On March 11th, after nearly four years, the SEC reaches its deadline to make a rule change that would open the door to publicly traded Bitcoin ETFs. The battle to gain approval for mainstream bitcoin investment has been a protracted process, but the introduction of the TradeBlock XBX Index solves one of the underlying hurdles.
This ruling will establish precedent moving forward for allowing institutional investors to engage with Bitcoin and other cryptocurrency assets. New types of cryptocurrency investment vehicles will allow traditional investors to hedge global currency, without assuming the risk of Bitcoin early adopters.
One of the underlying hurdles in this planned transition is establishing a reliable method to price Bitcoins. Currently, Bitcoin investment functions in a fragmented environment; constant trading across hundreds of global exchanges, can cause pricing parity to be dramatic. Bitcoin investors are able to exploit these inconsistencies through arbitrage. However, gaining the acceptance of institutional investors requires establishing a single method of pricing Bitcoins that accurately reflects the entire market.
To this end, SEC filing documents have revealed plans to introduce the TradeBlock XBX Index as the institutional metric for bitcoin price. The TradeBlock XBX Index is a US Doller-equivalent spot rate for bitcoin. The index value is algorithmically calculated based on the trading activity across the top Bitcoin exchanges: GDAX, Bitfinex, itBit, OKCoin, and Bitstamp. The XBX Index is able to track liquidity while adjusting for deviations caused by anomalies and exchange manipulation attempts.
In 2015, several minutes of unusual trading on the Bitfinex exchange, caused a pricing difference of multiple points with the rest of the market. The company claims that “the algorithm underlying the TradeBlock XBX index is uniquely designed to track liquidity while also protecting market participants from these types of events. As shown in the charts below, the XBX index discounted the anomalous trading at Bitfinex in real time”.
Opening up a new form of investment to the market at large is an inherently risky endeavor. The TradeBlocks XBX Index’s ability to maintain stability in the face of harmful trading patterns, illustrates that the development of financial tools for the Bitcoin market allows for the mitigation of undue risk. As crypocurrency markets as a whole begin to mature, their mainstream acceptance will promote innovation and whole new breed of financial instruments.