A Bitcoin ETF is likely to be approved in the US by the end of 2023. The general public has no idea this is going to happen. Even crypto denizens, appalled by the depressed markets and a decade of rejections by the Securities and Exchange Commission, are somehow shrugging off the current state of affairs.
Exchange-traded Bitcoin funds have been highly sought after since 2013, when the initial filing was filed with the SEC and then rejected. Over the past decade, the SEC has rejected each of dozens of subsequent proposals, including more than thirty since 2021. There are currently ten active applications from major institutions. An uninformed observer might expect more of the same rejection, but that would be naive.
Two substantial developments in the past three months have drastically improved the prospects for approval. Let’s take a look at these developments and consider whether a spot ETF can revive Bitcoin and lift crypto out of the bear market.
Development 1: BlackRock‘s ETF offer
The momentum started on June 15 this year when BlackRock made waves by unexpectedly submitting a Bitcoin ETF filing.
BlackRock CEO Larry Fink has since spoken positively about Bitcoin. Bitcoin “has a distinctive value from other asset classes, but more importantly, because it is so international that it will transcend any currency,” said Fink. His change of tone is notable, as he denounced Bitcoin as a “money laundering index” earlier in 2017.
BlackRock’s track record of ETF application approval is nothing short of outstanding. The asset management giant has submitted 576 applications and all but one have been approved. Did the Bitcoin ETF Tea Leaf Adjust and Did BlackRock Take Notice? BlackRock’s approval rate of 99.8% suggests this.
Several other high-profile institutions, including Fidelity and Ark Invest, have followed suit and pending applications are being reviewed. Their filing dates and decision deadlines are largely identical. There are four deadlines during the review process during which the committee can choose, and it often does, for adjournment and further review.
Whether the SEC decision comes early or not before the deadlines, the caliber of the institutions currently filing and their optimism point to one outcome: approval.
Development 2: Grayscalethe court wins
A separate but equally significant development toward ETF approval is the Aug. 29 federal court ruling that the SEC erred in denying Grayscale Investments’ application for a spot Bitcoin ETF. Grayscale has previously applied to convert their Grayscale Bitcoin Trust (GBTC) into an ETF. The SEC rejected this application, and Grayscale responded with a lawsuit alleging that the decision was incorrect. The U.S. Court of Appeals for the District of Columbia sided with Grayscale in its ruling: “In the absence of a coherent statement, contrary to the legal treatment of similar products, this is illegal.” The court also ruled that the “SEC’s denial of Grayscale’s proposal was arbitrary and capricious.”
The court ordered the SEC to re-evaluate Grayscale’s application, effectively overturning the previous rejection.
While the ruling does not equate to automatic approval, it increases the likelihood that approval is in the offing. The SEC should provide strong support for further rejection. This begs the question: if such support existed, wouldn’t it have been included in their original rejection?
Chance of approval
While the SEC recently delayed all ETF filings to Sept. 1, given that the initial review deadline for most applicants was Sept. 2, the delays were largely expected. The market reacted accordingly and Bitcoin fell about 5% from the announcement of the slowdown to around US$25,700 at the time of writing. Despite the delays, the road to approval for a spot ETF is much clearer after Grayscale’s court victory. JPMorgan analysts believe this, as does former SEC chairman Jay Clayton, who says approval is “inevitable.”
It’s reasonable to expect the SEC to approve several or even all filings at once. The applications are structured very similarly and it could be considered unfair to give one of the applicants an edge. Cathie Wood, the CEO of Ark Invest, told Bloomberg, “I think if the SEC is going to approve a Bitcoin ETF, it will approve more than one at a time.” Ark Invest has the earliest “deadline” for its submission, which is January 10, 2024.
Eric Balchunas, a senior ETF analyst for Bloomberg Intelligence, believes there is a 75% chance that a spot Bitcoin ETF will receive SEC approval this year. He increases the odds to 95% by the end of 2024.
If SEC approval is inevitable, how can we expect the markets to react?
What crypto markets will do, post-ETF
Bitcoin ETFs already exist in the European Union, Canada, Brazil and Dubai. But since the US is the center of the world’s financial markets, including the crypto markets, approval by the US government would undeniably be a major event.
An ETF could transfer new money to Bitcoin. While crypto exchanges like Coinbase are the main way to get into crypto these days, the average American understandably has trust issues with them. Know-your-customer (KYC) procedures and having to transfer funds to buy crypto are also tricky, as opposed to simply buying an ETF stock. Crypto wallets, private keys and self-management further complicate things.
The institutions applying for a Bitcoin ETF deeply understand these hurdles. They know that an ETF offers an opportunity for a large segment of the population, who have so far remained on the sidelines, to comfortably add crypto exposure to their portfolio.
Bitcoin spot ETFs, unlike futures ETFs – which have been trading in the US since 2021 – can be particularly constructive for crypto markets. Spot ETFs, the type that all current applicants sign up for, would require the offering institutions to back the ETF with real Bitcoin. This differs from futures ETFs, which only allow 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 real positive impact on the price of the underlying asset.
Another way to think about a futures-based ETF is like two people betting on how the price of something will change. It’s more like a bet on what will happen. Their bet has no direct effect on the price of the asset they bet on.
A Bitcoin spot ETF issuer like BlackRock or Fidelity needs to buy bona fide Bitcoin to support the fund’s shares that their clients hold. Buying or selling a Bitcoin spot ETF will actually change the price of BTC.
The new source of cash flows into space could provide the spark the industry needs to recover from a series of setbacks in 2022. The news itself will almost certainly trigger a buying wave in the near term. Volatility will breathe new life into markets, which have been largely under pressure throughout the summer. The August 29 Grayscale decision triggered an almost immediate 6% price increase for Bitcoin, from $26,100 to $27,700. This increase was entirely due to news of the SEC’s choice to defer all pending filings on August 31, as the first decision deadline for most filings approached.
If the ETF is approved, it is possible that market gains will last longer than just the short term.
In the short to medium term, a reflexivity loop can develop where:
Bitcoin price rises after ETF approval news.
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Investors want Bitcoin allocation due to price increases.
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Investors buy shares in a spot ETF, further driving Bitcoin prices up.
In the long run, we will see BlackRock et al guiding clients to diversify part of their portfolio into Bitcoin. Passive investors will buy and hold for the long haul. Since the supply of Bitcoin is finite, the price is bound to rise.
Gold appreciated eight years in a row after the first spot Gold ETF was approved in 2004. For all of Bitcoin’s proclamations as “digital gold,” it would be fitting that Bitcoin’s next upward cycle would begin similarly after the ETF’s approval.
The world is not paying attention to Bitcoin right now. That will change before the end of the year.
