After touching two-year price highs following spot Bitcoin ETF approvals in the US last week on Wednesday, the price of BTC dropped sharply to below US$42,000 on Friday. The +10% slide leaves BTC down ~2.2% in the last week.
Last week, the Securities and Exchange Commission (SEC) approved 11 spot ETFs for the first time. Approved issuers include giants from the investing world, such as Blackrock, Fidelity, and Ark. Currently, Fees on the products range from 0 (many issuers are offering zero fees in the first few months post-launch) to 1.5% on the Grayscale Bitcoin ETF.
On Thursday, the spot ETFs opened with a strong market reaction. On the first day of trading, the eleven approved spot BTC ETFs recorded US$4.6 billion worth of trading volume across 700,000 trades. ETF analyst Eric Balchunas described Thursday as — “Easily the biggest Day One splash in ETF history.”
Initially, the price of BTC jumped on news that the ETFs had been approved and the open was received with strong market demand. By Friday the price of BTC touched US$49,000 on some exchanges, cementing a two-year price high for the asset. This euphoria, however, was to be short-lived.
The price of BTC tanked over the weekend in what appeared to be a clear ‘buy the rumor, sell the news reaction.’ The classic maxim refers to traders making a buy based on speculation surrounding upcoming news events or releases, and then selling when it is clear the event has materialized. Traders buying into the speculation can purchase the asset or security before everyone else and then sell as soon as the influx arrives, capturing short-term profits and avoiding any potential risks that the news event is underwhelming or mishandled.
A driver of the selling pressure was news that much of the ETF volume on Thursday was likely bearish. Half of the spot ETF volume on Thursday came from the converted Grayscale product, about US$2.3 billion. This surprised many and some suggested a chunk of this volume was selling. “Very easy argument to be made that a ton of this volume was the selling of [Grayscale’s fund] and buying of other ETFs for now,” Bloomberg ETF analyst James Seyffart said.
Gary Gensler Likely Cast The Deciding Bitcoin ETF Vote
The SEC’s ETF approvals, although expected due to legal and market pressure, still came as something of a surprise because of the agency’s historical wariness of crypto investments. Since taking office, SEC chairman Gary Gensler has been particularly vocal about the risks tied to investing in crypto and frequently connected the asset class to frauds and scams.
Despite his public skepticism, Gensler was one of three commissioners to approve the spot BTC ETF offerings. Gensler was likely the deciding vote, with the approval being passed 3-2. Commissioners Hester Peirce and Mark Uyeda approved the ETFs alongside Gensler, while Caroline Crenshaw and Jaime Lizárraga dissented. This indicates how close the ETFs came to being rejected.
In a statement released after the ETFs were approved, Gensler was clear that the SEC does “approve or endorse” Bitcoin despite the approval. It appeared that a key factor in Gensler’s approval was a key win for spot ETF applicant Grayscale in a court case with the SEC. The agency did not appeal a recent court ruling that determined the agency had acted “arbitrarily and capriciously” in rejecting Grayscale’s proposal to convert its Bitcoin Trust (GBTC) into an Exchange Traded Funded (ETF). On Tuesday, August 29, 2023, the DC Circuit Court of Appeals made its ruling and ordered the SEC to review its decision and provide a clear rationale for its treatment of different types of Bitcoin-related products, including futures-based ETFs that it approved.
The SEC’s decision to not appeal the loss opened the door for spot Bitcoin ETFs to be approved. Gensler wrote in a statement post ETF approval — “We are now faced with a new set of filings similar to those we have disapproved in the past. Circumstances, however, have changed. The U.S. Court of Appeals for the District of Columbia held that the Commission failed to adequately explain its reasoning in disapproving the listing and trading of Grayscale’s proposed ETP (the Grayscale Order).” He said for this reason and others including the ETFs listing on regulated, national securities exchanges, the ETFs were approved.
An Ethereum ETF?
While BTC has lost value because of event-based selling, Ethereum (ETH) has surged. A key factor in this momentum is an expectation that, following the approval of the spot Bitcoin ETF, a spot Ethereum ETF is next. Analysts at Bloomberg predicted that the odds of a spot Ether ETH being approved by May is 70%.
Major industry players including Vaneck, Blackrock, and Fidelity have all applied for spot Ethereum ETFs and these applications all have a final decision deadline of May 23rd. Some expect these to come sooner with several intermediary firms set for late January.
If we consider a similar ‘Buy the Rumor, Sell the News’ structure to the spot Bitcoin ETF cycle, ETH is still in the ‘buy the rumor’ and a price drop may occur when the expected approval does come. A factor in this confidence is asset manager Blackrock’s exceptional record of ETF application approval which currently sits at 576-1.
Ethereum and the altcoin market have historically outperformed BTC in January. Since 2017, the average monthly return for Ether is a 26.7% gain. For BTC it is a 4.8% gain.
The ETF Fee War
Last week, U.S. Spot Bitcoin exchange-traded funds (ETFs) issuers finally disclosed their fees. There are now multiple Bitcoin Spot ETFs and the fees they charge are the primary way they compete with each other.
Many of the issuers have continued to update their fees in the days leading up to approval, in a game of cat and mouse that has been described as the “ETF Terrordome”, a reference to the ruthless, take-no-prisoners approach required to succeed at the sharp end of the asset management business.
Charging the least is crypto-savvy fund manager Bitwise, with a fee of just 0.20% after a 6-month waiver period of no fees. Ark21Shares is next with a fee of 0.21%. Franklin is at 0.29%. BlackRock, the world’s largest asset manager, has set its fee at 0.25%. This is much lower than many had predicted, given BlackRock’s brand power and market size.
Bloomberg ETF analyst James Seyffart wrote on X that, “The Bitcoin ETF fee war has sharp elbows. These fees are sooo low and the ETFs will trade ABSURDLY tight (penny wide bid-ask spreads) and without any commissions on most platforms.”
Grayscale, however, which plans to convert its Grayscale Bitcoin Trust (GBTC) into an ETF, has the highest fee at 1.5%. However, they have included a clause about the ability to waive fees. Plus, Grayscale already has $28 billion of assets under management (AUM) whereas the other applicants are starting from a position of zero.
What’s clear is that the lower-than-expected Bitcoin ETF fees are good news for investors, and they will put pressure on crypto exchange fees. U.S exchanges such as Kraken and Coinbase will now be competing with the ETF providers, and for those wishing to invest in Bitcoin, the ETFs look very attractive indeed.
A Wild Week of Mixed Signals
It has been a wild week in the lead-up to today’s Bitcoin ETF approval, with mixed signals, false reporting, an SEC hack, and a series of botched announcements by the SEC and the exchanges involved.
Perhaps it is a sign of today’s hyper-connected, extremely online world, and the average person won’t have noticed, but the denizens of crypto twitter have ridden an emotional rollercoaster this week, as official announcements appeared and then disappeared on various websites and exchanges.
The SEC has fought hard to get its ducks in a row, but ultimately it was the wisdom of the market that proved correct. Bitcoin failed to move much on final revelation, showing that the market has indeed priced in the ETF approvals. For now, at least.
In a series of events yesterday that were memorably described as a goat rodeo, the official SEC X Account appeared to announce that Bitcoin Spot ETFs had been approved.
However, 15 minutes later the SEC head Gary Gensler announced, “The @SECGov Twitter account was compromised, and an unauthorized tweet was posted. The SEC has not approved the listing and trading of spot bitcoin exchange-traded products.”
The price of Bitcoin surged quickly to $47,600 after the bogus announcement before dropping to around $45,500 after Gensler said “fake news.”
We’ll leave the final word on this to Edward Snowden.
Gary Gensler Sounds a Warning
Also this week, SEC Head Gary Gensler published a thread on X, stating that “Those offering crypto asset investments/services may not be complying w/ applicable law, including federal securities laws. Investors in crypto asset securities should understand they may be deprived of key info & other important protections in connection w/ their investment.”
Gensler wrote, “Investments in crypto assets also can be exceptionally risky & are often volatile. A number of major platforms & crypto assets have become insolvent and/or lost value. Investments in crypto assets continue to be subject to significant risk.”
Gensler’s thread concluded with “Fraudsters continue to exploit the rising popularity of crypto assets to lure retail investors into scams. These investments continue to be replete w/ fraud- bogus coin offerings, Ponzi & pyramid schemes, & outright theft where a project promoter disappears w/ investors’ money.”
Gensler is committed to being seen as the responsible adult in the room when it comes to protecting American investors.
Spot Bitcoin ETFs: Unlocking Opportunities
The spot Bitcoin ETFs, which track the actual price of BTC rather than its derivatives like Bitcoin futures, represent a breakthrough for the U.S. market. While such ETFs have gained approval in Europe, Canada, and Brazil, the SEC has previously rejected applications due to concerns about potential market manipulation.
The approval of eleven spot Bitcoin ETFs in the U.S. is a milestone for crypto investors and an opportunity for financial advisors. These ETFs, renowned for their efficiency and popularity, could unlock a $50 trillion market across financial advisors, retail investors, and private banks, fostering market maturity and institutional investor confidence.
While the underwhelming price action today shows that the market has indeed priced in the ETF approvals, what happens next could surprise.
BIoomberg senior ETF analyst Eric Balchunas has reported that BlackRock may break the first-day ETF flow record with a $2 billion asset injection on the first day of trading for its spot Bitcoin ETF. That would be a strong catalyst for the Bitcoin market and suggest momentum is just getting started.
New Year, New Opportunity for Bitcoin Investors
As the crypto community celebrates the SEC’s decision to finally approve spot Bitcoin ETFs, the cryptocurrency market is poised for an extended bull run. The approval of Bitcoin spot ETFs coincides with a potential demand shock for Bitcoin with the April 2024 halving, offering investors a unique confluence of factors that historically result in favorable outcomes.
The question is, how will the market respond? As Bitcoin has already experienced a 61% rally since early October, driven in large part by heightened expectations of approval for spot Bitcoin ETFs, some market observers are forecasting a sell-the-news-induced pullback.
Comparisons are drawn to past market events, such as the debut of CME Bitcoin futures in December 2017, Coinbase’s Nasdaq listing in mid-April 2021, and the introduction of various futures ETFs, including BITO. Historical trends indicate that Bitcoin, following rallying periods during these events, experienced subsequent crashes in the weeks that followed.
For instance, the three days leading up to the SEC’s approval of the first futures ETFs saw Bitcoin surge by 15%. However, a month later, the cryptocurrency reached a record high of $69,000 before plummeting into a bear market that endured for over a year. Analysts caution that historical precedents suggest a potential post-ETF approval downturn, emphasizing the importance of monitoring market dynamics in the aftermath of regulatory decisions.
Others are more bullish, however, with the likes of Max Keiser and Samson Mow predicting billions of dollars of new flow into Bitcoin once the ETFs start trading. And of course, the rumored two billion in immediate inflows from BlackRock.
Also very bullish, is a new report from Standard Chartered Bank predicting significant inflows into the spot ETFs.
The bank predicts inflows of $50 billion to $100 billion this year, meaning that between 436,000 and 1.3 million bitcoins will be held in U.S. ETFs by the end of this year.
At that volume of new inflows, Standard Chartered said Bitcoin could reach US$200,000 by the end of 2025.
Now that the ETFs are approved, expect a marketing war to begin, with the various asset managers competing to communicate Bitcoin’s narrative to an army of financial managers.
In the long term, nothing could be more bullish for Bitcoin.