One article to sort out the key information of BTC spot ETF

Written by Yilan, LD Capital

1. Mavericks engine started

On October 13, the U.S. Securities and Exchange Commission (SEC) announced that it would not appeal Grayscale’s lawsuit against its refusal to transfer GBTC Conversion to Spot ETF A court ruling, which occurred in August of this year, held that the SEC erred in rejecting Grayscale Investments’ application to convert GBTC into a spot Bitcoin exchange-traded fund (ETF).

It was this key event that triggered this round of market trends (as you can see from the CME positions in the picture below, on October 15th, CME BTC OI started to rise sharply). During this period, with the positive effects of Fed pauses, the BTC market continued to boom. The application nodes for Hashdex, Franklin and Global X have arrived, and the "window period" on November 17 has been extended again, which only provides the market with a reason to adjust. From a timeline perspective, the most critical point is the final decision date for Ark &21shares’ current round of applications on January 10. The market has the strongest betting sentiment towards this node. At present, the result of whether it has passed or not will be available as early as next Wednesday (January 3).

2. Spot ETFs are in Is it possible to pass under the current status?

Spot ETF looks at market expectations. Bloomberg ETF analyst James Seyffart believes that it is possible for the Bitcoin spot ETF to be approved before January 10 next year. Sexuality is as high as 90%. As the closest insider to the SEC, his views are generally conveyed by the market.

Griffin Ardern, head of the BloFin Options Desk&Research Department of the crypto-integrated financial services institution, released a report on potential AP (Authorized Participants) on spot BTC that may be passed in January ETF conducts research on seed fund purchases.

Griffen's research conclusion is that from October 16 to the present, an institution has continuously transferred US$1.649 billion to Coinbase, Kraken and other compliance exchanges through the same account. Buying BTC and a small amount of ETH, there are only a handful of institutions in the entire crypto market that can make cash purchases of US$1.6 billion. Combined with the fact that the transfer channel is Tron instead of Ethereum and the currency transfer activity track, it can be inferred that this account is likely to belong to one company. A traditional institution based in North America.

Theoretically, there is no limit on the size of seed funds. They only need to prove that they can provide sufficient liquidity on the day of trading. Traditional seed fund procurement will be conducted 2–4 weeks before the ETF issuance, not too early to reduce the position risk of AP (Authorized Participants) such as market makers or ETF issuers. However, in view of the impact of the December holiday and delivery, Purchasing may also begin earlier. From the above evidence, it is reasonable to speculate that the BTC spot ETF passed in January, but it cannot be used as a basis for whether it will definitely pass.

Judging from the ETF approval process, the maximum time is 240 days, and the SEC must make a final instruction. As the earliest institution to apply, Ark&21 shares, its current round The deadline for applying to the SEC to show approval results is January 10, 2024. If ARK is approved, there is a high probability that several others will be approved in the future.

If rejected, ARK needs to resubmit materials. In theory, it will restart another round of applications for 240 days, but in fact, if in March 2024 - In April or later, if any company is approved during this period, ARK may also be approved in advance.

Judging from the SEC’s attitude, the SEC previously rejected Grayscale GBTC’s proposal to convert Grayscale GBTC into a Spot ETF, mainly for two reasons:

First, there are concerns that cryptocurrencies are traded on unregulated trading platforms, making it difficult to monitor, and point out that market manipulation is a long-standing problem in the spot market. Although the SEC has approved cryptocurrency futures ETFs, these ETFs are traded on platforms regulated by US financial regulatory authorities. Second, many BTC spot ETF investors use pensions, retirement funds, etc. to invest, and they cannot afford high-volatility and high-risk ETF products, which may cause investors to suffer losses.

However, the SEC did not appeal against Grayscale again, and the SEC’s more active communication during the process of major asset managers applying for ETFs reflected a higher probability of passing. The SEC’s official website disclosed two memorandums (Memorandum) the day before yesterday. One memorandum showed that on November 20, Eastern Time, the SEC and Grayscale were discussing proposed rule changes for the listing and trading of the Grayscale Bitcoin Trust ETF. On the same day, the SEC held a meeting with BlackRock, the world's largest asset management company, to discuss proposed rule changes for the listing and trading of the iShares Bitcoin Trust ETF. Attached to this memo is a two-page PPT produced by BlackRock, which shows two ETF redemption methods: In-Kind Redemption Model or In-Cash Redemption Model. . The physical redemption model means that the final redemption is the Bitcoin shares held by the ETF, while cash redemption means replacing the Bitcoin shares with equivalent cash, and BlackRock seems to be more inclined to the former (it has agreed so far In-Cash conditions). As of the 20th of this month, the SEC has held 25 meetings with various ETF applicants. This also means that the two new conditions were discussed after multiple meetings, including 1) requiring the ETF to use cash to create and remove all physical redemptions; 2) the SEC hopes that the applicant can convert the AP (authorized participant, that is) Underwriters) information will be confirmed in the next S-1 filing update. If these two conditions are met before the expected approval time of January 10, it seems that everything is in place. These are positive signs that the SEC's attitude may have changed.

Game of interests

Coinbase is generally considered to be chosen as the custodian of most asset management companies, which is beneficial to its revenue growth, but the actual custody fees (generally range between 0.05%-0.25%) is not significant compared with the new international perpetual transaction revenue and the new scale transaction revenue of spot. But Coinbase remains one of the industry’s biggest beneficiaries following the passage of a spot BTC ETF, and became a major government lobbying force in the U.S. crypto industry following the FTX collapse.

BlackRock has launched a cryptocurrency-related stock fund, the iShares Blockchain and Tech ETF (IBLC). However, although the fund has been launched for more than a year, its assets are less than $10 million. BlackRock also has enough incentive to push for a spot BTC ETF.

In addition, traditional asset management giants such as BlackRock, Fidelity and Invesco have entered the market to play a unique role in government supervision. BlackRock, as a global The largest asset management company, currently managing approximately US$9 trillion in assets. Blackrock has maintained close ties with the U.S. government and the Federal Reserve. U.S. investors are eager to legally hold crypto assets such as Bitcoin to combat the inflation risk of fiat currencies. Institutions such as BlackRock have fully realized this and used their political influence to put pressure on the SEC.

In the political game of the 2024 election, cryptocurrency and artificial intelligence have become hot issues in the 2024 election cycle.

Democrats, Biden, the White House, and the current regulatory agencies appointed by the president (SEC, FDIC, Fed) appear to be largely opposed to cryptocurrencies. However, many young members of Congress within the Democratic Party support cryptocurrencies, as do many of their constituents. So there may be a turning point.

Republican presidential candidates are more likely to support crypto innovation. Republican leader Ron DeSantis has said he would ban CBDC and support innovation related to Bitcoin and crypto. As governor, DeSantis made Florida one of the most crypto-friendly places in the country.

Trump has spoken negatively about Bitcoin in the past, but he also launched an NFT project last year. And its main supporting states like Florida and Texas support the crypto industry to a great extent.

The biggest uncertainty comes from Democratic SEC leader Gary Gensler. Gensler believes that, with the exception of Bitcoin, most token transactions on Coinbase are illegal. The SEC, under the leadership of Chairman Gary Gensler, has taken a tough stance on crypto. Coinbase is in the midst of an SEC lawsuit over its core business practices. Binance is facing a similar lawsuit and is defending it in court. In a worst-case scenario, a regulatory crackdown could wipe out more than a third of Coinbase's revenue, according to Berenberg Capital Markets analyst Mark Palmer. "There is little hope of changing the position of the majority of SEC commissioners in the short term,"

What Coinbase and other companies hope is not to wait for the court's ruling, but to hope that Congress can Separate crypto from securities rules. Executives at companies like Coinbase have been pushing for bills that would limit the SEC’s regulatory power over tokens and establish rules for “stablecoins” such as digital dollar tokens such as USDC, in which Coinbase holds a stake.

Crypto companies are also trying to play defense - lobbying against bills that would require them to comply with anti-money laundering requirements, which executives say will affect blockchain-based assets and transactions. are expensive or impossible to comply with in a decentralized world. However, with every ransomware attack or terrorist attack that is partially funded using tokens, their task becomes more difficult. Both before and after the attack on Israel, Hamas-linked groups sent it requests for crypto donations.

There are some bills that are moving toward that goal. For example, the House Financial Services Committee has passed bills on crypto market structure and stablecoins backed by Coinbase, paving the way for a full-house vote. But there is no indication yet whether Senate Democrats will introduce the bill or whether President Joe Biden will sign an encryption bill.

With this year's spending bill likely to be a major priority for Congress, which will enter election mode in 2024, the controversial encryption bill may not be available for some time Hard to make progress.

FTX’s collapse is a setback, but some in Congress recognize that crypto is inevitable,” Blockchain Association CEO Christine Smith said. For now the industry may have to settle for Bitcoin exchange-traded funds while its lobbying army continues to work on a bill to push it over the finish line next year.

According to a recent study by Grayscale, 52% of Americans (including 59% of Democrats and 51% of Republicans) agree with the statement that cryptocurrencies are the future of finance; 44% of respondents said they hope Invest in crypto assets in the future.

For the SEC, the most important reason for opposition and the contradiction with cryptocurrencies is still that the inherent controllability of BTC cannot be fundamentally eliminated Solved. However, we will soon be able to get the result, that is, whether the SEC will pass the BTC spot ETF under the pressure of the gaming power of all parties.

3.Spot BTC ETF& ;BTC price impact sensitivity analysis

Although the United States has not launched an ETF directly related to spot Bitcoin, investors have already participated in Bitcoin through the existing product structure market. The total assets under management of these products has reached more than $30 billion, approximately 95% of which are invested in products related to spot Bitcoin.

In the United States spot Before the emergence of BTC ETF, BTC’s investment methods and product structures included trusts (such as Grayscale Bitcoin Trust GBTC), BTC futures ETFs, spot ETFs that have been launched outside the United States (such as in Europe and Canada), and other private placements with BTC allocated. Funds, etc. The AUM of GBTC alone reaches US$23.4 billion, the largest BTC futures ETF BITO AUM is US$1.37 billion, and Canada's largest spot BTC ETF BTCC AUM is US$320 million. The allocation of BTC in other private placements is not transparent, and the actual total amount may be Far greater than US$30 billion.

New Demand

If new adoption from the retail side is taken into account, the proportion of BTC holdings in the United States will be 5% and 7% respectively from 2019 to 2023. 8%, 15%, 16%, ranking 21st among all countries. The adoption of spot BTC ETF is very likely to continue to increase this ratio. Assume that this proportion increases to 20%, and 13.2 million retail customers are added. Calculated based on the average household income of 120k US dollars, assuming that the average person holds 1,000 US dollars of BTC, it will generate an additional demand of 13 billion US dollars.

4. Conclusion

As more investors begin to appreciate the benefits of Bitcoin as a store of value asset or digital gold, the certainty of a combined ETF launch is increasing , the approaching halving and the combined impact of the Federal Reserve stopping raising interest rates will most likely push the price of BTC to 53,000 in the first half of next year.

The Ethereum spot ETF is combined with the 240-day application process of the BTC spot ETF, and there are disputes over the nature of securities in Ethereum compared to BTC. The BTC spot ETF passed, so perhaps Ethereum will get its own ETF market when Gensler is replaced by a more crypto-friendly leader.