Gensler arrives at a Senate Banking Committee hearing on Capitol Hill on September 12, 2023, where cryptocurrency regulations were discussed. Photo by Drew Angerer/Getty ImagesGetty Images
Prediction: After a rocky start, Grayscale’s spot Bitcoin ETF review will be approved sooner rather than later.
The launch last month of Jacobi Asset Management’s first spot exchange-traded fund BitcoinBTC in Europe, listed on Euronext Amsterdam, paves the way for the Securities and Exchange Commission to declassify the Grayscale Bitcoin Trust (GBTC) from an open-ended fund convert a fund (that would not be in the market to buy more Bitcoin) to an exchange-traded fund (that would be in the market to buy more Bitcoin). If the SEC rules against Grayscale, numerous financial companies will be lining up to create similar funds anyway.
Make no mistake: Cryptocurrencies are a new financial product for traditional finance – just as ETFs and mutual funds were years before. GBTC investors should be rewarded if this succeeds.
“We are in the early days of the institutional regime in cryptocurrencies and blockchain as the Wild West regime ends,” says Peter Knez, chairman of the Venom Foundation and former CIO at Barclays Global Investors when the iShares product was developed and later sold became BlackRockBLK.
The “institutional regime” is characterized by increased participation from traditional Wall Street players and even sovereign governments, which will add Bitcoin to their sovereign wealth funds. Congress is expected to pass legislation establishing the regulatory framework for digital assets, but there is no timeline for this.
Gesturing as he speaks with ARK Invest CEO Catherine Wood at the Miami Beach Convention Center Bitcoin Conference in 2022. ARK also has a spot Bitcoin ETF awaiting SEC approval. (Photo by Marco Bello/Getty Images)Getty Images
“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,” says Knez. “The Bitcoin ETF sends a very strong signal of institutional entry into the crypto market. Other asset managers will follow suit. The SEC’s rejection is mild, negative and a delay at best.”
There are currently over 623,000 Bitcoins held by Grayscale on behalf of GBTC investors, which are not freely tradable as GBTC is currently a closed-end fund. At $27,000 per BTC, GBTC has over $16 billion worth of Bitcoin supply “locked up.” This amount represents approximately 3.4% of all outstanding Bitcoins. The fact that GBTC investors are locked out and unable to redeem results in GBTC trading at a 20% discount to spot value, a total estimated discount of $3.2 billion. In short, this means that owners of the Grayscale Bitcoin ETF will not receive the same Bitcoin value as someone who purchases Bitcoin directly on a cryptocurrency exchange. Creating a spot market ETF would change that. The ETF would not constantly lag the Bitcoin price.
Mark Yusko, CEO and chief investment officer of Morgan Creek Capital Management, said in a recent video interview on Paul Barron Network that the SEC’s final Grayscale decision could result in around $300 billion of fresh capital flowing into the cryptocurrency market .
“The details of the price impact are difficult to predict, but the approval of a spot ETF for Bitcoin would undoubtedly be followed by applications for other crypto ETFs such as Ethereum,” said Tony Fenner-Leitão, president of Cambrian Asset Management. “These eventual approvals would represent a change in the SEC’s regulatory stance on cryptocurrencies, which has been highly controversial to date. This would undoubtedly stimulate developer and investor interest in this asset class in the US, where it has previously been very low.”
This “additional demand” for Bitcoin, which has not been met by GBTC as a closed-end fund, Chicago Mercantile Exchange BTC futures, or the spot Bitcoin market accessible through cryptocurrency exchanges such as Coinbase, is likely coming from regulated investment advisors. These advisors, 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 Martin Green, CEO and co-CIO of Cambrian.
“The total additional demand is unknown, although the size of the capital pool represented by these organizations is quite large, so one can attribute a fairly wide range of possible demand in this scenario,” says Green, without hazarding an estimate. “In the past, as new, safer and more convenient ways for people to acquire Bitcoin exposure became available online, new investors increased demand. Additional demand due to an ETF requires the fund to purchase physical Bitcoin, which may create upward pressure on the price.”
Andrey Stoychev, project manager at Nexo, a capital markets firm that trades digital assets in France, said if the U.S. follows Europe, it would be another “positive signal” for Bitcoin as an investment tool. “If it is seen as appropriate by the world’s leading asset managers to complement and form an exchange-traded fund product, then that is a strong signal of (Bitcoin’s) maturity,” he says.
Sen. Bill Hagerty (R-Tenn) asked SEC Chairman Gary Gensler when he would rule on Grayscale’s conversion from a closed-end fund to a spot Bitcoin ETF during a Senate Banking Committee hearing on Sept. 6. It was “arbitrary and.” “capricious”. What is the SEC waiting for? Wall Street strives to bring this market into line with existing securities markets.
“What does the SEC need to see in an application to approve a spot Bitcoin ETF?” Hagerty asked him. “What questions do issuers still need to answer to make this possible?”
Gensler said the SEC is still reviewing it, suggesting there are still many questions unanswered. He acknowledged that Grayscale is not alone. “We have multiple filings for Bitcoin exchange-traded products,” Gensler said.
Securities Exchange Commission (SEC). Photographer: Al Drago/Bloomberg© 2023 Bloomberg Finance LP
What happens if the SEC rejects Grayscale’s proposal?
If the SEC rejects Grayscale’s application, it could hurt Bitcoin’s price and shake market confidence, says Smiyet Belrhiti, general partner at London-based venture capital firm Elixir Capital and former head of risk at Visa EMEA.
“Due to the SEC’s previous rejection of spot Bitcoin ETFs, Bitcoin typically experiences a decline in value shortly after the announcement,” says Belrhiti.
When the SEC rejected the Winklevoss ETF in 2017, Bitcoin fell 18% in one day. When the SEC rejected the VanEck ETF in 2021, Bitcoin fell 8% in 24 hours. “Whether we have a Bitcoin spot ETF or not, it will have no impact on the use case and purpose of Bitcoin,” says Belrhiti.
Of course, even though the DC Court of Appeals ruled in Grayscale’s favor, the fund is not out of the woods. The SEC is taking its time.
“The SEC may be pursuing a different litigation strategy in its attempt to reject the conversion of the Grayscale Trust fund into a spot ETF,” said 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 could impact the outlook for other spot ETF applications such as BlackRock and ARK and others,” says Harland. “But if spot ETF applications are rejected by the SEC in future quarters, we can reasonably expect the same managers to continue to resubmit applications as a commitment to offering investors an SEC-compliant investment product.”
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I write about global business trends, major economic dramas and investments, mostly in emerging markets. I am also a private investor with an interest in cryptocurrencies, so I tend to write about the investment ideas that I am considering myself. Ex-WSJ in Brazil. China-focused analyst at the Coalition for a Prosperous America.
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