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Bitcoin ETF Could be the Bane on Bitcoin’s Price

  • Bitcoin ETF may get regulatory approval out of the U.S. with a new incoming administration
  • Loss of Grayscale’s Bitcoin premium through its Grayscale Bitcoin Trust as outflows head to an ETF could see a short term decline in Bitcoin’s price but is still long term bullish

“Be careful what you wish for, cause you just might get it got all, you just might get it all and then some you don’t want.”

- Daughtry, Home, from the self-titled album Daughtry

For years, Bitcoin advocates from the Winklevoss twins to Bitwise, have been lobbying the U.S. Securities and Exchange Commission (“SEC”) to approve the issuance of a Bitcoin exchange traded fund (“ETF”), to make trading in the cryptocurrency more accessible and more liquid.

And for years, the SEC has rejected such appeals, citing Bitcoin’s susceptibility to being manipulated as a primary reason for not allowing such products.

But growing institutional investment in the cryptocurrency space as well as resurgent retail interest is weighing in on such decisions.

To be sure, the cryptocurrency space is vastly different when those early appeals to approve a Bitcoin ETF were made.

Assets under Grayscale Bitcoin Trust, the primary means that institutional investors still use to gain access to Bitcoin, were a fraction of what they are now, and it’s estimated that Grayscale currently holds some 3% of the world’s Bitcoin supply.

According to strategists from JPMorgan Chase (+1.54%), a Bitcoin ETF could spark a broad selloff in Bitcoin in the short term because competition from such a vehicle might potentially spark outflows from Grayscale Bitcoin Trust, currently the world’s largest cryptocurrency fund.

Grayscale effectively has a monopoly on institutional trading of Bitcoin, enjoying a premium to underlying net asset value of Bitcoin by providing the necessary corporate and regulatory structures that institutional investors require before taking a punt on Bitcoin.

In note, JPMorgan Chase strategists, led by Nikolaos Panigirtzoglou wrote,

“A cascade of GBTC outflows and a collapse of its premium would likely have negative near-term implications for Bitcoin given the flow and signaling importance of GBTC.”

While outgoing SEC Chairman Jay Clayton was resistant to cryptocurrencies and policed initial coin offerings (ICOs) in piecemeal fashion, his term, which is ending soon, could also see a shift in attitudes towards a Bitcoin ETF.

Incoming U.S. President-elect Joe Biden is known to be open to cryptocurrencies, and firms including VanEck Associates are taking advantage of the shifting regulatory winds to refile a Bitcoin ETF, after standing down from a previous effort.

Although a Bitcoin ETF could see a short term pullback in Bitcoin’s price, it would be good for the cryptocurrency longer term.

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Phuong Nguyen

Phuong Nguyen

Business Development of Novum Alpha, a leading quantitative cryptocurrency trading firm that specializes in Managed Account and DeFi products