Sophia’s Thoughts on the Grayscale Win
Grayscale just won its lawsuit against the SEC. Are spot Bitcoin ETFs a thing now? And what will happen with the rest of crypto?
These are Sophia's Thoughts:
A federal court in the US found that the SEC’s rejection of Grayscale’s application to convert its Bitcoin trust into the first spot Bitcoin ETF was unlawful.
The ruling sent the crypto market into a new frenzy. Bitcoin jumped up by more than 5% and sentiment became very positive in less than 24 hours.
While the ruling almost certainly implies that spot Bitcoin ETFs are coming in the US, the question now is when. Social chatter says a positive decision may arrive as early as next week.
But our intelligence suggests that a more likely scenario is that we will see a wave of spot Bitcoin ETF approvals early next year. 2024 already promises to be a big year for crypto.
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🚀 Last week’s market performance
The crypto market and Bitcoin (BTC) had flatlined last week. Until Grayscale won its appeal against the SEC today. Bitcoin and the crypto market ended the week 6% up. The Coinbase stock (COIN) was a key winner this week, jumping up by more than 13% throughout the week. But the absolute winner was the Grayscale Bitcoin Trust (GBTC), posting a total return of 21% last week.
🧐 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!
👀 What just happened?
Today, Grayscale won its lawsuit against the SEC. Grayscale had sued last year in June when the SEC rejected its application to convert its Bitcoin trust (GBTC) into the first spot Bitcoin ETF in the US. In its rejection, SEC claimed that Grayscale had not answered questions of how it would address market manipulation in the spot Bitcoin market. But Grayscale contested this rejection reasoning. Grayscale argued that market manipulation is also possible in the Bitcoin futures market and the SEC had approved a Bitcoin futures ETF.
The D.C. Circuit Court of Appeals sided with Grayscale. It stated that:
“Grayscale is similar, across the relevant regulatory factors, to bitcoin futures ETPs [exchange-traded products]. The Commission failed to adequately explain why it approved the listing of two bitcoin futures ETPs but not Grayscale’s proposed bitcoin ETP. In the absence of a coherent explanation, this unlike regulatory treatment of like products is unlawful.”
The market reacted positively to the news. Bitcoin (BTC) jumped up more than 5% upon announcement of the ruling. Coinbase (COIN) and the Grayscale Bitcoin Trust (GBTC) jumped by more than 13%.
🏆 A blowout win
Grayscale and Bitcoin are clearly the winners today. The decision does not mean that the Grayscale Trust will immediately become an ETF. But, given the kind of ruling, it is almost certain that it will eventually.
The decision clearly states that spot Bitcoin ETFs are not that different from Bitcoin futures ETFs. The SEC could try to appeal this argument. But it would be hard to beat given its prior approvals of Bitcoin futures ETFs. And the fact that several new Bitcoin ETF applications have now explicitly addressed the market manipulation concerns. BlackRock, Fidelity, Ark Invest, and WisdomTree all included a surveillance-sharing framework in their application to manage the market manipulation issue. The ruling makes clear that the question now is no longer whether the SEC will approve spot Bitcoin ETFs. Now it’s a matter of when the SEC will approve the first spot Bitcoin ETF. This is good news for BlackRock, Fidelity, Ark Invest, and WisdomTree.
The approval of a spot Bitcoin ETF is sure to bring much more liquidity into crypto markets. That’s because the operators of Bitcoin ETFs would have to purchase Bitcoin in the same amount as funds flow into the ETFs. The global ETF industry held around 10 trillion USD in assets last year. The total crypto trading volume yesterday was only around 40 billion (or 0.04 trillion) USD. So even a small ETF allocation towards crypto would be a huge deal.
The approval of a spot Bitcoin ETF would institutionalize crypto markets. It would make it possible for anybody to gain exposure to crypto through trusted and regulated traditional brokers and marketplaces. Without having to actually hold crypto and all the cybersecurity risks associated with crypto markets. As our cofounder and Santa Clara University Professor Gustavo Schwenkler told CNBC:
“If you invest in a spot Bitcoin ETF, you’re not directly buying Bitcoin. You’re buying shares of a fund that holds Bitcoin.”
Allowing investors to gain some exposure to Bitcoin through traditional routes makes it possible for a broader community to participate in the diversification benefits that crypto offers. As we have highlighted in a previous Sophia’s Thoughts, even a small allocation into Bitcoin can help investors diversify risk and increase expected returns. That’s because Bitcoin generally has low correlation with the stock market. This allows investors to improve on their portfolio Sharpe ratios (i.e., how much return they can expect per unit of volatility they are exposed to).
While the win directly benefits Bitcoin, many other crypto assets can equally benefit. If a spot Bitcoin ETF gets approved, it’s likely that spot ETFs for other crypto assets may also get approved. We already saw this with futures ETF. Since Bitcoin futures ETF have been approved, investors are now expecting Ethereum futures ETFs to also be approved. The surveillance-sharing agreements that have been brought forward for spot Bitcoin ETFs are likely to also apply for other liquid cryptos. If a spot Bitcoin ETF gets approved, what could the SEC argue against a spot ETF for another crypto traded in exactly the same way? It would be a hard argument to make.
All in one, the Grayscale decision is a huge win for crypto. It implies that we can now expect more inflows to come into all of crypto in the future. Grayscale summarized it succinctly:
“This is a monumental step forward for American investors, the Bitcoin ecosystem, and all those who have been advocating for Bitcoin exposure through the added protections of the ETF wrapper.”
🎉 A new market frenzy
Unsurprisingly, the market has reacted extremely positively to this news. Our estimate of social chatter sentiment across the top 100 coins jumped up from neutral to very positive in a few days.
But with all the hype, it is important to keep in mind what this decision really means:
No spot Bitcoin ETF has yet been approved yet.
The court rejected the SEC’s rejection of Grayscale’s request to convert its trust into an ETF. Both sides now have the opportunity to appeal within 45 days. If no appeal is filed, the court will decide what comes next. That may be to approve Grayscale’s conversion request right away or for the SEC to reconsider the application and make another decision. Which could involve a rejection for another reason.
There are several deadlines for SEC decisions on other spot Bitcoin ETF applications over the next few weeks.
While the news is certainly positive for crypto, it is not a final decision in the Bitcoin ETF situation. That likely explains why Bitcoin jumped up today. But it did not recover to its previous high of almost 31,000 USD from less than a month ago.
🧠 What’s next?
As with everything in crypto, things can happen very quickly now. Of course, the SEC can decide to appeal the decision and drag out the approval of spot Bitcoin ETFs. That seems rather unlikely. So, it is likely that spot Bitcoin ETFs will come. The question then is how soon.
Some analysts speculate that the decision may come sooner rather than later. The SEC has taken two big losses recently. The first when Ripple won its lawsuit and token were not deemed securities. Now this one. The judge called the SEC rejection “arbitrary and capricious.” That is not a good look. So some people expect the SEC to use this ruling as a way out of a losing battle against spot Bitcoin ETFs.
But will a decision from the SEC arrive within a week from today when a set of deadline on spot Bitcoin ETF application lapses? Many people on social media believe so. But we are of the mindset that it may take some more time. We concur with Ark Invest’s CEO Cathie Wood. We’re likely to see a concentrated wave of spot Bitcoin ETF approvals early next year.
We believe that the SEC will use up the 45-day appeal time frame on the Grayscale decision. We do not believe that the SEC will appeal the ruling or re-reject the Grayscale application. Then, the court would decide what the next steps would be. We do not believe that the court will automatically approve the Grayscale conversion. Instead, Grayscale will likely have to reapply to convert its Bitcoin trust to an ETF. That would push a decision to early next year. That’s also the time for the final deadlines for the Blackrock, Fidelity, and other spot Bitcoin ETF applications. So, 2024 is already guaranteed to be a big year for crypto in the US.
Of course, a lot can happen in crypto in 6 months. So make sure to check in with Sophia to keep up-to-date on the latest crypto intelligence, powered by you and your data. Join Indicia Labs for free now!
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