How BlackRock’s ETF Application Has Already Changed the Crypto Market
When BlackRock filed for iShares Bitcoin Trust on June 15th, the market received it as a landmark move that is manifesting in multiple ways. Bitcoin’s price climbed by 18% since the filing, from $25.5k to $30.2k.
This was expected given BlackRock’s stature as the world’s largest asset manager, at $9 trillion AuM. Not only is BlackRock large, but it crosses the boundary between politics and finance with its ESG (environmental, social, and corporate governance) initiative, which typically views proof-of-work blockchains negatively.
Correspondingly, BlackRock is in the process of breaking down the remaining psychological barriers for institutional investing, with Bitcoin having gone from “index of money laundering” and “carbon intensive” to a spot-traded exchange-traded fund (ETF).
Nearly all BlackRock applications with the SEC have been approved, so the same is expected of iShares Bitcoin Trust. Projected capital inflows are already boosting Grayscale Bitcoin Trust (GBTC).
GBTC Up 36%
Initially launched in 2013 as Bitcoin Investment Trust (BIT), Grayscale Bitcoin Trust (GBTC) has been the closest to an exchange-traded fund (ETF). The fund holds 626.14k BTC, making it the world’s largest Bitcoin fund. The concept behind it is to expose investors to Bitcoin’s price moves without directly having it.
This means that GBTC allows indirect BTC trading, similar to the stock market, through the over-the-counter (OTC) market. That’s because the Securities and Exchange Commission (SEC) has rejected every Bitcoin ETF application.
In short, investors give the GBTC cash. The fund buys BTC and represents it with shares. Investors can then pick when to sell or buy more GBTC shares, as it tracks Bitcoin’s price. The problem is that the fund has a relatively high up-front cost, requiring a minimum of $50k investment and a 2% annual fee.
If the demand for bitcoins is high, investors will pay more for GBTC shares than actual bitcoins as net asset value (NAV). Otherwise, they trade at a discount. The last time GBTC traded at a high premium was in December 2020, at 35%.
From February 2021 to the present, GBTC has been consistently in the discount to NAV territory, currently at -33%. Yet, BlackRock’s application was a major boost over the last week.
However, we must remember that GBTC also filed a lawsuit against the SEC for rejecting its ETF application. The same watchdog agency recently sued Coinbase as an unregistered broker for offering ‘crypto asset security.’ But Coinbase is also BlackRock’s selected custodian for the fund the SEC is yet to approve.
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What Makes BlackRock’s Bitcoin Venture Different?
The SEC has consistently bulwarked against spot-traded Bitcoin ETFs, rejecting dozens of applicants. Although the official reasoning is that the crypto market is too unregulated, the prevailing speculation is that the SEC doesn’t want to be responsible for opening capital floodgates into Bitcoin.
Referring to the lawsuit against the SEC on the What Bitcoin Did podcast, Grayscale Investments’ CEO Michael Sonnenshein noted that conversion of GBTC into an ETF would close the discount to NAV gap, bringing in a “couple of billion dollars.”
So far, the presiding judge panel has expressed skepticism on SEC’s reasoning for rejecting this conversion. In particular, Judge Neomi Rao found it puzzling that the SEC approved Bitcoin futures ETFs but not spot-traded ones.
“It seems to me that [what] the Commission really needs to explain is how it understands the relationship between bitcoin futures and the spot price of bitcoin … it seems to me that … one is just essentially a derivative. They move together 99.9% of the time. So where’s the gap, in the Commission’s view?”
Of course, derivatives Bitcoin trading, exclusively conducted on CME, doesn’t translate into ‘physical’ Bitcoin ownership. Such funds don’t exert a buying pressure that would benefit Bitcoin.
BlackRock’s filing acknowledges that the SEC relied on the underlying futures market as the “basis for approving the series of Currency and Commodity-Based Trust Shares.” Accordingly, BlackRock reasons that:
“the regulated market of significant size test does not require that the spot bitcoin market be regulated in order for the Commission to approve this proposal, and precedent makes clear that an underlying market for a spot commodity or currency being a regulated market would actually be an exception to the norm.”
Therefore, because “Bitcoin Futures pricing is based on pricing from spot bitcoin markets,” and because “the CME comprehensively surveils futures market conditions,” BlackRock then concludes the following:
“both the Exchange and the Sponsor believe that the Bitcoin Futures market represents a regulated market of significant size and that this proposal and others like it should be approved on this basis.”
Technically, BlackRock iShares Bitcoin Trust is a Trust like GBTC. But it would effectively work as an ETF due to its daily generation and redemption of shares, conducted by regulated exchange brokers.
More Bitcoin ETFs on the Way?
Based on BlackRock’s application framing, more investment managers are emboldened. So far, WisdomTree has filed for a spot-traded Bitcoin ETF under the ticker “BTCW.” If approved, this would be ‘third time’s the charm,’ as the SEC refused the last two applications. Once in December 2021 and the second one in October 2022.
Likewise, another failed Bitcoin ETF applicant, Invesco, reactivated its Bitcoin ETF application, so its Invesco Galaxy Bitcoin ETF can be listed on the Cboe BZX platform. There is also some speculation that Fidelity, holding $4.5 trillion AuM, will also join BlackRock.
The obvious gambit here is that TradFi firms no longer think the SEC can legally justify refusing spot-traded Bitcoin ETFs, if the exceedingly likely BlackRock approval happens. In the meantime, it appears that Bitcoin’s FUD is all but depleted.
Bitcoin’s Fundamentals Shinier than Ever Before
Since Bitcoin launched in January 2009 as peer-to-peer sound money, it has undergone multiple maturation phases. For the first decade, it has been besmirched as a fad and underground money for drug lords and money laundering.
But as statistics consistently showed that the Bitcoin network offers transparency that dissuades criminals, this narrative waned. In the last few years, the narrative switched to sustainability, i.e., carbon footprint. But ESG analyst Daniel Batten showed that Bitcoin mining is over 50% renewable.
Of course, Bitcoin’s energy consumption increases with the network’s security. In this area, Bitcoin broke all records this year, reaching 394 million TH/s on June 13th. This means that it is exceedingly unlikely for any other cryptocurrency to step in and replace Bitcoin.
Speaking of altcoins, as many have been labeled ‘crypto asset securities,’ they are on a downward trajectory. Because this particular FUD does not apply to Bitcoin, its market cap dominance surged roughly 25% this year, reaching 51.51%.
The last time Bitcoin market cap dominance was so high was in April 2021. Lastly, Bitcoin long-term holders (LTHs) are showing remarkable resilience. Glassnode analysis, since the SEC-induced FUD, shows that LHT only sent 0.004% to exchanges, compared to short-term holders (STH), at 0.93%.
Moreover, LHTs comprise 68% of Bitcoin’s supply, making it much more difficult to erect major selling pressures.
With BlackRock’s application pending, Bitcoin’s FUD supply seems nearly depleted. Bitcoin’s bottom is in the rear-view mirror unless a major macroeconomic event happens.
What price range do you expect from Bitcoin by the end of 2023? Let us know in the comments below.