The US Securities & Exchange Commission (SEC) has approved 11 spot Bitcoin exchange-traded funds (ETFs), capping a decade-long effort to secure regulatory approval that will integrate mainstream finance with the burgeoning $1.7tn digital assets sector. The regulatory approvals paved the way for the 10 new spot Bitcoin ETFs, and the conversion of the Grayscale Bitcoin Trust, to start trading on 11 January, igniting fierce competition for market share among investment giants such as Blackrock, Fidelity and Invesco, alongside digital and technology-focused managers like Ark Invest and Grayscale.
The SEC’s approvals were received amid fever-pitch anticipation among the crypto community. But its regulatory endorsement struck a sour tone. Gary Gensler, Chair of the SEC, acknowledged court rulings in June 2022 forced a change to its decade-long opposition to endorsing spot Bitcoin ETFs. In his statement confirming the landmark news – released 24 hours after a premature announcement of the approvals after SEC’s social media X account (formerly Twitter) was hacked – Gensler made plain his scepticism for Bitcoin and crypto. “Though we’re merit neutral … Bitcoin is primarily a speculative, volatile asset that’s also used for illicit activity including ransomware money laundering, sanction evasion and terrorist financing,” Gensler wrote. “While we approved the listing and trading of certain spot Bitcoin ETP shares today, we did not approve or endorse Bitcoin. Investors should remain cautious about the myriad risks associated with Bitcoin and products whose value is tied to crypto.”
Sell the news event
In the three months leading up to the ETF approval, speculators bought the rumour, including investing around $2.5bn into the Grayscale Bitcoin Trust (GBTC) to capitalise on the evaporation of the deep discounts to net asset value (NAV) upon conversion to an ETF, as well as the post-autumn price rally. Investor reaction to the ETF approvals was initially robust, with a surge in the price of bitcoins to $49,000 in early New York trading on 11 January – the first day of ETF trading. The day was commemorated with Blackrock ringing the opening bell at the Nasdaq Stock Exchange. However, the ETF approvals ultimately proved to be a ‘sell the news’ event. The collective 11 ETFs traded $4.6bn on the first day and $3.2bn on day two, overwhelming GBTC’s $579m outflows. Nevertheless, the price slumped 15% by the end of ETF approval week to a low of around $41,500 as long-term speculators booked profits after a sensational price rally that saw the price appreciate 80% in the prior three months, and virtually 200% since the start of 2023.
Institutional adoption at a cost
Bitcoin was the runaway best-performing asset class of 2023. The real impact of the ETFs will be over the long term, serving to provide an on-ramp for greater institutional and retail capital to enter crypto markets. Goldman Sachs and JPMorgan are among a raft of Wall Street banks expected to take on the role of “authorised participant” in support of various Bitcoin ETFs, broadening out the participation of mainstream finance in crypto. But for some, Bitcoin’s acceptance into mainstream finance is bittersweet, conflicting with the original purpose of Bitcoin as a decentralised peer-to-peer payment and value transfer alternative to mainstream finance. For the original advocates, the introduction of ETF wrappers is an anathema to the anti-centralised financial clarion call that Bitcoin embodied when Satoshi Nakamoto’s invention was delivered 15 years ago in the teeth of the global financial crisis. While these foundational idealistic aspirations have been diluted, Bitcoin’s relevance, adoption, and growth potential look firmer than ever.
Price catalysts dwarf headwinds
The recent cooling price is unlikely to last long, as multiple positive price catalysts continue to build. In April, the next Bitcoin ‘halving’ is due, where the reward ‘miners’ receive for processing transactions is cut in half – from 6.25 to 3.125 bitcoin per block. Halving events (which occur every four years) reduce the rate at which the remaining Bitcoin supply enters the market, increasing the scarcity of the original cryptocurrency. As a result, post-halving periods are associated with strong upward volatility. Broader crypto prices are also expected to benefit from incoming US Financial Accounting Standards Board (FASB) accounting rules that allow companies to report the value of crypto they hold on their balance sheets at market prices, rather than reporting gains/losses upon sales. These rules, which come into effect in December, will make it easier for US companies to invest and hold cryptocurrencies on their balance sheets. Currently, more than 40 public companies worldwide own an estimated 278,403 bitcoins, representing 1.3% of the total 21 million supply. MicroStrategy owns 189,150 bitcoins, representing more than two-thirds (67.9%) of the public company tally. An Ethereum ETF is also broadly considered a ‘when not if’ inevitability, supporting the environment for dozens of major crypto assets connected to this second-largest token.
At the macro level, the eventual monetary policy pivot by the Federal Reserve, and correlated decline in the US dollar, will act as huge positive catalysts. The lead-up to the US presidential election in November will also likely be supported by fiscal stimulus, amplifying bullish conditions for crypto from the second half of this year into the first quarter of 2025. In the longer term, the institutionalisation story continues to evolve. In February 2023, the European Central Bank (ECB) introduced a new global minimum prudential framework to protect the banking system from risks associated with banks’ direct and indirect exposure to crypto assets. These crypto exposure limits mandate banks to hold no more than 1% of their total Tier 1 capital and up to a maximum of 2% including stablecoins. According to calculations by crypto and stock exchange eToro, this equates to an upper limit of c.$200bn ownership among banks regulated by the ECB’s purview. More speculative crypto price catalysts include FX diversification by central banks. While this is far-fetched for US and European central banks, their counterparts in regions including central Asia have been mooted as potential first movers.
Market outlooks are never one-sided. While positive catalysts dwarf headwinds, more positive, significant challenges and uncertainties remain into the year ahead. The SEC remains a significant threat to the industry. The US regulator took more than 32 actions against cryptocurrency tokens in 2023, including Solana and Cardano, claiming they are securities and fall under SEC oversight. These actions are robustly denied by all crypto innovators. Coinbase, the US-listed cryptocurrency exchange, is actively lobbying Washington for more clarity on crypto regulation, but progress is expected to slow in the lead-up to the US presidential election in November. Hopes for a comprehensive digital assets markets bill may depend upon the political landscape in Congress after the election.
Bitcoin and crypto markets are navigating a delicate balance between regulatory scrutiny, institutional acceptance, and the fundamental principles that underpin decentralised currencies. As the crypto sector continues to mature, companies considering incorporating Bitcoin and crypto into their treasury strategies may benefit from speaking with our team. BTG Advisory is well-positioned to advise companies on crypto due diligence, tax and treasury strategy. Do not hesitate to get in touch with our team today.