Countdown: Less than 24h Until Decision on Spot Bitcoin ETF Approval — The U.S. Reluctant to Let Go!
By Hedy Bi, OKG Research
Takeaway from OKG Research:
- The U.S. is unlikely to relinquish bargaining power from Wall Street — the ETF approval will bring overlapping negotiation effects.
- A new market is on the brink of unfolding while the existing market remains steadfast.
- Steps from Hong Kong:
3.1 On December 22, 2023, the Securities and Futures Commission (SFC) issued multiple circulars indicating their readiness to accept applications for the approval of virtual asset spot ETFs.
3.2 If the US spot Bitcoin ETF is approved and traded on one of the three platforms according to the application materials, with such a case as a reference, the Hong Kong Stock Exchange (HKEX) would be more motivated to consider providing a trading platform for spot Bitcoin ETFs issued by Hong Kong companies.
After over a decade of anticipation since the initial ETF approval request in 2013, let’s set aside the noise of “fake news” and delve straight into the heart of the matter.
The U.S. is unlikely to relinquish bargaining power from Wall Street — the ETF approval will bring overlapping negotiation effects.
If the spot ETF opens its doors, mutual funds, private equity funds, and individual investors can participate in the crypto market by buying stocks on traditional stock exchanges, allowing for direct ownership of Bitcoin and removing compliance channel restrictions. While the short-term market effects brought by the influx of funds are just one aspect, the key lies in the U.S. enhancing its bargaining power in the crypto market through ETFs, positioning itself as a regulator and rulemaker in the industry.
With Bitcoin mining power shifting from China to the U.S., the country now commands 40% of the global Bitcoin mining share, securing its top-ranking position worldwide. This signifies that the U.S. holds significant bargaining power on the supply side.
Institutional holdings and transaction data will be disclosed if the spot ETF is approved. This would provide regulators and market participants with greater market transparency. To illustrate, while it’s known that ‘every drop of water’ can be easily traced, tracked, and verified on the blockchain, regulating ‘each drop of water’ is challenging for regulatory bodies. If we gather these drops and place such regulatory demands in each ‘glass,’ regulators would be better equipped to formulate rules and manage the market. For the U.S., ETF approval would solidify its position as a rulemaker and market leader in the crypto market. Regardless of whether the Spot Bitcoin ETF is approved or not, the U.S. is unlikely to relinquish this significant advantage easily.
Additionally, the expected impact of the Spot Bitcoin ETF approval on the supply side is evident. There is fierce competition among miners on the supply side, as indicated by the hash rate’s average growth of 5.17% in the past three months, compared to last year’s monthly average growth rate of 1.76% (see Figure 1). The intense competition among miners (supply side) is clear.
From an operational cost perspective, OKLink data reveals that miners’ unit hash rate earnings have continuously decreased at a rate of 8% in the past three months (see Figure 2). However, during the same period, the monthly average growth rate increased, reaching approximately 1.55%. Despite the decrease in unit earnings, the supply side continues to sell to maintain operational costs.
In summary, the U.S. stands at the cusp of a potential shift in crypto market dynamics, leveraging ETF approval to strengthen its position as a market influencer and regulator. The impending decision on the Spot Bitcoin ETF carries far-reaching implications for both domestic and global crypto landscapes.”
A new market is on the brink of unfolding, while the existing market remains steadfast.
Despite the prolonged anticipation for ETF news, insights from OKLink blockchain data reveal that the willingness of new investors to endure the opportunity cost of waiting for convenient compliance channels is substantial. They opt to forgo potential profits from early positions held in the blockchain. On the other hand, original market participants — long-term investors, Bitcoin enthusiasts, and institutions that have long believed in Bitcoin — place greater emphasis on the crypto’s long-term value.
Some early institutional believers in Bitcoin have already found alternative ways to participate. For instance, ARK has liquidated its entire remaining GBTC position, injecting funds into BITO (Bitcoin Strategy ETF, which invests in Bitcoin futures rather than the crypto itself). Grayscale is also seeking to convert GBTC into an ETF. These entities may be more focused on Bitcoin’s fundamentals, technological developments, and market demand, and are relatively less swayed by short-term market fluctuations and ETF approval news.
Observations from OKLink blockchain data indicate that these developments have not stirred much excitement within the blockchain ecosystem. Over the past three months (from October 10 to January 7), the total number of Bitcoin (BTC) addresses on the blockchain has shown a steady upward trend, with an average monthly growth rate of 1.16%. This growth rate remains consistent compared to the same period last year.
Furthermore, by examining the number of active addresses, we notice that the surge in active addresses does not necessarily coincide with the breakout of Bitcoin ETF-related news. Instead, it aligns with relatively higher points in December 2017 and March 2021.
“Never Go Back to the Old Life”
Even if the US spot Bitcoin ETF is not approved, the market will not revert to the ‘wild growth era.’ According to CoinGecko, there are currently eight markets globally allowing the operation of spot crypto ETFs, including Canada, Germany, and Switzerland, as well as tax havens like the Cayman Islands and Jersey. However, this has not generated the same fervour in the market as the anticipation for the approval of a US spot ETF, once again underscoring the significant impact of opening up supply and channels in the US.
Just as the ETF narrative in the US remains perplexing, Hong Kong, a highly anticipated player in 2023, has taken a significant step forward. On December 22, 2023, the Securities and Futures Commission (SFC) issued multiple circulars, indicating their readiness to accept applications for the approval of virtual asset spot ETFs. Taking Hong Kong as an example, according to KPMG’s 2023 Private Wealth Management Report, as of the end of 2022, the total assets under management for private banking and wealth management in Hong Kong amounted to HKD 89,650 billion. If 1% of these funds flow through a spot Bitcoin ETF, approximately USD 11.6 billion will enter the market.
According to insights from the OKLink Research Institute, several financial institutions are currently planning to launch spot Bitcoin ETFs in the first half of the year. The competitive intensity of this billion-dollar competition is likely to compel the US SEC not to easily reject the poised spot ETFs.
When comparing the differences between spot Bitcoin ETFs in Hong Kong and the US, two points are worth market attention:
- In the circular issued on December 22, the Hong Kong SFC expressed support for both cash and in-kind redemption models, providing investors with more options. In contrast, the US SEC employs a mandatory cash redemption strategy to reduce market manipulation risks. The use of cash redemption is a de facto control mechanism over Authorized Participants (APs), potentially squeezing their profits from risk-free arbitrage. If APs attempt to manipulate market prices through operations in primary and secondary markets, it may lead to market instability. Additionally, in the in-kind redemption model, market makers can receive Bitcoin in exchange for ETF shares, improving tax efficiency. Financial institutions across the Pacific are also seeking approval for cash and in-kind redemptions. According to CNBC, Fidelity and BlackRock have applied for approval for both cash and in-kind redemptions to accommodate investors who already hold Bitcoin but seek convenience in market trading and taxation.
- Currently, the US has submitted eight Bitcoin ETF applications, planning to trade on one of the three exchanges: Nasdaq, Cboe BZX (Chicago Board Options Exchange BZX), and NYSE Arca (New York Stock Exchange Arca). Among them, Cboe BZX occupies the largest proportion, accounting for 5/8 of the total applications. Unlike the exchanges applied for by the US applicants, which are platforms with prior experience in trading other financial instruments, Hong Kong’s circular on December 22 only outlines the requirements and conduct expected of intermediaries in the distribution of ETFs.
If the US spot Bitcoin ETF is approved and traded on one of the three platforms according to the application materials, with such a case as a reference, the Hong Kong Stock Exchange (HKEX) would be more motivated to consider providing a trading platform for spot Bitcoin ETFs issued by Hong Kong companies.
Whether the US ETF is approved or not, time marches on, and the crypto market, reminiscent of the “Wild West”, will never be the same again. In 2024, the cryptocurrency market is bound to be “in full bloom”.
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