SEC Sends Negative-ish Bitcoin ETF Signal that May Be Positive for Grayscale
The US Securities and Exchange Commission (SEC) is now not-unexpectedly sending somewhat negative bitcoin (BTC) (and ethereum (ETH)) exchange-traded fund (ETF) signals - that might be a good sign for Grayscale Bitcoin Trust (GBTC).
As is practically notorious by now, an American ETF is a rather elusive creature, not because there's nobody to launch it - on the contrary, many have tried over the past eight years - but because the country's regulator keeps rejecting these filings left and right.
Per the SEC's statement, BTC, including gaining exposure through the bitcoin futures market, is a highly speculative investment, that comes with volatility, lack of regulation, and fraud/manipulation potential.
Since the Division of Investment Management (IM)'s positions issued in a 2017 letter, the bitcoin futures market has developed, they noted, seeing increased trading volumes and open-interest positions; it has consistently produced a reportable price for BTC futures, and has not presented the custody challenges associated with some crypto-based investing because the futures are cash-settled.
The IM with the Division of Economic and Risk Analysis and Division of Examinations "will closely monitor the impact of mutual funds’ investments in Bitcoin futures on investor protection, capital formation, and the fairness and efficiency of markets," they said, and this includes:
"Consider[ing] whether, in light of the experience of mutual funds investing in the bitcoin futures market, the bitcoin futures market could accommodate ETFs, which, unlike mutual funds, cannot prevent additional investor assets from coming into the ETF if the ETF becomes too large or dominant in the market, or if the liquidity in the market starts to wane."
Among open-end funds, investment in the bitcoin futures market should be pursued only by mutual funds with "appropriate strategies" that support this type of investment and full disclosure of material risks, the staff said. But closed-end funds don't provide for daily redemption of their shares and don't present the same types of liquidity challenges as open-end funds, they added, so any closed-end fund that seeks to invest in the bitcoin futures market is encouraged to consult with the IM prior to filing a registration statement "about the fund’s proposed investment, anticipated compliance with the Investment Company Act and its rules, and how the fund would provide for appropriate investor protection."
These comments come after Gary Gensler took over as the SEC chairman, with his early comments throwing cold water on hopes that the Commission might approve a BTC ETF this year.
Bloomberg Intelligence ETF Analyst Eric Balchunas argued that with this note the SEC is effectively telling retail investors to "keep using GBTC," while a BTC ETF wouldn't even be among the top 50 most volatile ETFs in the country.
Before the most recent warning by the SEC, Balchunas said earlier this week that he was more optimistic than ever that 2021 could be the US BTC ETF year, for four reasons: 1) greater institutional adoption; 2) intense growth of ‘default’ crypto products like GBTC "which are not ideal for retail investors and the SEC knows this", 3) Canada's ETFs, which have worked fine and seen a lot of action; 4) Gensler coming in as chair.
"I do think time is now of the essence on this issue due to the increased flows going to these ‘default’ ETFs like GBTC and stocks that put Bitcoin on-balance sheet," he said. The more the SEC waits "the more it will get messy when they approve given all the cash in these other vehicles. Also the longer they delay the more they will effectively play kingmaker as whoever is out first is instantly wealthy. [...] Whoever gets out first is set for life."
As reported in April, major US-based crypto investments company Grayscale Investments said that they were "100% committed" to converting their Grayscale Bitcoin Trust into an ETF when permissible. The company said it is confident in its current positioning and engagement with the SEC.
GBTC, which is currently closed for investments, has around USD 37bn in assets under management.
Grayscale's trusts are structured to hold the underlying crypto, while the value of each share is dependent on the amount of crypto under management. They also provide a familiar structure for accounting and taxation. However, there is no way to redeem the underlying crypto.
The current market price of a GBTC share is less than USD 45, or 14% less than than the amount of BTC held per share.
In the end of last year and the begining of this year, high demand from institutional investors led to the high premium (+40%) on Grayscale’s BTC trust. However, it went negative in March and is now more than -14%, compared with 19% yesterday, per Bybt.com data.
Meanwhile, In March, the Chicago Board Options Exchange (Cboe) filed an application to list a BTC ETF from the New York-based investment management firm VanEck and its Bitcoin Trust. And in May, Cboe filed for a Fidelity BTC ETF. In February, NYDIG, a Stone Ridge-run subsidiary firm that provides crypto services to institutional investors, also said it aimed to launch a BTC ETF. Meanwhile, VanEck also aims to launch the first US exchange-traded fund tracking ETH.
Many believe that approval of a Bitcoin ETF in the United States would be a watershed moment for BTC adoption. Multiple surveys have indicated that financial advisors in the US would be keen to put their clients' money into BTC ETFs.
"If Gensler isn’t yet fully comfortable with crypto exchanges, it’s highly unlikely he would bless a Bitcoin ETF," Nate Geraci, president of advisory firm ETF Store, told Bloomberg.
Also, Ben Johnson, Morningstar Inc.’s global director of ETF research, added that "given that the SEC has bigger fish to fry, and taking Gensler’s recent remarks regarding crypto ETFs into account, I think the odds we’ll see a Bitcoin ETF approved in 2021 are very low."
Meanwhile, as the world waits to see if the very first American crypto ETF would be approved, these ETFs have practically become commonplace in Canada and Europe.
At 10:49 UTC, BTC is trading at USD 57,015, having appreciated 2.5% in a day and 7% in a week.