanges that Bitwise did not indicate as having “actual volume” may have cleaned up their practices.
CNON: This is one of the better critiques on this list. All US investors know that just cause an industry (like the stock market) is regulated does not mean it does much to prevent bad actors. In the crypto-economy, being regulated and complying with those regs is a good thing since so few try to do so, but that hardly means they are more legitimate than a Shapeshift, who does an excellent job running their exchange while complying with some regulation.
Another thing that would help to answer this critique is something that is getting more popular in the crypto-economy: Proof of Solvency. People are wanting exchanges to prove they are solvent either with audits or with broadcast messages to the blockchain.
Critique #5 is that people have over-extrapolated the report to apply to cryptoassets other than Bitcoin, to markets other than BTC/USD & BTC/USDT, and to exchanges that don’t list Bitcoin. This report, as it stands right not, does not apply to cryptoassets other than BTC, to markets other than BTC/USD & USDT, and exchanges other than the 80 they examined (all of which list Bitcoin). While Bitwise’s analysis was perfect for a Bitcoin ETF, it’s a mistake to apply their findings broadly to all crypto markets.
CNON: I agree that this report applies to Bitcoin and Bitcoin only. I have not seen any extrapolation to other cryptos other than not including crypto to crypto or decentralized exchanges. But they are right. If you are long ETH or EOS or LTC, this report means nothing to that position, good or bad.
Critique #6 is that there is no stated timeframe for the most important data point in the report. For example, they assert that 95% of the volume on global crypto exchanges is fake. Is this volume on one day of analysis? Is this for 2019 YTD? 2018? The lack of details is important to note.
CNON: As a detail for analyzing volume, this critique is true. For Bitwise, they are concerned with volume numbers now and in the immediate future since that’s what the SEC will look at when trying to approve their ETF.
Critique #7 is that the public’s response to the Bitwise report has been unfair to upstanding exchanges. There are many exchanges like ShapeShift and IDEX that have gone out of their way to comply with regulators, and in ShapeShift’s case, have ostensibly experienced layoffs as a result. Yet too many readers have given the report a cursory glance and concluded that there are only 10 exchanges with true volume: this is an incorrect assumption.
CNON: Based on our previous answers, you can see we agree with this too. Shapeshift, in particular, has been an excellent example of transparency and something we hope to see more of.
Some of these critiques by Nomics are really accurate or good things to think about for future discussion. For you, the object remains the same. You are safer using one of the Real 10 to buy your crypto and then you MUST move it into a wallet where you own and control the private keys (less any smaller amt you intend to trade more frequently). Nothing in the Bitwise report or the Nomics respond changes this for you or me.