Carbono Insights #92 | The last thing to read about spot bitcoin ETFs before the approval of spot bitcoin ETFs
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Six things you need to know before the ETF approval. Or after. Depends on when you read this.
What was it? Better late than sorry?
This newsletter is not the first recap you’ll find on the spot bitcoin ETFs. If anything, it might be the last since experts agreed that the window for the approval closes tomorrow, January 10th (which might be today for you if you’ve opened this mail a bit later).
The main takeaways from this issue will remain relevant after the approval, though. The goal is to approach the spot bitcoin ETF from six angles, providing readers with all the necessary context to understand the history and implications. Especially those who haven’t been glued to the news, like all of us crypto-nerds, who’ve been feeding off of hopeful headlines for months.
What’s an ETF?
An ETF is a publicly traded investment vehicle that tracks the value of an underlying asset
In very simple terms, it’s a box that you can sell shares of. It is a bureaucratic mechanism that allows for certain assets to be tradeable across the mainstream financial markets the same way as shares from a company.
ETFs are used to make exposure to assets easier for investors. Sometimes, those boxes hold a varied group of assets, sometimes, they hold a single asset that’s hard to trade for whatever reason. That’s the reason for a BTC spot ETF. All those firms filing for one are trying to remove all the hassle from buying crypto for all those buyers who want to make some money off the most profitable asset in late times without spending hours watching YouTube tutorials from kids in their rooms.
Who’s applied for one?
There are eleven high-profile bitcoin spot ETF filings underway, some of them from top-tier ETF managers. Here are some names.
BlackRock, the world’s largest asset manager, with $9T in assets under management. Invesco, WisdomTree, and VanEck, which are among the top 10 ETF managers per AUM. Actually, WisdomTree already manages a spot bitcoin ETF in Switzerland. Grayscale, which already holds over 600,000 BTC in its closed-ended fund, that wants to turn into an ETF. Bitwise, which had already filed for an ETF in 2019. The list is long and respectable.
https://milkroad.com/bitcoin/etf/
History says that the ETF market plays by the “winner-takes-most” rule. The factors that will determine who takes the lead are branding, distribution, and fees. Brand reputation will help create some trust in financial advisors for such a new vehicle. Distribution guarantees that many of said financial advisors can offer their customers the new product. And finally (probably the least important of the three), price will determine where people allocate their funds.
Why is this happening now?
The dream of a spot bitcoin ETF is more than a decade old. The first application was filed in 2013 by the Winklevoss twins. During these 10+ years, the SEC has consistently rejected every proposal, citing risks of market manipulation as the main reason.
In the meantime, though, the SEC did approve a futures bitcoin ETF. These “boxes containing bitcoin futures” started trading in late 2021 and pushed bitcoin to its last All-Time High mark, despite being quite a suboptimal product.
What the SEC did not know then is that they were setting a precedent that eventually compelled them to approve a spot ETF. Years later, when the Commission rejected Grayscale’s request to convert their GBTC fund into a spot ETF, Grayscale retaliated with a lawsuit where they claimed that the SEC’s reasoning was flawed. The SEC’s reasons for the rejection were incoherent with approving a futures ETF. Eventually, a judge ruled in Grayscale’s favor in August 2023. This was two months after BlackRock’s submission. Maybe BlackRock anticipated it?
It wouldn’t be weird to find out that the largest asset manager in the world had privileged information or were just better informed and better prepared. In any case, their submission tackled all known counterarguments from the SEC against a spot ETF. Their track record is 575 ETF approvals versus one rejection spoke volumes.
Crypto went crazy.
What will be the main consequences?
The short-term effects of the approval of an ETF are uncertain. On one hand, ETFs are expected to open the floodgates of a wave of adoption. Increased demand means higher BTC prices. At the same time, as prices react positively to the approval or to the launch, a sell-the-news event could be triggered. Investors who anticipated price hikes might want to realize their gains. It’s still unclear how the price will react in the short run.
Zooming out, though, ETFs bear the promise of regulatory clarity. An ETF would give a legal blessing to the asset, and it sets a positive precedent for the rest of the cryptocurrencies.
Then there’s the increased liquidity. Estimations range from tens to hundreds of billions in new bitcoin purchases. A massive inflow of capital with equally massive secondhand effects.
And then there’s the marketing side. Once approved, ETF managers will take on the role of onboarding customers to crypto. bolstering the industry’s reputation in the eyes of the public.
How will this affect other cryptos?
The truth is that launching a spot bitcoin ETF is mostly an outward sales movement for bitcoin, more than anything else. Actually, the first ones to feel the effects of the spot ETF will be all those companies like Microstrategy, which had become the closest alternative for normies looking to get exposure to crypto through traditional challenges. With an ETF in town, who would instead buy Microstrategy shares?
The impact on the crypto ecosystem as a whole will probably be indirect, but it is likely to be massive. the whole ecosystem is heading toward contagion in terms of regulatory clarity, improved reputation, increased attention share, and increased liquidity.
We expect 2024 to give crypto the opportunity to show off all its capabilities. First, through the adoption of cryptocurrencies (starting with BTC, followed by the rest), then through the improvement of DeFi’s services, and finally, through the broad scope of potential applications in areas such as AI, digital infrastructure (storage, computing…), gaming or social media.
What’s next?
The best possible next chapter of this series would be the approval of a spot Ethereum ETF.
Ethereum’s path towards ETFs is mimicking bitcoin’s, but at a faster pace. Only a few months ago, the SEC approved several ETH futures ETFs. This approval, just like with bitcoin’s, paves the legal way for a spot ETF since it implicitly defines the asset as a commodity and blesses the industry around it.
VanEck, Invesco, and Ark filed for a spot ETH ETF, too. Grayscale applied for the conversion of their trust into one. And BlackRock joined the party in November, signaling a more profound commitment to crypto. There are at least six high-profile ETF proposals on the SEC’s desk, although the approval will have to wait since the deadline for a verdict expires in May 2024.
