Oct 23, 2023
The beginning of 2023 was dominated by a regulatory crackdown on the crypto industry in the United States. Since June 15, 2023, however, the narrative shifted as Blackrock submitted a spot Bitcoin ETF application to the Securities Exchange Commission. Following their application, a host of other financial giants followed suit, including Fidelity, Franklin Templeton, Invesco and others. The potential approval of these applications has dominated discussions and speculation in crypto markets.
In 2013, the Winklevoss twins submitted the first application for a Bitcoin Exchange Traded Fund (“ETF”) with the Securities Exchange Commission in the United States. Since that time, many have viewed ETFs as the holy grail for enshrining Bitcoin in the financial system and providing a safe, user-friendly product for the American investing public to hold Bitcoin in their portfolios. Several times in the last decade, submissions have been made and the SEC has duly denied them based on several factors, but chiefly under the claim that there was fraud and manipulation in Bitcoin markets.
In fact, there are already Bitcoin ETFs traded in the American market. These products, however, are based on CME Futures instead of spot Bitcoin. Their performance has been hampered by contango in the Bitcoin futures markets as well as roll-costs, the costs incurred for rolling from expired contracts to new ones. This makes futures products much less efficient and therefore less attractive to investors. See below for a chart noting the performance difference 2023 YTD between the largest Bitcoin futures ETF, BITO, and the spot Bitcoin price.
Yet BITO and several other Bitcoin futures ETFs have attracted a relatively significant amount of assets under management. In the USA, futures ETFs represent roughly $1,081,194,650 in assets under management. Furthermore, there are other products globally which have showed the attractiveness of Bitcoin financial products, including several spot ETFs in Canada and the massive, $17B Grayscale Bitcoin Trust, which is one of the largest individual holders of Bitcoin.
The Grayscale Bitcoin Trust is also one of the major players in the spot Bitcoin ETF discussion due to its denial by the SEC to transform it into an ETF and Grayscale’s subsequent court victory to overrule that SEC decision. On August 29, 2023, the US Court of Appeals for the DC Circuit ruled that the SEC had acted “arbitrarily and capriciously” in denying Grayscale its application. This stinging rebuke sent shockwaves through the community and cued many to start the clock on an eventual approval of spot Bitcoin ETFs.
Furthermore, several analysts and issuers have spoken knowledgably about the fact that the SEC has been interacting with issuers to iron out any issues in the applications. This points to a very high likelihood of eventual approval.
So when could a Bitcoin Spot ETF be finally approved? The below chart, provided by Bloomberg’s ETF analysts via Twitter, shows the schedule. There are several dates which stand out. First, if we presume that most of the applications listed below are materially the same (not withstanding Grayscale’s conversion), it would stand to reason that if one will be approved, denial of others is unlikely. It has also been widely rumoured that several or all would be approved at the same time in order to demonstrate impartiality. The ARK 21 Shares filing, then, creates an almost “final cutoff” date wherein the SEC must make a final decision to approve or deny by January 10th 2024. Between now and then it seems likely that we would see an approval. While some pundits have suggested the SEC may wait until January 10th, others point to increasing inertia pointing to approval much sooner. For instance, On October 23rd, 2023, it became clear that Blackrock would be seeding its ETF in October and also that it had obtained its ticker symbol (ITBC) from the Depository Trust & Clearing Corporation (link here).
There are reasons to be cautious, however, on October 1st, 2023, Ethereum Futures ETFs were approved for trading by the SEC. It was a disappointing debut for these products, with only $1.7m on the first trading day, compared to BITO (the first Bitcoin Futures product) first day inflows of $567M. Many in the community saw this anaemic response as an indication that excitement for a Bitcoin spot ETF was blown out of proportion.
When comparing the debut of BITO, the largest Bitcoin futures ETF, vs the launch of EFUT, the largest Ether futures ETF, there is a stark difference clearly visible on a logarithmic chart and almost comically apparent on arithmetic chart.
Timing played a big role in the two vastly different outcomes. BITO debuted at a time when the crypto cycle was near its absolute top and the massive interest in the product is clearly a reflection of this time.
Therefore, the lackluster launch of the Ether Futures product is likely a combination of several factors; a general disinterest among investors in crypto investment opportunities and the fact that futures ETF products are generally much less attractive as efficient investment vehicles.
The differences in the interest level in crypto markets also manifests itself in different ways. Both volume of trading on exchanges, and number of Bitcoin on exchanges (where they are typically kept for trading purposes) are extremely low. This reduction in volume and inventory means that price impacts could be larger if new interest builds quickly.
The Bitcoin Spot ETF has been regarded as the holy grail for the crypto community. Not only because of the potential impact on Bitcoin price, but also because it would further enshrine Bitcoin as a modern financial asset. Armies of advisors from some of the most well-known, trusted, advisory firms would be educating their constituents about Bitcoin in order to attain allocations to the ETFs they represent. This would have an immeasurable effect, again not just on price as a result of constant inflows, but also in terms of educating the public on the premier crypto asset. It seems likely that the SEC will soon approve an ETF and that the $1B in less efficient Futures ETFs will migrate, all in a low liquidity environment.
There is plenty of excitement about a Bitcoin Spot ETF, and rightfully so. Once we have it, then what? That may be an issue for a future article but there are some corollaries based on the points listed above. How long would it be until there could also be a Ether Spot ETF? What would happen to the ETH/BTC ratio? Something to ponder…
Allan Matheson is the founder of Golden Pear Capital, a crypto asset-focused investment management company.
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