Ten years of breakthrough and extreme push: Who is the biggest winner after the Bitcoin ETF is approved?

Author: Xu Tingfang, Source: Southern Weekend

On January 11, the SEC approved 11 Bitcoin spot ETF fund products.

U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler “lost” the decade-long battle that ended in a victory for cryptocurrencies after he voted in favor of Bitcoin.

On January 11, 2024, Eastern Time, the SEC officially approved 11 Bitcoin spot ETF fund products (ETF refers to traded open-end index funds, also known as exchange-traded funds). Since then, Investors can invest in Bitcoin through their stock brokerage accounts by purchasing fund shares instead of holding the cryptocurrency themselves. These funds trade on the three major U.S. exchanges.

SEC represents the attitude of some financial regulations around the world. Gensler has publicly stated that cryptocurrencies are still traded in unregulated markets, with violent price fluctuations and are extremely susceptible to manipulation. He even called it a "fraud." ". However, the increasing scale of assets and the application of its underlying technology, blockchain, have made Bitcoin regarded by some as the next "gold", a high-quality asset that can fight inflation.

Most of the issuers of the 11 spot ETFs are well-known financial institutions, such as BlackRock, one of the world's largest asset management groups, Ark Investment, Fidelity, etc. Institutional endorsement undoubtedly makes investors feel more comfortable with cryptocurrencies, even though fraud scandals and bankruptcies still occur in the industry from time to time.

But few were satisfied with the victory.

Cryptocurrency supporters claim that it is the strict review of cryptocurrencies that has caused insufficient investment supply and sharp price fluctuations in Bitcoin, and the SEC has an unshirkable responsibility. Opponents believe that after the approval of such ETF products, they will attract participation from traditional investors such as pension funds and mutual funds, which will most likely cause unnecessary losses to the account holders behind them.

Ironically, the cryptocurrency market ushered in a wave of selling on the second day after the ETF was listed, with Bitcoin falling by more than 8% that day. According to calculations by data provider CoinGlass, at least 100,000 Bitcoin accounts were liquidated that day. Those investors who bought spot ETFs on the first day generally suffered losses of more than 10%, which further confirmed the SEC's concerns.

If we count from the launch of the first Bitcoin ETF in 2013, it took ten years for cryptocurrency to gain a place in the mainstream market. In the latest statement, Gensler still linked Bitcoin to illegal activities such as extortion, money laundering, and terrorism. Whether it can allow investors to make money may be a secondary issue in the eyes of the SEC.

Key Judgment

A few hours after the SEC approved the listing of Bitcoin ETF, Tang Kai was temporarily pulled into an online meeting. The topic of the meeting was "After the adoption of spot ETF "Impact on the Cryptocurrency Market", the more than one hundred participants were mostly senior investors and trading platform practitioners in global cryptocurrency.

Tang Kai predicted the current situation half a year ago. "It is certain that currency prices will rise in the future. Spot ETFs have brought Bitcoin from 'grassroots' to 'mainstream', which is a major benefit." Tang Kai Kai told Southern Weekend reporters.

He is a little modest. In the second half of last year, almost all virtual currency exchanges were silently making money. The trading platform Tang Kai worked for saw assets increase nearly tenfold in the last two months of 2023. Bitcoin The total global market capitalization has also returned to a high of US$850 billion.

Tang Kai's determination stems from a case. In June 2022, GrayScale, one of the world's largest cryptocurrency asset management companies, sued the SEC to the U.S. Federal Court on the grounds that the SEC repeatedly rejected GrayScale's application for a Bitcoin spot ETF.

“Everyone in the industry is staring at that case. Whether cryptocurrency can enter the mainstream market in the future, the outcome of this case is very critical.” Tang Kai recalled. The court ruled at the end of August of the following year that the SEC lost the case.

At this point, the SEC has been unable to prevent large financial institutions from extending an olive branch to the cryptocurrency market, and the issuance of Bitcoin spot ETFs is almost a certainty. The price of Bitcoin began to skyrocket, rising from around US$26,000 at the end of August last year to around US$46,000 recently, an increase of nearly 80% in four months.

“Bitcoin spot ETF can be understood as a more professional packaging based on the original underlying assets of Bitcoin, allowing it to enter the market of traditional players. Therefore, it will attract more of funds entering the market," Hu Jie, a professor of practice at Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University, explained to Southern Weekend reporters.

Before the verdict, Tang Kai had a vague premonition of the outcome. One sign is that more and more traditional financial institutions are joining the process of applying for ETFs. In the past, several asset management companies applied to the SEC for Bitcoin spot ETFs every year, but most of them were small and medium-sized institutions in the encryption circle. Since April last year, giants such as Ark Assets and BlackRock have appeared in the application list, “indicating that traditional institutions have begun to deploy in this field.”

There are even family offices, family trusts and other institutions talking to Tang Kai about cooperation. "Such old money investments will be relatively cautious. Putting cryptocurrency into asset allocation has been overtaken." More and more wealthy people are accepting it.”

The blessing that spot ETFs bring to Bitcoin is obvious, first of all, traffic and liquidity.

“ETF has brought a huge traditional market. Even though Bitcoin is the largest category among all cryptocurrencies, compared with the entire financial market, it is still a game for a small number of people. Spot ETFs have greatly expanded Its liquidity." Zhang Feng, a partner at Wanshang Tianqin Law Firm and a technology evaluation expert at the Shanghai Blockchain Technology Association, told Southern Weekend reporters.

From alternative to mainstream, Bitcoin lacks an opportunity. Spot ETF may be a breakthrough for the combination of Bitcoin and traditional finance. "This trend of mutual integration will become more and more obvious in the future." Zhang Feng judge.

Ten Years of Pulling

The earliest application for a Bitcoin ETF dates back to July 2013, when the Winklevoss brothers, American investors, applied to establish the "Winklevoss Bitcoin Trust Fund." "The sponsors believe the trust is the first exchange-traded product designed to track the price of a digital-based asset such as Bitcoin," the filing reads. Three years later, the SEC rejected Winklevoss's application, citing “concerns about potential fraudulent or manipulative conduct.” In the years since, the cryptocurrency industry has never stopped making such attempts, succeeding one after another and failing again and again.

The reason for the rejection is almost unanimous - the cryptocurrency industry is full of fraud and manipulation, which is not conducive to investor protection. According to data released by the SEC, from the time when former SEC Chairman Jay Clayton took office in 2018 until March 2023, the SEC has successively rejected more than 20 related applications.

Especially in 2021, no fewer than 13 Bitcoin spot ETF applications were rejected. However, in October of that year, the newly appointed Gary Gensler opened an opportunity for Bitcoin and approved the first Bitcoin futures ETF in the United States, the ProShares Bitcoin Strategy ETF. Since then, several Bitcoin futures ETFs have been approved for listing.

SEC gave priority to launching futures ETFs instead of spot ETFs. One reason was that the price bubble was obvious at the time.

Due to the COVID-19 epidemic in 2020, the U.S. government and the Federal Reserve issued a large amount of social assistance and low-interest loans to the society. After some funds flowed into the Bitcoin market, the price of Bitcoin doubled in 2021 and reached a historic high. At $64,400, the investment risk is quite obvious.

The SEC has stated that if regulators do not understand the source and pricing process of Bitcoin, it will make investors more vulnerable to fraud and manipulation. Since the SEC lacks jurisdiction over crypto trading venues that are not registered as exchanges in the United States, the regulator prefers futures-based ETFs.

Hu Jie analyzed that at that time, the U.S. Bitcoin market already had some relatively standardized trading platforms, and ease of supervision may not be the main reason for prioritizing the launch of Bitcoin futures ETFs.

He explained that compared with futures, spot ETFs are more biased towards “inducing long” in terms of trading characteristics, so they have a greater impact on subsequent prices and are more attractive to market participants. This is not what the SEC wants to see.

“For institutions, Bitcoin futures ETF may become a tool for hedge funds or asset management companies to hedge their Bitcoin spot targets or other asset targets, and it is also a better short-selling tool.”

This also allowed Grayscale to seize the SEC’s “handle”.

After unsuccessfully applying for a Bitcoin spot ETF several times since 2021, Grayscale finally filed a lawsuit with the Court of Appeals for the Federal Circuit of the District of Columbia. Grayscale believes that "the SEC failed to adopt a consistent approach to similar investment vehicles" and its behavior was "arbitrary and capricious". In short, it is a double standard in supervision.

The court ultimately ruled that the SEC’s repeated refusal to convert Grayscale’s Bitcoin Trust into an ETF was “arbitrary and capricious, and the Commission cannot explain its different attitudes towards similar products.” The price of Bitcoin rose slightly due to this news.

But in September, the SEC once again decided to postpone the Bitcoin spot ETF applications submitted by BlackRock, Fidelity and other institutions. After the news broke, the price of Bitcoin fell below $26,000. In the next four months, the agency and the SEC were still at odds, experiencing multiple delays, application modifications, and meetings and discussions.

But the market has reached a consensus that Bitcoin spot ETF will come sooner or later. In a case law country like the United States, losing a lawsuit means losing everything after that. As a report in the Financial Times put it, Gensler, the “number one policeman” of cryptocurrency, has lost a key battle in the battle against Bitcoin.

“Bitcoin has lost its soul”

SEC’s caution is justified.

In November 2023, Sam Bankman-Fried, the founder of the original cryptocurrency trading platform FTX, was found guilty. He stole more than $8 billion in client assets from FTX to fund his cryptocurrency hedge fund, repay loans, buy luxury homes, and more.

This largest financial fraud case in U.S. history told the market that cryptocurrency is far from safe as imagined.

As SEC Commissioner Caroline A. Crenshaw said in a statement, “One form of manipulation prevalent in the crypto markets, particularly the Bitcoin market, is ‘fake trading,’ where traders attempt to pass Selling and buying the same products drives up prices and then sells them at inflated values ​​to unsuspecting third parties."

SEC research on 29 major crypto exchanges shows that in unregulated On the exchange, false transactions account for an average of 77.5% of the total trading volume. For example, Binance, the world's largest cryptocurrency exchange, uses fake transactions to artificially increase trading volume.

"This type of transaction is also called wash trading. In a normal securities trading market, it usually does not make sense to trade just to increase trading volume, because investors will not be separated from the price. , investment decisions are based solely on trading volume. But in the highly fragmented cryptocurrency trading market, trading volume does have a significant impact on transactions, especially where they are traded, and such a market is also more prone to manipulation." Deputy Director of the Singapore Management University School of Law Dean Zhang Wei explained to Southern Weekend reporters.

Fake trades distort prices and volumes, causing volatility and then investor losses. For Bitcoin in particular, an SEC analysis of 157 crypto exchanges found that 51% of daily Bitcoin trading volume was fake.

Crenshaw put it in one sentence, "I am concerned that our actions today do not provide investors with access to new investments, but rather provide those investments themselves with access to new investors in order to maintain Its price."

The SEC is worried that if large investment groups such as pension funds and mutual funds enter the market, the account holders behind them may unknowingly purchase Bitcoin assets and bear considerable consequences. Big risk.

Even staunch supporters of the currency circle are dissatisfied with spot ETFs. At the same online conference that Tang Kai participated in, a familiar veteran in the industry retorted that "Bitcoin has lost its soul."

In 2008, Satoshi Nakamoto invented Bitcoin. The "white paper" he wrote for the industry described a payment system that was separate from mainstream financial institutions, trying to use the power of the Internet and cryptography to ensure that individuals can Be free from the long arm of national financial systems and escape the effects of global fiat currency debasement.

“In the past, when inflation was severe, Bitcoin rose rapidly. When the economic situation was good, Bitcoin fell instead.” Zhang Feng analyzed that this is similar to traditional safe-haven assets such as gold.

However, since Bitcoin has become closer to traditional finance, its ability to fight inflation has become weaker and weaker. The best proof is that when global inflation surges in 2023, especially in the second half of the year, Bitcoin The price of currency has not gone out of the trend independent of traditional financial products. But its role as a speculative asset is more obvious because it is volatile enough and its price grows fast enough.

“The market’s eager anticipation for Bitcoin spot ETFs just illustrates the failure of the crypto-asset trading market over the years. In the end, investors still rely on traditional financial markets to support crypto-assets. If the cryptocurrency market succeeds, Then it should be the other way around, investors are eager to convert traditional financial assets into cryptocurrencies for trading." Zhang Wei said.

New political issues

The attitude of all sectors of society towards cryptocurrency is constantly changing.

For example, BlackRock, which participated in the ETF issuance this time, its CEO Larry Fink also called Bitcoin a "tool for money laundering" in 2017, but in 2022 he said it could subvert finance. He told the media that more and more global investors are consulting BlackRock about cryptocurrencies, and BlackRock is also actively exploring investment opportunities and options for cryptocurrencies.

In addition to participating in the issuance of Bitcoin spot ETF, BlackRock has also launched a spot Bitcoin trust and invested in shares of cryptocurrency-related companies, such as Coinbase, MicroStrategy, etc.

Differences also exist among giants.

A spokesperson for Vanguard Group, the asset management giant, said in an interview that in addition to being unable to purchase Bitcoin spot ETFs on the Vanguard platform, Vanguard also no longer accepts cryptocurrencies including Bitcoin futures ETFs. Monetary products. Currently, Citigroup, Bank of America, UBS, etc. do not support their customers in purchasing such products.

The passing of spot ETFs in the United States may affect the attitude of other financial markets.

In June 2023, the Hong Kong Securities Regulatory Commission began to accept applications for virtual asset trading platform operator licenses. In October, the Monetary Authority of Singapore finalized the regulatory framework for local stablecoin-related activities.

“Hong Kong is very likely to follow the policies of the United States. The Hong Kong dollar itself is anchored to the US dollar. In addition, many regulatory policies have been issued in the past two years. The Hong Kong government also regards the digital economy as the focus of the future economy.” Zhang Feng judged.

In this SEC vote to pass the Bitcoin spot ETF, the two votes in favor came from the Republican Party, and the two votes against it came from the Democratic Party. Although Gary Gensler, as chairman, ultimately voted in favor, he Both members of the Democratic Party, like the former chairman, have been opponents of cryptocurrencies.

Elizabeth Warren, a Democratic senator from Massachusetts and an expert on financial issues, publicly stated, "There is no doubt that the SEC made the wrong decision here." Last October, she and about 100 lawmakers sent a letter to the White House and Treasury Department calling for a crackdown on illegal cryptocurrencies, citing reports that Middle Eastern militant groups were using cryptocurrencies for fundraising.

The U.S. cryptocurrency community is not complacent about the ETF’s victory. They want to elect a president who is more “friendly” to cryptocurrency.

Multiple overseas media reported that industry leaders Coinbase, Circle, a16z and other companies invested US$78 million in lobbying platform Fairshake in December last year to use "pro-encryption leadership in the 2024 election" ".

Coinbase’s Chief Policy Officer Faryar Shirzad publicly stated, “We will depoliticize cryptocurrencies at all costs.”