The Bitcoin ecosystem tends to be a very sensitive space with decisions, news, regulations and announcements by big financial institutions, governments and business magnates making the marketplace susceptible to wild fluctuations in price.
A price boom that could storm the bitcoin market with a great impact on investors is a bitcoin spot exchange-traded fund (ETF) proposal. This ETF filing is quite promising considering its prospective influence being envisaged. As stakeholders and crypto enthusiasts are seeking a headway in getting approval from the U.S. Securities and Exchange Commission (SEC).
CEO of Grayscale Investments, Michael Sonnenshein, made a good move by holding a meeting with U.S. financial regulators, in a bid to seek approval for an overdue ETF request the company had with the SEC. The request aims at converting the Grayscale Bitcoin Trust (GBTC) into an ETF: A massive proposal that could unlock $8 billion worth of returns for investors, as reported by CNBC.
What Has Held Up Spot ETF Approval?
The bitcoin spot ETF is quite promising, but there is a level of uncertainty lurking around its approval. Apparently, the SEC gave a green light on the bitcoin futures ETF but has turned down bids for the spot ETF. This seems more like discrimination, but the SEC claims a heavy risk is associated with the spot ETF due to potential fraud and manipulation in the bitcoin market as well as volatility in the bitcoin price.
The commission has rejected a few bids because they say there hasn't been sufficient provision by Grayscale to address risks associated with a trading spot ETF. The premises for SEC concerns as reported by CoinDesk are:
- Wash trading
- Prominent individuals influencing bitcoin price
- Hacking and malicious control of trading platforms and the Bitcoin network
- Scam and fraud on bitcoin trading platforms and manipulation of the Tether (USDT) stablecoin.
- Trading based on nonpublic information, including false and misleading information
What Are The Estimated Grayscale Holdings?
The Grayscale Bitcoin Trust is known as the largest publicly traded bitcoin fund in the world. The pain point of the approval’s setback is that GBTC holds about 3.12% of the world's BTC.
The assets under management (AUM) of Grayscale are about $14 billion worth of BTC. The GBTC market price per share of $19.05 and holdings per share of $27.12 as of May 26, 2022, as stated by Grayscale. Hence, broader access to bitcoin is very much certain as GBTC has up to 700,000 investors. This is huge!
Taking a look into whether the SEC approves a spot ETF or not isn't the goal of this article, but let’s look into a probable way out, since pressure kept coming in from different ends to the SEC. It's been reported that there are over 4,000 petitions seeking the approval of the bitcoin spot ETF already, with many more to come as the July 6 deadline approaches.
Understanding A Bitcoin Spot ETF
A Bitcoin ETF enables retail and average investors to access or invest in bitcoin without directly possessing the asset.
In response to increasing demands for bitcoin by investors, bitcoin ETFs are designed to enable people to trade bitcoin like they would with stocks. Since bitcoin has become popular and the price is scaling over tens of thousands of dollars, affording one bitcoin isn’t easy for an average investor. Hence, a bitcoin funds-holding company would offer a bitcoin ETF on an exchange for investors to trade.
The first bitcoin futures ETF to ever be traded was the ProShares Bitcoin Strategy ETF (BITO). The SEC approved BITO on October 19, 2021, and it is traded on the Chicago Mercantile Exchange (CME). It took no time at all before bringing in massive investment into bitcoin, trading up to $1 billion in assets within a few days.
In trading a bitcoin futures ETF, a contract is offered to exchange bitcoin for a particular asset at a predetermined price and date agreed upon between two parties. So whether bitcoin increases or decreases in price, the trade will be carried out at the predetermined price during which the contract was made.
However, the difference between a futures ETF and a spot ETF is to offer an exchange at the actual price of bitcoin at the time of purchase/sale, by using a real-time price of bitcoin to trade and exchange contracts as opposed to that of a future price.
Headway On A Spot ETF
Recently, there has been some headway with a spot ETF approval because the SEC approved Teucrium's future ETF under similar conditions as the basis for Grayscale’s proposal:
“Most importantly, the SEC has paved the way to ultimately approve spot Bitcoin ETFs like GBTC. First we saw the approval of the first Bitcoin futures ETF regulated under the ‘40 Act. Second, we saw the first Bitcoin futures ETF regulated under the ‘34 Act and ‘33 Act. The next natural step is to see the first Bitcoin spot ETF regulated under the ‘34 Act and ‘33 Act, like GBTC. We believe that to do otherwise would be ‘arbitrary and capricious’ and “unfair discrimination” in violation of the APA and ‘34 Act.” — Grayscale
The SEC observed that the Teucrium ETF is integrated into the CME's protocol, hence if someone were to disrupt the Teucrium ETF, they would have to manipulate the CME's market in the process. Therefore, one approach that could convince the SEC and ease their concerns is for Grayscale to build the bitcoin spot ETF on a specialized blockchain protocol and ensure the protocols are encrypted such that it's only accessible by SEC authorized and approved brokers.
They would be able to regulate all forms of transactions that are carried out via this protocol. Once it's stored on a secured command within their jurisdiction, they would be able to prevent illegal transactions and reduce risks associated with the spot ETF by having strict security.
What happens once a spot ETF gets approved?
People want a spot ETF, in fact, a survey by Nasdaq shows that 72% of 500 financial advisers would be more comfortable with trading the crypto market if the spot ETF got approved.
A Grayscale Bitcoin Trust conversion into a New York Stock Exchange-traded fund (NYSE) would be a major milestone. It would be an open door for broader adoption of the digital asset because investors and many regular folks will have access to bitcoin in a similar pattern to trading stocks.
Bitcoin spot ETFs will tolerate the non-bitcoin savvy. That is, with a bitcoin ETF, anyone can gain access to bitcoin without having to learn how it works, understanding a cryptocurrency exchange, and without having to deal with the risks of possessing bitcoin directly. Also, the bitcoin market has the potential to become much bigger with spot ETF approval and sentiment could become quite bullish.
Recalling what happened when the ProShares ETF was approved, a whopping $550 million in investments was recorded on the first day of ETF trade. Moreover, bitcoin surged to a record-breaking price of $66,900.
This is a guest post by Joseph Ayomide. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.