July 2023       

The U.S. Securities and Exchange Commission (SEC) has launched its review of the latest bitcoin exchange-traded-fund (ETF) applications. Only a few applications use a bitcoin reference rate to determine the price of bitcoin for the ETF valuation. The use of a robust index methodology such as a reference rate is expected to be a critical factor in the SEC’s decision. The following FAQ provides answers to questions regarding why a bitcoin reference rate is poised to be a game-changer, propelling digital assets into the US ETF space and offering investors regulated access. Discover the key points that can revolutionize the future of finance!

What is the MarketVectorTM Bitcoin Benchmark Rate?

The MarketVectorTM Bitcoin Benchmark Rate (BBR) is a benchmark reference rate designed to provide a reliable and universally accepted benchmark for the rapidly evolving digital assets market, specifically for Bitcoin. It utilizes volume-weighted medians to offer more accuracy and resilience against market manipulation compared to standard indexes.

Why do investors need an index for a single token like Bitcoin?

Unlike traditional assets, digital assets can trade across hundreds of exchanges with varying prices. This can lead to temporary price differences and even price manipulation. The BBR aggregates prices to provide a better answer to the question "What is the most reliable / consistent representation of the price of Bitcoin today?"

How is the BBR calculated?

The BBR is not a simple average of Bitcoin prices from various exchanges. Instead, it employs volume-weighted medians in its calculation methodology, which significantly reduces the influence of extreme values (outliers) and less significant trades. Unlike many traditional indexes that update daily, the BBR provides more accurate and timely information by updating real-time every 15 seconds. This is done by dividing one hour into 20 equal partitions and calculating the median price in each on a rolling basis, providing a comprehensive and real-time view of the market conditions throughout the day.

How does the BBR shield against market manipulation?

The BBR is resistant to various types of attacks, including large trades, short-term volume spikes, price manipulation, and exchange targeting. Its design makes it challenging for potential manipulators to influence the index significantly.

How does the BBR handle flash crashes?

The BBR's case studies demonstrate its resilience during flash crashes. It accurately tracked the market price and remained stable during significant flash crashes on exchanges, providing a reliable representation of Bitcoin's price.

What is the significance of using USD pairing in the BBR?

The BBR only includes trades executed between Bitcoin and USD to minimize vulnerability to temporary price swings and outlier prices. This approach ensures the stability of the reference rate, as the US Dollar, a government-issued currency, offers a level of stability and confidence that cryptocurrencies or stablecoins may not provide. 

How is the BBR used in the financial market?

The BBR has been actively applied by entities in the realm of Exchange Traded Funds (ETFs) and Exchange Traded Products (ETPs). Asset managers license the MarketVector digital asset reference rates for their single token ETFs, such as Ether ETF and Bitcoin ETF to benefit from a robust and reliable reference rate.

How does the BBR enhance investor confidence?

How is the BBR utilized beyond traditional ETFs?

The BBR's broad applicability extends beyond traditional ETFs to crypto futures offerings. For example, Coinbase has licensed the BBR for their crypto futures products, highlighting its importance in driving innovation and expanding utility in the crypto futures space.

What makes the BBR stand out?

The BBR's distinctive feature is its innovative methodology: it doesn't rely on simple averages or single-point daily closing prices like some indexes do. It uses volume-weighted medians, resulting in a robust and resilient price benchmark that's less susceptible to market manipulation. Moreover, unlike many other indexes, the BBR offers the benefit of real-time data updates every 15 seconds, providing users with a constant, accurate reflection of Bitcoin's market value. This rigorous and real-time approach makes the BBR a superior choice for market participants, fostering greater acceptance and engagement in the digital assets market. 

Why is a Real-Time Bitcoin Reference Price Important?

real-time index, as opposed to one updated once a day, offers several significant advantages to various market participants, including ETF market makers and derivative issuers. Here's why:

  • Accurate Pricing and Arbitrage Opportunities: For ETF market makers, having real-time information is crucial for accurate ETF pricing. ETFs are designed to track the performance of their underlying assets – in this case, Bitcoin. The ETF's price may deviate from the index's value if the index does not accurately represent the current value of Bitcoin. Real-time information can allow sophisticated traders and institutional investors to spot and exploit arbitrage opportunities, which can arise from temporary price discrepancies between different markets or between an ETF and its underlying asset.
  • Risk Management: For derivative issuers, having real-time updates can be important for managing risk. Derivatives like futures and options are highly sensitive to the underlying asset's price. Real-time updates allow issuers to better monitor changes in the asset's value and adjust their positions accordingly.

MarketVectorTM Bitcoin Benchmark Rate

17/07/2022-17/7/2023

Source: MarketVector IndexesTM. Data as of July 17, 2023.

 

Find out more read the paper on MarketVector Benchmark Reference Rate here.

For more information on our family of indexes, visit www.marketvector.com. 

 

For informational and advertising purposes only. The views and opinions expressed are those of the authors but not necessarily those of MarketVector Indexes GmbH. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results. It is not possible to invest directly in an index. Exposure to an asset class represented by an index is available through investable instruments based on that index. MarketVector Indexes GmbH does not sponsor, endorse, sell, promote, or manage any investment fund or other investment vehicle that is offered by third parties and that seeks to provide an investment return based on the performance of any index. The inclusion of a security within an index is not a recommendation by MarketVector Indexes GmbH to buy, sell, or hold such security, nor is it considered to be investment advice.