Bitcoin ETFs on the Horizon
Bitcoin ETFs on the Horizon: Exploring Grayscale’s Triumph and Industry Impact
Grayscale’s landmark legal victory against the U.S. Securities and Exchange Commission (SEC) has ignited a new phase in the cryptocurrency realm. This triumph could signify the opening of doors to further institutional cryptocurrency investment through Bitcoin Exchange Traded Funds (ETFs). Our article delves into the evolving landscape of Bitcoin ETFs, exploring the implications of Grayscale’s win and the transformative potential it holds for the industry.
1. Understanding the Current Bitcoin ETF Landscape
In the rapidly evolving world of cryptocurrency, the pursuit of a Bitcoin Exchange Traded Fund has recently gained momentum. While the United States stands as a prominent player in the financial world, the regulatory environment for cryptocurrencies lags behind its counterparts in Europe, Canada, Asia, and the Middle East, with Europe launching their first spot Bitcoin ETF in August, the Jacobi FT Wilshire Bitcoin ETF.
In June this year, BlackRock, the world’s largest asset manager, filed for a spot Bitcoin ETF to the U.S. Securities and Exchange Commission (SEC). Their initiative was followed by a surge in applications for spot Bitcoin ETFs submitted (or re-submitted) to the regulator by heavyweight financial firms. These applications signal a profound shift in institutional sentiment, with established players recognising Bitcoin’s potential as a mainstream investment.
The list of recent applicants includes:
- Ark/21
- Bitwise
- BlackRock
- Fidelity Wise Origin
- Grayscale
- Invesco Galaxy
- Valkyrie
- VanEck
- WisdomTree
Despite regulatory uncertainties, the significance of the U.S. market cannot be overstated. While the regulatory journey is complex, the potential for Bitcoin ETFs to open doors to institutional capital inflows remains a transformative prospect.
2. Legal Milestone: Grayscale Prevails in SEC Battle for Bitcoin ETF
In August 2023, on a pivotal day for the cryptocurrency industry, a federal appeals court asserted that the SEC’s prior decision to reject Grayscale’s application was misplaced. To provide some background, Grayscale had put forth an application to convert its flagship Grayscale Bitcoin Trust, a product that the SEC had greenlit in 2015, which currently holds assets worth more than $16 billion in Bitcoin, into an ETF. While the SEC had given the nod for Bitcoin futures ETFs since October 2021 (including a 2x leveraged Bitcoin futures ETF), it held a firm stance that spot funds were susceptible to manipulation given that crypto tokens predominantly operate in largely unmonitored markets.
In a ruling that has become a beacon for the cryptocurrency space, Judge Neomi Rao stated that the SEC’s refusal was “arbitrary and capricious because the commission failed to explain its different treatment of similar products”. Grayscale, in their public response, commented, “This is a monumental step forward for American investors, the Bitcoin ecosystem, and all those who have been advocating for Bitcoin exposure through the added protections of the ETF wrapper.”
While this court’s decision introduces immediate ramifications for the cryptocurrency realm, we will explore later in this article how this could potentially usher in a long-term positive shift for the entire cryptocurrency market and traditional finance industry.
Early September, Grayscale sent a letter to the SEC expressing their frustration with the prolonged approval process for their exchange-traded product (ETP). They emphasized being confident that no significant differentiation between spot bitcoin ETPs and bitcoin futures ETPs should exist, especially given the extensive previous discussions and Commission orders.
Three main concerns were communicated:
Financial Impact on Current Investors: Without NYSE Arca listing, the Trust’s shares trade at a significant discount to their net asset value, harming existing investors. This disparity could be resolved if the Trust received the same treatment as bitcoin futures ETPs approved by the Commission.
Unfairness to U.S. Investors: Grayscale argued that investors shouldn’t be pushed towards inefficient investment products. Spot-based ETPs, like those for gold, are generally preferred. Without approval as an ETP, Grayscale and its investors are at a competitive disadvantage.
Emergence of Competitive Spot Bitcoin ETPs: Recent Rule 19b-4 filings for other proposed spot bitcoin ETPs threaten to overshadow Grayscale’s offering. Given prior approvals related to bitcoin futures ETPs, Grayscale argues against imposing any additional requirements on spot bitcoin ETPs.
Grayscale’s call to action requests the SEC expedite the approval process for their ETP, with the aim of levelling the playing field for their nearly one million investors.
3. Immediate Implications of Grayscale’s Legal Victory
The recent court decision in favour of Grayscale is not just another news sound bite; it is a strong call for the entire cryptocurrency industry. As the SEC finds itself being challenged in favour of a cryptocurrency asset manager, the implications are grand and multifaceted. Especially given the U.S. market’s sheer number of investors and the potential future investments, the verdict is resonating across the financial markets.
The words used by the court are not just sharp; they are also revelatory, highlighting the SEC’s earlier position as “arbitrary and capricious.” This intense judicial scrutiny not only emphasises the need for a clearer regulatory framework but also sends an optimistic signal regarding the potential approval of a spot Bitcoin ETF in the U.S.
What is pivotal to recognise is that this court decision fundamentally challenges the SEC’s approach to crypto. The regulatory body now finds itself at a crossroad, increasingly being held accountable for its obligations and strategies. The strong language used by the appeals court has somewhat dented the SEC’s authoritative stance, thereby adding pressure for a more transparent and crypto-friendly framework.
Yet, the legal dance is far from over. The SEC, while being cornered, still has a few cards to play:
Approve: Green-lighting one, a few or all ETF applications, signifying a proactive response to the court’s decision.
Delay: The SEC can legally stretch its timeline, making applicants wait as long as possible. Case in point, the earliest filed application by Ark, which got its initiation on May 15 this year, has a maximum SEC review window of 240 days. This translates to a potential wait till January 10, 2024.
Redefine Rationale: While the SEC may no longer leverage the argument about market size and manipulation, it can architect new reasons for rejection, challenging entities like Grayscale to retaliate legally.
Appeal: While the SEC has the option to appeal the court’s decision, given the strong language and reasoning used in the judgment, it seems highly improbable that a court would reverse its stance.
As we pivot from the euphoria of the court’s ruling, it’s paramount to remain rooted in the immediate reality. While this is undeniably a monumental step for American investors and the crypto landscape, the legal panorama remains dynamic, now awaiting mid-October for the SEC’s next move.
4. Projecting the Future: The Transformative Potential of Spot Bitcoin ETFs
Market Evolution and Enhanced Regulatory Scrutiny
The recent triumph of Grayscale in its legal battle against the SEC marks a significant turning point in the quest for a Bitcoin ETF. This outcome has not only bolstered the prospects of Bitcoin ETFs but has also intensified the call for more comprehensive regulatory oversight in the cryptocurrency space.
The anticipation surrounding the approval of a spot Bitcoin ETF has brought regulators into sharper focus. The case of Grayscale winning against the SEC underscores the industry’s determination to push for a more structured regulatory framework. With institutional heavyweights like BlackRock, Fidelity, and Invesco vying for the approval of a Bitcoin ETF, the U.S. market’s demands for regulatory clarity are gaining momentum especially after the introduction in Europe of the Markets in Crypto Assets Regulation (MiCA) that entered into force in June 2023. Bitcoin ETF applicants are today acting as catalysts for refining regulations and providing a more secure environment for investors.
Against the backdrop of recent industry challenges, such as the collapse of major entities like FTX and regulatory crackdowns, the cryptocurrency landscape is maturing. This maturation process instils greater confidence in institutional players considering Bitcoin as a potential diversification asset. The influx of knowledgeable and experienced traditional finance institutions contributes to the industry’s growth, stability, and heightened professionalism.
Enhancing Market Accessibility for Global Participants
The introduction of a spot Bitcoin ETF transforms cryptocurrency market access for global participants. Traditional finance has historically faced obstacles due to complexities and risks of direct engagement. Gaining exposure to cryptocurrencies involves navigating exchanges (Centralised and Decentralised), setting up electronic wallets, and managing blockchain risks. These challenges deter institutional involvement and heighten concerns, amplified by regulatory uncertainty.
The advent of a Bitcoin ETF addresses these obstacles, enabling investors to access Bitcoin without directly holding the asset. Investors entrust ETF issuers with management, reducing the need for intricate market understanding. Notably, custody remains a pivotal factor, especially in light of market collapses and regulatory actions. Reputable custody providers enhance the security of Bitcoin ETFs, appealing to institutional investors seeking secure entry points to digital assets. This approach, although divergent from Bitcoin’s core principle of self-custody, pragmatically aligns with the priorities of traditional finance participants who value compliance and risk reduction.
Furthermore, Bitcoin’s evolving role as digital gold and its potential as a diversification asset attract interest from private banking and asset management firms. The inability to fulfil this demand while managing elevated investment risks presents a compelling case for the inclusion of Bitcoin in ETFs. This shift bridges the gap between traditional and digital finance, paving the way for a more interconnected financial landscape.
The potential impact of Bitcoin ETFs becomes even more pronounced when comparing the total market capitalization of the entire cryptocurrency market to the assets under management of traditional financial behemoths such as BlackRock, Fidelity, and Invesco:
- BlackRock: $8.59 trillion AuM
- Fidelity: $4.5 trillion AuM
- Invesco: $1.5 trillion AuM
- Total Cryptocurrency Market (2023): Approximately $1 trillion (reduced from its peak of $3 trillion in 2021)
This enhanced accessibility is further facilitated by the fact that ETFs are traded on already regulated exchanges. A recent example, Jacobi Asset Management’s ETF listed on Euronext Amsterdam. By offering a product that operates within the existing legal framework of financial institutions, ETF issuers are poised to unlock substantial investment inflows.
Broadening Institutional Adoption and Legitimisation
The enhanced accessibility offered by spot Bitcoin ETFs plays a pivotal role in expanding institutional adoption and legitimising Bitcoin as a viable asset class. As more traditional finance entities gain exposure through ETFs, they become increasingly acquainted with Bitcoin’s functioning, potential, and risk-reward dynamics. This growing familiarity encourages them to consider Bitcoin as a component of their portfolios, enhancing diversification strategies. This process triggers a virtuous cycle, where increased institutional participation further validates Bitcoin and other cryptocurrencies as a legitimate investment avenue. The availability of ETFs serves as the catalyst that ignites this transformative movement, fostering greater interest, engagement, and acceptance of cryptocurrencies within the broader financial landscape.
Enhanced Liquidity, Price Stability and Lower Commissions
The introduction of Bitcoin ETFs can have a profound impact on the liquidity, stability, and cost dynamics of the cryptocurrency market. As institutional players increasingly participate , the market witnesses a surge in liquidity. This heightened participation fosters a more stable price environment, reducing the extreme volatility often associated with cryptocurrency markets.
One of the notable outcomes of widespread adoption of ETFs is the anticipated reduction in trading fees and commissions. Traditional finance entities like BlackRock, with their extensive reach, can exert downward pressure on trading fees. The contrast between the average 0.01% fee for ETF trading and current trading fees, such as Coinbase’s tiered structure that can reach up to 3%, highlights the potential cost savings for investors. This change in fee structure not only enhances accessibility for a broader range of investors but also positively impacts trading profitability.
This shift in the market landscape can also have a cascading effect on the price of Bitcoin itself. According to some analysts, the potential launch of a Bitcoin ETF could introduce an additional $100 million in daily demand for Bitcoin. This increased demand, coupled with the upcoming halving in April 2024 that will slash daily mining rewards, creates a scenario where supply and demand equilibrium requires a substantial increase in Bitcoin’s price. Fundstrat’s analysis suggests that a clearing price range of $140,000 to $180,000 would be necessary to match daily supply with the heightened demand triggered by a spot Bitcoin ETF launch in the U.S.
Through these interconnected effects on liquidity, stability, and cost dynamics, spot Bitcoin ETFs emerge as a driving force capable of reshaping both the market structure and the valuation of cryptocurrencies.
Paving The Way to Expanded Tokenization
The introduction of spot Bitcoin ETFs not only transforms the landscape of cryptocurrency markets but also sets the stage for broader advancements in financial innovation, notably expanded tokenization. As institutional and traditional finance players embrace Bitcoin ETFs, they become more accustomed to the underlying technology and principles of digital assets.
This familiarity could stimulate further interest in the tokenization of traditional financial assets, a trend that is already gaining momentum. Initiatives such as the European Investment Bank’s issuance of a digital bond on the blockchain underscore the growing inclination toward leveraging blockchain technology for financial securities.
Additionally, the surge in Central Bank Digital Currencies (CBDCs) emphasises the convergence of traditional finance with technology. Around two dozen central banks are set to introduce CBDCs by 2030, according to a Bank for International Settlements (BIS) survey.
The synergy between the adoption of Bitcoin ETFs and the ongoing advancements in tokenization suggests a trajectory toward a more interconnected and efficient financial ecosystem. By facilitating the acceptance of digital assets and blockchain technology within traditional finance, Bitcoin ETFs could serve as a catalyst for driving innovation and collaboration across both the cryptocurrency and traditional financial realms.
Grayscale’s successful battle against the SEC marks a pivotal moment in cryptocurrency history. As the journey towards Bitcoin ETFs accelerates, the impact of Grayscale’s win reverberates. This milestone paves the way for increased accessibility, adoption, and innovation, sparking an era where cryptocurrency investments gain traction within traditional finance.
Discover the next chapter of this transformative journey with Jacobi Asset Management. Dive deeper into the nuances of Bitcoin ETFs versus ETPs, and explore the unique attributes of Jacobi AM’s Bitcoin ETF. Aligned with Article 8 of the European Sustainable Finance Disclosure Regulation (SFDR), our ETF not only grants access to Bitcoin but also aligns with environmental, social, and governance (ESG) objectives. Get involved today to shape the future of cryptocurrency investments and embrace a new era of financial possibilities.
Sources
Financial Times
https://www.ft.com/content/c862dd6c-6d9f-4565-ae40-1869b00e6e48
CNBC
https://www.cnbc.com/2023/08/29/a-spot-bitcoin-etf-is-much-closer-to-reality-were-not-there-yet.html
Cointelegraph
https://cointelegraph.com/learn/blackrocks-bitcoin-etf
https://cointelegraph.com/news/black-rock-etf-bitcoin-price
Reuters
Blockworks
https://blockworks.co/news/grayscale-win-over-sec-might-not-change-much-industry-watchers-say
NYDIG Study Gold ETF vs BTC ETF
Business Insider
https://markets.businessinsider.com/news/currencies/bitcoin-price-outlook-blackrock-etf-filing-demand-180000-crypto-halving-2023-7