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After court victory, what’s next for Grayscale’s Bitcoin ETF?

After court victory, what’s next for Grayscale’s Bitcoin ETF?
Grayscale CEO Michael Sonnenshein has called his company's court victory over its spot Bitcoin ETF application a 'huge win' for crypto and investors. Credit: Andrés Núñez/DL News.
  • The Securities and Exchange Commission could approve spot Bitcoin ETF applications any day now.
  • DL News markets correspondent Adam Morgan McCarthy weighs in for what that means for markets.

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GM, Joanna here.

There’s a good chance that the Securities and Exchange Commission may approve a spot Bitcoin exchange-traded fund soon, after losing a court case against Grayscale.

That’s a big deal — issuers believe an ETF would make owning Bitcoin more attractive to a multi-billion-dollar market.

I roped in DL News markets correspondent Adam Morgan McCarthy to set the scene for the coming weeks.

But first, to recap

The Grayscale Bitcoin Trust, GBTC, is a closed-end fund and the asset manager’s flagship product with $16 billion in assets under management.

The NYSE Arca exchange filed in October 2021 to convert GBTC to an exchange-traded fund so it could be more widely traded.

The SEC denied the application, as it has denied all applications to provide spot crypto ETFs.

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It has, however, approved six Bitcoin futures funds that trade on national stock exchanges.

The SEC reasons that futures products are tailored for sophisticated institutional investors, and come with built-in safeguards against market manipulation.

The regulator is not convinced of those safeguards when it comes to the spot markets.

Grayscale, however, cried foul. The firm sued the regulator in mid-2022, arguing that the SEC’s stance was unfair and the rejection ought to be overturned.

In June 2023, with the Grayscale lawsuit in full swing, BlackRock filed an application to offer its own Bitcoin spot ETF.

A flurry of copycat filings followed from major players including Fidelity, WisdomTree, and ARK Invest.

In August, an appeals court sided with Grayscale. The SEC chose not to appeal the ruling.

The regulator is now in a tricky position. Clearly, it doesn’t want to approve spot Bitcoin ETFs.

But a federal court has ruled that it can’t deny Grayscale’s application based on its market manipulation concerns, so at the very least the regulator will have to reconsider the application.

I asked Adam:

The SEC chose not to appeal the court ruling. So what now?

AMM: Things will start heating up now. Grayscale will think they are owed a new decision, and will want to start pushing to get their approval. They’ve told me they are operationally ready to switch GBTC into a Bitcoin ETF.

What happens if the SEC changes its stance, will GBTC be first to market?

If the SEC is forced to approve Grayscale, then they have to approve everyone else.

Crucially, they don’t want a repeat of what happened with futures ETFs. ProShares launched its fund BITO ahead of everyone else in October 2021, and it’s basically the only game in town now, with 97% market share.

Do ordinary investors want a spot Bitcoin ETF?

Crypto folks definitely think so, and some mainstream analysts too. Bloomberg Intelligence’s Eric Balchunas, for instance, reckons the potential market for Bitcoin ETFs is around $150 billion. His argument is simple — financial advisors manage about $30 trillion in the US, so it’s about 0.5% of that.

Will this have a big impact on markets?

Short run, it’s positive for markets. Medium term mixed. Long term, it’s a great tool for solidifying Bitcoin as an asset class investors can safely and seamlessly invest in.

Crucially, in the short run, Bitcoin ETFs aren’t priced in yet, and Monday’s false start proved that. Bitcoin jumped to $30,000 as traders thought a spot ETF had finally been approved. There’s clearly room to move higher on approval, but by the time launch comes, most of that will be priced in.

When these funds launch there will be a lot of buying power. ProShares’ futures ETF was the fastest fund to reach $1 billion in AUM. It took just two days, a record it still holds. Spot funds could certainly challenge that, especially with improved sentiment around the Bitcoin halving in April.

A lot of money could flow out of futures funds and into spot, but if GBTC is converted there are a lot of investors desperate to redeem their shares — which would mean some selling power too.

Do you have an opinion or tip on Bitcoin ETFs or crypto regulation in general? To contact the authors, email joanna@dlnews.com or adam@dlnews.com.