Sophia’s Thoughts on the Bitcoin ETF
Last week, BlackRock filed an application with the SEC to launch the first true Bitcoin ETF in the US. Many have tried in the past and failed. Will BlackRock’s faith be different?
These are Sophia's Thoughts:
BlackRock is trying to convince the SEC that they are better able to implement a Bitcoin ETF than past applicants. But BlackRock will be partnering with Coinbase, which is in the crossfire with the SEC right now.
In the past, the SEC has raised concerns about how operators of Bitcoin ETFs would deal with market manipulation in crypto exchanges. Especially in light of wash trading, the common practice of some exchanges that inflate their trading volumes to attract more customers.
In spite of the concerns, the market has reacted positively to the news. Crypto sentiment has turned back positive this week, recovering from the SEC lawsuit shocks.
Sophia’s Mood has turned Bullish for most coins, boosted by strong sentiment and fair fundamentals.
🚀 Last week’s market performance
The crypto market gained 6% last week. Bitcoin (BTC) gained more: 9%. Bitcoin was boosted by the Bitcoin ETF application from BlackRock. Oasis Network (OASIS) gained even more: 11%. It was boosted by the hype around AI applications in crypto. Only very few coins lost value over the course of the week. Chainlink (LINK) was one of them, losing around 1%.
The star of the show, nonetheless, was not a crypto asset but a fund that tracks a crypto asset. Namely, the Grayscale Bitcoin Investment Trust (GBTC). GBTC posted an impressive 28.5% return over the course of the last 7 days.
🧐 What is your crypto mood today?
In each Sophia's Thoughts newsletter, we ask about your crypto mood. Your response to this question helps Sophia get a better sense of the pulse of crypto markets. And this ultimately translates into better insights for you when combined with Sophia's AI models. Your data empowers Sophia to provide you with even better intelligence going forward!
⚫ BlackRock’s Move
BlackRock, the largest asset manager in the world, filed an application with the Securities and Exchange Commission (SEC) for a spot Bitcoin ETF called iShares Bitcoin Trust last week. A spot Bitcoin ETF would track the Bitcoin price as it is observed in broadly accessible cryptocurrency exchanges. This stands in contrast to a Bitcoin futures ETF, one of which is already run by ProShares. A Bitcoin futures ETF tracks the Bitcoin futures price that is only observed in exchanges that trade crypto derivatives. Such exchanges are restricted. Most investors are unable to gain access to derivative exchanges because trading derivatives is highly risky.
The move by BlackRock is creating waves in the cryptocurrency world. It’s taking place one week after the SEC sued Binance and Coinbase for various legal infringements. In particular, the iShares Bitcoin Trust will use Coinbase as custodian for its assets.
BlackRock bitcoin ETF: The wolf enters the henhouse? (Blockworks)
BlackRock Tries for Spot-Bitcoin ETF With Fresh Filing (Bloomberg)
The announcement signifies a significant shift in the traditional finance world’s approach to cryptocurrencies. If the SEC approves, we can see many more institutional investors entering the crypto markets. That would bring more legitimacy to crypto as a viable asset class.
🙋🏻♂️ What’s different?
The recent filing by BlackRock for the iShares Bitcoin ETF is not a pioneering move. Several others have tried to launch their own Bitcoin ETFs in the past. Notably, the Winklevoss Brothers made their last attempt in 2017. But their proposal was turned down by the SEC due to concerns about the unregulated nature of the exchanges in which Bitcoin trades. Similarly, Bitwise, a crypto index fund manager, applied for a Bitcoin ETF in 2019. But they quickly withdrew their application.
The common challenge that most, if not all, previous applications faced was the inability to adequately document how they would prevent being exposed to crypto market manipulation and other illicit activities. One common concern is the fact that many exchanges intentionally inflate their reported trading volumes to appeal to more investors — a practice known as wash trading. For example, a research team led by Cornell University Professor Will Cong demonstrates that as much as 80% of trading volumes on unregulated crypto exchanges may be fake. The SEC questions whether investors can trust the data that is used to run a Bitcoin ETF.
What sets BlackRock’s iShare Bitcoin ETF application apart is its proposed framework to counteract market manipulation. By implementing a “surveillance-sharing agreement” among exchanges, BlackRock anticipates a higher likelihood of approval compared to previous filings. This agreement would facilitate the exchange of information on trading and clearing activities, as well as customer identification, with all relevant parties. It enables the SEC to monitor potential market manipulation.
The recent attention surrounding BlackRock’s SEC filing is largely due to the current climate in the crypto market. Following the FTX collapse last year, crypto regulation has become a significant concern. And the SEC has taken strong actions in this space with its lawsuits against Binance and Coinbase. Why has BlackRock chosen to file now, amidst all the regulatory pressure? In an interview with CNBC, Indicia Labs Co-Founder & Santa Clara University Professor Gustavo Schwenkler offered several reasons why the timing might be right for BlackRock and its partner Coinbase:
The move positions BlackRock as pioneers in introducing more mainstream tools to the crypto world. Especially at a time when there are questions about the utility of crypto and survival in the face of regulatory scrutiny.
BlackRock is of the belief that Bitcoin is here to stay and wants to be among early adopters.
BlackRock aims to lead in legitimizing the crypto market.
The application benefits Coinbase as it demonstrates that one of the world’s largest asset managers backs them.
📈 The market reaction
The market has responded positively to the news of the BlackRock Bitcoin ETF application. Bitcoin has moved up by 9% since last week. And the broader market also moved up by 6%. This move has primarily been driven by a strong increase in sentiment towards crypto. Indicia Labs measures that sentiment crypto sentiment in social chatter is positive after BlackRock filed for its Bitcoin ETF application. It had temporarily turned negative when the SEC filed its lawsuits against Binance & Coinbase.
The Bitcoin ETF application by BlackRock also had a positive effect on one of its potential competitors: the Grayscale Bitcoin Investment Trust, or GBTC. GBTC is a fund that aims to track the Bitcoin spot price. Unlike the proposed spot Bitcoin ETF of BlackRock, there are only a limited number of shares of the GBTC trust. As a result, the value of a share of GBTC can fluctuate openly in the market depending on the demand for shares of GBTC.
Prior to BlackRock’s Bitcoin ETF application, a share of GBTC was trading at a 44% discount relative to the value of the underlying Bitcoin held by the trust. This discount shrank by 18% since BlackRock filed its application with the SEC. Investors appear to be pricing in the possibility that BlackRock may be successful in its quest to get approved by the SEC. This would set a positive example for other fund operators to pursue similar applications.
🧠 Sophia’s crypto intelligence for the week
Sophia was mostly bullish on coins last week. Sophia’s optimistic outlook on crypto was supported by the strong sentiment that Sophia measured in social chatter. Controlling for the fundamentals of the different coins, Sophia viewed coin valuations as low relative to the strength of social chatter sentiment in the market. It appears that the BlackRock Bitcoin ETF application really turned sentiment around and boosted crypto performance.
A coin that Sophia viewed as having extremely low valuation relative to the strength of its social sentiment is Oasis Network (ROSE). ROSE is a leading privacy-enabled and scalable layer-1 blockchain network. The coin posted a positive return of 11% in the last 7 days. It benefitting from the strong hype around AI applications in crypto.
On the other hand, Sophia viewed Chainlink (LINK) as having extremely high valuation when compared to its social chatter sentiment. LINK lost around 1% last week. It was one of the few coins that did not benefit from the boost granted by the BlackRock Bitcoin ETF application. Recently, LINK has faced a selloff as investors are uncertain about Chainlink’s blockchain expansion.
It remains to be seen whether sentiment will continue to stay positive. Today, Sophia continues to be Bullish on the market. But with a little less conviction. Coins appear to be fairly valued relative to their fundamentals. Yet social sentiment continues to be strong. So there may still be room for more gains going forward.
Indicia Labs does not provide investment, tax, or legal advice. You are solely responsible for determining the suitability of any investment, investment strategy, or related transaction based on your personal investment objectives, financial circumstances, and risk tolerance. Indicia Labs may offer educational information about digital assets, which may include blog posts, articles, third-party content, news feeds, tutorials, and videos. This information does not constitute any form of advice, and you should not rely on it as such. Indicia Labs does not recommend buying, earning, selling, or holding any digital asset and will not be responsible for any decisions you make based on the provided information. Any content provided by Indicia Labs may contain errors, inaccuracies, or outdated information and should not be relied upon for making any investment decisions and Indicia Labs and its affiliates hold no responsibility for the accuracy of the provided information or content.
As with any asset, the value of digital assets can fluctuate, and there is a significant risk of losing money when buying, selling, holding, or investing in digital assets. Consult your financial advisor, legal or tax professional regarding your specific situation and financial condition, and carefully consider whether trading or holding digital assets is suitable for you.
Indicia Labs is not registered with the U.S. Securities and Exchange Commission and does not offer securities services in the United States or to U.S. persons. You acknowledge that digital assets are not subject to protections or insurance provided by the Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation.