Prediction: After a rough start, Grayscale’s spot bitcoin ETF review will be approved sooner rather than later.
Europe’s introduction last month of its first spot BitcoinBTC exchange-traded fund from Jacobi Asset Management, listed on Euronext Amsterdam, sets the table for the Securities and Exchange Commission to allow for the Grayscale Bitcoin Trust (GBTC) to be converted from an open-end fund (that is not in the market to buy more bitcoin) to become an exchange-traded fund (which would be in the market to buy more bitcoin). Should the SEC rule against Grayscale, there will be plenty of financial firms lining up to create similar funds anyway.
Make no mistake about it: cryptocurrencies are a new financial product for traditional finance – like ETFs and mutual funds were years before it. GBTC investors should be rewarded if this passes.
“We are in the early innings of the institutional regime in cryptocurrencies and blockchain as the Wild West regime ends,” says Peter Knez, Chairman of the Venom Foundation and a former CIO at Barclays Global Investors, when the iShares product was created and later sold to BlackRockBLK.
The “institutional regime” is characterized by increased participation of traditional Wall Street players and even by sovereign governments who will add bitcoin to their sovereign wealth funds. Congress is expected to enact legislation outlining the regulatory framework for digital assets, though there is no timeline for that.
“A Blackrock or Grayscale bitcoin ETF opens the market to institutional and retail investors who have never used a digital wallet and most likely never will,” Knez says. “The Bitcoin ETF sends a very strong signal of entry by institutions in the crypto market. Other asset managers will follow suit. SEC rejection is mild, negative and a delay at most.”
There are currently over 623,000 Bitcoin held by Grayscale on behalf of GBTC investors that are not freely tradable since GBTC is currently a closed-end fund. At $27,000 per BTC, GBTC holds over $16 billion worth of bitcoin supply that is “locked up”. This amount represents approximately 3.4% of all outstanding bitcoin. The fact that GBTC investors are locked up and cannot redeem translates into GBTC trading at a 20% discount to the spot value, or an estimated $3.2 billion worth of discount in total. In short, that means owners of the Grayscale Bitcoin ETF are not getting the same value in bitcoin as a person buying bitcoin directly on a cryptocurrency exchange. Creating a spot market ETF would change that. The ETF would not be constantly trailing the bitcoin price.
Mark Yusko, the CEO and Chief Investment Officer of Morgan Creek Capital Management, said in a video interview on the Paul Barron Network recently that the SEC’s final Grayscale decision could lead to some $300 billion in fresh capital flow into the cryptocurrency market.
“The specifics of the price impact are difficult to forecast, but the approval of a spot ETF for bitcoin would undoubtedly be followed by applications for other crypto ETFs like Ethereum,” says Tony Fenner-Leitão, President at Cambrian Asset Management. “These eventual approvals would represent a change in the SEC’s regulatory stance toward crypto, which has been very adversarial. This would no doubt re-encourage developer and investor interest in this asset class in in the US, where it has been very low.”
This “additional demand” for bitcoin, which has not been satisfied by either GBTC as a closed-end fund or by Chicago Mercantile Exchange BTC futures or the spot bitcoin market accessible via cryptocurrency exchanges like Coinbase, is likely to come from regulated investment advisors. These advisors who, for compliance, operational or investment mandate reasons, would prefer an ETF – something they are used to — rather than diving into futures or opening client accounts on cryptocurrency exchanges, says Cambrian’s CEO and co-CIO Martin Green.
“The total additional demand is unknown, although the size of the pool of capital that is represented by these organizations is quite large, so one can assign a fairly wide range of possible demand in this scenario,” Green says, without daring an estimate. “In the past, as new, safer and more convenient ways for people to buy exposure to bitcoin have come online, new investors have added to the demand. Additional demand because of an ETF requires the fund to purchase physical bitcoins so that may put upward pressure on the price.”
Andrey Stoychev, project manager for Nexo, a capital markets firm trading in digital assets in France, said if the U.S. follows Europe, it is another “positive signal” for bitcoin as an investment vehicle. “If it is considered worthy to add to and form an exchange-traded fund product by the world’s leading asset managers, then that is a strong signal of (bitcoin’s) maturity,” he says.
Senator Bill Hagerty (R-Tenn) asked SEC Chairman Gary Gensler when he would decide on Grayscale during a Senate Banking Committee hearing on Sept. 6. The U.S. Court of Appeals for the District of Columbia unanimously ruled last month that the SEC’s denial of Grayscale’s conversion from a closed-end fund to a spot bitcoin ETF was “arbitrary and capricious.” What is the SEC waiting for? Wall Street is banging on the door to get this market in line with existing security markets.
“What does the SEC need to see in a filing to approve a spot bitcoin ETF?” Hagerty asked him. “What questions do you still need answered from issuers in order to allow this to happen?”
Gensler said the SEC was still reviewing it, suggesting there are a lot of questions left unanswered. He acknowledged that Grayscale is not alone. “We have multiple filings around bitcoin exchange-traded products,” Gensler said.
What if SEC Rejects Grayscale’s Proposal?
If the SEC rejects Grayscale’s application, it could hurt the price of bitcoin and jolt market confidence, says Smiyet Belrhiti, a General Partner at London-based venture capital firm Elixir Capital and former head of ventures at Visa EMEA.
“Based on the previous rejections of spot Bitcoin ETFs by the SEC, bitcoin usually experiences a drop in its value shortly after the announcement,” Belrhiti says.
When the SEC rejected the Winklevoss ETF in 2017, Bitcoin fell by 18% in one day. When the SEC rejected the VanEck ETF in 2021, Bitcoin fell by 8% over a 24-hour period. “Whether we have a bitcoin spot ETF or not, it won’t have an impact on the use case and purpose of bitcoin,” Belrhiti says.
Even with the DC Court of Appeals ruling in favor of Grayscale, the fund is not out of the woods, of course. The SEC is taking its time.
“The SEC may employ a different litigation strategy in its attempt to reject the conversion of the Grayscale Trust fund to a spot ETF,” says Lewis Harland, Liquid Funds Research Analyst at Republic Crypto and Head of Research at RxR, a fund collaboration between Republic Crypto and Re7 Capital.
“Ultimately, this may inform the prospects of other spot ETF applications like BlackRock and ARK, among others,” Harland says. “But if spot ETF applications are rejected by the SEC over the coming quarters, we can reasonably expect persistent re-filings by these same managers as a commitment to providing investors an SEC-compliant investment product.”
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