Bitcoin Spot ETF Update

Franklin Templeton has joined the likes of Fidelity, Invesco and Blackrock in the race to get a Bitcoin spot ETF approved. The USD$1.5T asset management giant recently filed with the US Securities and Exchange Commission (“SEC”) to list a spot ETF with custody services provided by Coinbase (the US’ largest crypto exchange) to trade on the CBOE BZX Exchange.

Blackrock was the first of the asset management titans to file back in June, along with a raft of other traditional and crypto-focussed issuers. The SEC has deferred judgment until October at least, extending the period for public feedback. Under SEC rules, it has 240 days from the date that it starts to review an application to either approve or deny the application, leaving the swathe of issuers on tenterhooks.

In what might be considered a supporting gesture, the D.C. Circuit Court of Appeals ruled (in the SEC v Grayscale legal stoush) that some of the SEC's arguments in rejecting Bitcoin ETF applications seemed “arbitrary and capricious” after Grayscale argued that the SEC didn't have a firm basis to reject its bid to convert the Grayscale Bitcoin Trust into a spot Bitcoin ETF. While this Grayscale ruling doesn’t directly affect the SEC’s adjudication of other issuers’ attempts to get their own spot Bitcoin ETFs approved, it does point to a more positive environment for the crypto king.

The court noted the SEC’s resistance to approving a Bitcoin spot ETF when it has already approved Bitcoin futures ETFs, ordering the regulator to revisit Grayscale’s application to convert from a Trust structure to a spot ETF. This is no guarantee of a positive outcome, but places pressure on the SEC to find other justifiable causes to deny Grayscale’s application at least.

Additional pressure bore down on SEC Chair Gary Gensler in the form of a recent Senate Committee review, prompting one Republican senator to ask Gensler what the SEC would need to see in a filing for a Bitcoin spot ETF in order to approve it. Gensler fought back saying “It’s a field which is rife with fraud, abuse, and misconduct”, clearly showing the colour of the SEC’s regulatory stripes. But with nearly a dozen or so Bitcoin spot ETF applications including from Wall Street giants, the odds for an approval are shortening.

Given Bitcoin’s reputation as digital gold, it’s interesting to compare the market’s response following the approval of the first gold ETF in the US back in 2004. Gold rallied some 350 per cent over the next seven years from around USD$400/oz to nearly USD$1800/oz before peaking. It’s possible that the emergence of a publicly traded gold ETF played some part in the price action.

A spot ETF would provide similar benefits to Bitcoin investors that gold ETFs did for gold investors, including:

• Increased awareness amongst investors that would otherwise not be Bitcoin “hodlers”, spurring demand.
• Dispensed with the challenges and risks of self-custody.
• Easy on-ramp for all investor classes… institutional, corporate, family office, retail.
• Highly liquid on readily accessible, regulated exchanges.

With Bitcoin’s fixed and predictable supply schedule, increased demand means that price must go up if all that demand is to be satisfied. Asset managers worth some AUD$28T in funds under management have applied to the SEC for Bitcoin spot ETFs over the last few months. Bitcoin’s current market cap is around AUD$800B. Only a small allocation by those issuers (assuming their applications are successful) is needed to materially move the price.

The current raft of spot ETF applications also comes amidst the point in the Bitcoin halving cycle leading into the next halving event in May 2024. If history rhymes, then the Bitcoin price will likely see a significant price rise into and out of the halving, culminating in a blow-off top sometime around 12 to 18 months or so from the halving. Other macro factors such as interest rate reductions and/or a return to quantitative easing would likely fire a rocket under the Bitcoin price if occurring simultaneously with the arrival of one or more Bitcoin spot ETFs.

Investors should watch the SEC moves closely through October, and some may consider whether or not to bet on a positive outcome by front-running the approvals. Of course, punting on events which may or may not occur is a risky business, and “buy the rumour, sell the news” price action is magnified in crypto.

Nevertheless, approval of one or more Bitcoin spot ETFs in the US would likely be a positive driver for the Bitcoin price, and lead to a wave of new money entering the asset. Investors with the appropriate risk appetite may weigh the odds favourably.