A Bitcoin ETF will likely be approved in the U.S. by the end of 2023. The general public has no idea this is about to happen. Even crypto natives, dismayed by depressed markets and a decade of rejections by the Securities and Exchange Commission, are somehow brushing off the current state of affairs.
Bitcoin exchange-traded funds have been highly sought after since 2013 when the first application was submitted to the SEC and subsequently rejected. Over the past 10 years, the SEC has denied each of the several dozen ensuing proposals, including over 30 just since 2021. There are currently 10 active applications from major institutions. An uninformed observer may expect more of the same rejection, but this would be naive.
Two substantial developments in the past three months have drastically improved the prospects of an approval. Let’s take a look at these developments and consider whether or not a spot ETF could revitalize Bitcoin and lift crypto out of its bear market.
Development 1: BlackRock‘s ETF bid
Momentum kicked off on June 15 this year when BlackRock made waves by unexpectedly submitting a Bitcoin ETF application.
BlackRock CEO Larry Fink has spoken favorably about Bitcoin since then. Bitcoin “has a differentiating value versus other asset classes, but more importantly, because it’s so international it’s going to transcend any one currency,” Fink said. His change of tune is remarkable as he previously denounced Bitcoin as an “index of money laundering” back in 2017.
BlackRock’s track record of ETF application approvals is nothing short of superb. The asset management giant has submitted 576 applications and all but one have been approved. Have the Bitcoin ETF tea leaves adjusted, and BlackRock taken note? BlackRock’s 99.8% approval rate suggests so.
Several other high-profile institutions including Fidelity and Ark Invest have followed suit with pending applications under review. Their filing dates and decision deadlines are largely identical. There are four deadlines during the review process in which the commission may, and often does, opt for delay and further review.
Whether the SEC decision arrives early or not until final deadlines, the caliber of the institutions currently applying and their optimism are signaling one result: approval.
Development 2: Grayscale‘s court win
A separate but equally significant development in the direction of ETF approval is the Aug. 29 federal court ruling that the SEC was wrong to deny Grayscale Investments’ filing for a spot Bitcoin ETF. Grayscale previously applied to convert their Grayscale Bitcoin Trust (GBTC) to an ETF. The SEC denied this application, and Grayscale responded with a lawsuit arguing that the decision was incorrect. The U.S. Court of Appeals for the District of Columbia sided with Grayscale in its decision stating “In the absence of a coherent explanation, this unlike regulatory treatment of like products is unlawful.” The court also ruled that the SEC’s “denial of Grayscale’s proposal was arbitrary and capricious.”
The court ordered the SEC to once again review Grayscale’s application, effectively reversing the previous rejection.
While the ruling does not equate to automatic approval, it strengthens the odds that approval is on the horizon. The SEC would need to provide strong support for further rejection. This begs the question: If such support exists, would it not have been included in their original rejection?
Odds of approval
While the SEC recently delayed all ETF applications on Sept. 1, as most applicants’ first deadline for review was on Sept. 2, the delays were largely expected. The market responded accordingly with Bitcoin dropping about 5% from the delay announcement to around US$25,700 at the time of this writing. Despite the delays, the path to a spot ETF approval is much clearer after Grayscale’s win in court. JPMorgan analysts believe this, as well as former SEC Chair Jay Clayton who says approval is “inevitable.”
It is reasonable to expect the SEC to approve several or even all of the filings at once. The applications are structured very similarly, and it may be considered unfair to grant any of the applicants a head start. Cathie Wood, the CEO of Ark Invest, told Bloomberg: “I think the SEC, if it’s going to approve a Bitcoin ETF, will approve more than one at once.” Ark Invest has the earliest “final deadline” for its filing, which is slated for Jan. 10, 2024.
Eric Balchunas, a senior ETF analyst for Bloomberg Intelligence, believes there is a 75% chance of a spot Bitcoin ETF getting SEC approval this year. He ups the odds to 95% by the end of 2024.
If SEC approval is inevitable, how might we expect markets to respond?
What crypto markets will do, post-ETF
Bitcoin ETFs already exist in the European Union, Canada, Brazil and Dubai. But as the U.S. is the center of world financial markets, including crypto markets, approval by its government would undeniably be a major event.
An ETF would shuttle new money into Bitcoin. While crypto exchanges such as Coinbase are the primary avenue for entering crypto today, the average American understandably has trust issues with them. KYC (know-your-customer) procedures and having to transfer funds to purchase crypto are also onerous as opposed to simply buying an ETF share. Crypto wallets, private keys and self-custody complicate matters further.
The institutions applying for a Bitcoin ETF deeply understand these hurdles. They know an ETF is an opportunity for a large segment of the population, who have thus far remained sidelined, to comfortably begin adding crypto exposure to their portfolio.
Bitcoin spot ETFs, in contrast to futures ETFs — which have traded in the U.S. since 2021 — may be particularly constructive to crypto markets. Spot ETFs, the type that all current applicants are applying for, would require the offering institutions to back the ETF with real Bitcoin. This differs from futures ETFs, which merely enable investors to trade an indexed derivative. In the case of futures ETFs, Bitcoin does not actually change hands. A new buyer of a spot ETF has a genuine positive impact on the price of the underlying asset.
Another way of thinking about a futures-based ETF is like two people betting on how the price of something will change. It’s more akin to a side bet on what will happen. Their bet has no direct effect on the price of the asset they are betting on.
A Bitcoin spot ETF issuer such as BlackRock or Fidelity must buy bona fide Bitcoin to back the shares of the fund that their customers hold. A Bitcoin spot ETF buy or sell will actually change the price of BTC.
The new source of fund flows into the space may provide the spark the industry needs to recover from a series of blows in 2022. The news itself will almost certainly cause a rush of buying in the short term. The volatility will breathe new life into the markets which have largely been subdued throughout this summer. The Grayscale decision on Aug. 29 produced a near immediate 6% Bitcoin price increase from US$26,100 to US$27,700. This increase fully re-traced on news of the SEC’s choice to delay all of the outstanding applications on Aug. 31 as the first decision deadline for most filings approached.
If the ETF is approved, it is possible that market gains will extend longer than only in the short term.
In the short to medium term, a reflexivity loop may be created whereby:
Bitcoin price increases on ETF approval news.
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Investors desire Bitcoin allocation due to price increases.
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Investors purchase shares in a spot ETF, which drives Bitcoin prices up further.
In the long term, we will see BlackRock et al shepherding clients to diversify part of their portfolio into Bitcoin. Passive investors will buy and hold for the long term. As Bitcoin’s supply is finite, the price is bound to be driven upward.
Gold appreciated eight years in a row after the initial spot Gold ETF was approved back in 2004. For all proclamations of Bitcoin as “digital gold,” it would be fitting for Bitcoin’s next upward cycle to similarly commence following ETF approval.
The world is not paying attention to Bitcoin at the moment. That will change before the year ends.