Sophia’s Thoughts On The Expected ETF Approval
For months we’ve been hearing that the SEC may finally approve spot Bitcoin ETFs in the US. This may be happening as soon as tomorrow. What does this mean for the crypto market?
These are Sophia's Thoughts:
The market is expecting that the SEC will approve all spot Bitcoin ETF applications tomorrow.
This may open the floodgates for institutional capital to flow into crypto, leading to a potential new bull run.
Despite the optimism, some experts are worried that much of the anticipated impact may already be reflected in prices after Bitcoin more than doubled in 2023.
We see the approval of a spot Bitcoin ETF as a positive event for the crypto market with large upside potential in the long run. Still, spot ETFs will also introduce additional risks for investors.
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🚀 Last week’s market performance
The crypto market gained 1.4% last week. Bitcoin (BTC) beat the market, gaining 6.1%. The best performing coin of the week was the small-cap Siacoin (SC), which gained 39%. Sophia assigned Siacoin (SC) a bullish score of 57% over the week given its strong vision for decentralized storage. The worst performing coin of the week was Tellor (TRB). It lost 31% over the week after peaking at its all-time high late in December. Many suspect a pump-and-dump scheme was at play.
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⌚ Spot Bitcoin Approvals Tomorrow?
The crypto world is abuzz waiting for the approval of the first spot Bitcoin ETF in the US. Several companies have filed applications with the SEC to run spot Bitcoin ETFs, including Ark Invest, BlackRock, Fidelity, Franklin Templeton, Grayscale, and others. Several deadlines for the approval of these applications have passed without any positive outcome. Now, we have neared the final decision deadline for one of the applications. Tomorrow, the decision on Ark Invest’s spot Bitcoin ETF application becomes due. After the SEC suffered several losses in court fighting the crypto industry, it seems unlikely that this deadline will pass without a positive resolution. Bloomberg analyst Eric Balchunas sees only a 5% probability that the SEC will deny Ark Invest’s application tomorrow.
Although tomorrow only the decision on Ark Invest’s application is due, it seems implausible that the SEC would approve one application and deny the other ones. Even Ark Invest’s CEO Cathie Woods stated that she expects all spot Bitcoin ETF applications to get approved at the same time. That brings us to the conclusion that most market participants have also reached: tomorrow is likely the day we will see several spot Bitcoin ETF applications be approved by the SEC. Interest in this topic has skyrocketed, as can be seen by a surge of Google searches for the term “Bitcoin ETF”.
But what can the approval of spot Bitcoin ETFs mean for the crypto market? We analyzed both the upside and the downside of this potentially monumental event.
👍 The Case For A Good Reaction
To understand why the approval of spot Bitcoin ETFs may be good for crypto, we first need to understand the purpose that ETFs serve in the first place. For many investors, the availability of a spot Bitcoin ETF is somewhat irrelevant. That’s because a spot Bitcoin ETF does what many people can already do: gain exposure to Bitcoin and participate in the upside that it promises. Many investors do this today by buying Bitcoin on crypto exchanges and then holding their Bitcoins in wallets.
The problem that a spot Bitcoin ETF solves is subtle. It allows investors to gain exposure to Bitcoin without necessarily needing to worry about everything that goes along with trading crypto. One big issue is trust in the crypto trading system. Another big issue is custody. With a spot Bitcoin ETF, an investor can essentially delegate the trading and custody of Bitcoin to the operator of the ETF. An investor can turn on or off their exposure to Bitcoin simply by buying or selling shares of the ETF through traditional brokerages. In return for convenience, the spot Bitcoin ETF operator charges an annual service fee. The lowest fee proposed for a spot Bitcoin ETF is 0.20% per year.
The convenience offered by spot Bitcoin ETFs may not be as relevant for many of the investors that are already in the crypto market. But it is highly important for a block of investors that have so far been reluctant to enter crypto: institutions such as mutual funds, pension funds, and other investment companies that manage money on behalf of others. Often, these kinds of institutions have mandates that only allow them to invest in liquid and easily tradable securities. They may not be able to implement their own crypto trading and custody solutions. So, for many institutions, the availability of spot Bitcoin ETFs would offer an opportunity to enter the crypto market for the first time. Indeed, many experts are expecting the approval of spot Bitcoin ETFs to open the floodgates for institutional capital to flow into crypto.
Increased demand would naturally lead to a higher price for Bitcoin. Some analysts expect that the Bitcoin price could climb up to USD 50,000 shortly after the approval of a spot Bitcoin ETF. In the medium to long run, some experts think Bitcoin can jump above USD 100,000. Early crypto investor Anthony Scaramucci forecasts that Bitcoin could topple USD 330,000 after a spot Bitcoin ETF is approved. All in one, the case for a Bitcoin run in response to the approval of spot Bitcoin ETFs is simple: more demand for Bitcoin will drive the Bitcoin price up.
But the approval of a spot Bitcoin ETF is not just expected to benefit Bitcoin. Investors expect ripple effects across the whole crypto ecosystem. There are now several applications to run spot Ethereum and Ripple ETFs as well. If the SEC approves a spot Bitcoin ETF, it is very likely that we will also see other spot crypto ETFs approved. So Ethereum and Ripple likely stand to gain from a green light for Bitcoin.
👎 The Case For A Bad Reaction
Not all opinions are positive. The approval of a spot Bitcoin ETF, while long-awaited, may trigger a ‘sell-the-news’ phenomenon. This effect occurs when investors buy ahead of an event that is expected to drive prices up, which on its own drives prices up like a self-fulfilling prophecy. Once the event materializes, investors sell off their investments to take the gains. Since it became clear in December that the last deadline for a spot Bitcoin ETF was due in January, the price of Bitcoin already skyrocketed. Bitcoin gained more than 24% since December 1. Investors do appear to have traded the rumor that a spot Bitcoin ETF may soon be approved.
In line with the sell-the-news story, analysts at K33 suggest that investors that already participated in the Bitcoin run might consider taking profits following the approval. That may lead to short-term price declines in the crypto market. If the sell-the-news narrative materializes, some investors see Bitcoin dropping to the USD 41,000 range.
Not all experts agree with the sell-the-news story but still do not agree that the approval of an ETF will lead to price increases. Some experts think that the positive impact of the approval of spot Bitcoin ETFs may already be reflected in the incredible bull run that Bitcoin experienced recently. Bitcoin more than doubled in 2023, going from USD 16,500 at the beginning of January to over USD 44,000 at the end of December. While we’re still below the all-time high of USD 67,500 from back in 2021, some experts question how much more the price can move in one swing once the ETF is approved.
If the crypto market does not react strongly in response to the approval of a spot Bitcoin ETF, investors could feel disappointed. That on its own could trigger a sell-off. In our last sentiment update, we highlighted that crypto market sentiment is very positive now. If investors become nervous that their support of crypto is not backed by actual market developments, they may exit some of their crypto bets. We saw a similar phenomenon last year in the summer, when the market reacted skittishly to fears that the Fed might continue to raise interest rates. All in one, there are risks that the approval of a spot Bitcoin ETF may not trigger an instantaneous new crypto bull run.
🥸 Sophia’s Insights For Crypto After The ETF
Our intelligence suggests that the approval of a spot Bitcoin ETF will be good for crypto in the long run. The possibility that more institutional capital will flow into crypto will be good for many different reasons. First, it will increase demand for crypto, which will provide support for prices and valuations. Second, it will enable more supervision by established players and welcome more regulatory oversight. This is good for investors in spite of the costs that additional compliance may bring with it. Finally, it will bring new players into the market. That may increase competition and bring fees down. Trading crypto is notoriously expensive. The availability of spot crypto ETFs may bring crypto trading costs down as it enables crypto exposure through traditional platforms with lower fees.
But we also see risks once spot Bitcoin ETFs are approved. Investors will gain an ability to short Bitcoin by shorting the ETF or trade Bitcoin with leverage by trading the ETF on margin. This creates an avenue for the amplification of volatility through speculative trading. Research by Professor Will Cong from Cornell University also supports the notion that the introduction of an ETF could increase volatility rather than reduce it. We will continue to vigilantly observe the crypto market and deliver the best possible intelligence to you as we learn more about how spot Bitcoin ETFs will impact the crypto market.
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