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What will the approval of Bitcoin Spot ETF bring?

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If the Bitcoin spot ETF is approved, it means that the huge traditional wealth world recognizes Bitcoin and even the Web3.0 world.

Original Title: Guosheng Blockchain Depth | What will Bitcoin Spot ETF bring?

Original Author: Song Jiaji, Ren Heyi, Jishi Communication

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Bitcoin spot ETF, with Bitcoin spot as the underlying asset, is a compliant investment tool for traditional capital market investors to hold Bitcoin. Whether spot ETF can be approved in the United States is the most concerned focus of the market. Bitcoin ETF allows investors to gain exposure to Bitcoin and related assets without researching, purchasing, or storing actual cryptocurrencies (or derivative assets), making it very suitable for a wider range of capital markets and investors in terms of compliance, cost, liquidity, and management costs. Therefore, the market has been eagerly awaiting the approval of Bitcoin spot ETF by the US SEC.

Intense price fluctuations are one of the reasons for SEC's caution, and the final deadline for the latest batch of spot ETF applications is in March next year. In the past, Bitcoin spot ETFs submitted to the US capital market have been rejected by the SEC multiple times, mainly due to insufficient protection for Bitcoin market investors. On October 16th, industry media Cointelegraph posted false news on X (formerly Twitter), causing short-term intense fluctuations in Bitcoin prices, resulting in the liquidation of nearly $100 million worth of cryptocurrency positions in less than an hour. Similar situations are not uncommon in the cryptocurrency market, so the SEC's concerns are not entirely unfounded. The US SEC has successively postponed the decision on the Bitcoin spot ETF applications of WisdomTree, Invesco Galaxy, Valkyrie, Fidelity, VanEck, Bitwise, and BlackRock. Currently, the latest review time for the main 11 Bitcoin spot ETF applications will be concentrated in mid-October, and the final deadline is in March 2024. It can be said that the application of Bitcoin spot ETFs in the US market has entered a peak period, and the Bitcoin halving is expected to occur in late April 2024. Therefore, whether this spot EFT will be approved has become the most concerned focus of the industry.

Reference to the launch of gold ETF pushing up the gold price, Bitcoin spot ETF is worth looking forward to. The launch of gold ETF has a positive impact on the gold price, which has positive implications for Bitcoin spot ETF. It should be noted that the world's recognition of gold does not come from spot ETFs, and if Bitcoin spot ETF is approved, it means that the vast traditional wealth world's recognition of Bitcoin, and even the Web3.0 world, will further accelerate the integration of the two. This is a process from 0 to 1, and the marginal change far exceeds the approval of gold ETF. Of course, on another level, the total number of bitcoins is fixed at 21 million, while gold still has continuous new output. The approval of Bitcoin spot ETF in the United States is expected to bring incremental funds. The conclusion drawn by Galaxy Digital is that Bitcoin is expected to rise by 74% in the first year of the approval of spot ETF (starting from September 30, 2023, with the Bitcoin price of $26,920); in the longer term, the potential size of funds investing in Bitcoin products is between $125 billion and $450 billion.

Information, fundamentals, and capital are expected to "resonate" next year. Looking back at the three rounds of bull and bear market since the birth of Bitcoin, the halving of Bitcoin always starts in the starting area of the upward trend, which is the "experienced good news" at the information level. Each round of market is supported by a round of industry innovation application as the fundamental support, and of course, the injection of incremental capital is the basis for the start of the upward trend. From the current situation: Information: It is expected to usher in the fourth halving at the end of April 2024; Fundamentals: RWA/intent and other innovative drives are giving birth to new industry applications, accumulating new application innovations; Capital: If Bitcoin spot ETF is approved, it will bring huge incremental capital.

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1. Core Viewpoint

Bitcoin spot ETF is a compliant investment tool for traditional capital market investors to hold Bitcoin as the underlying asset. In the past decade, Bitcoin spot ETF has been repeatedly rejected in the US market, but with the growth of the cryptocurrency market and the increasing recognition of cryptocurrency assets by traditional capital markets. Although there are Bitcoin spot ETFs in other countries' markets and some Bitcoin futures ETF products in the US market, whether spot ETFs can be approved in the US is still the most concerned focus of the market.

Looking back at the three rounds of bull and bear market transitions since the birth of Bitcoin, the halving of Bitcoin always occurs at the starting point of the upward trend, which is an "experiential benefit" at the information level. Each round of market trends is supported by innovative industry applications as the fundamental basis, and of course, the injection of incremental funds is the foundation for the start of the upward trend. From the current situation, it is expected that the fourth halving will occur at the end of April 2024 at the information level; new industry applications driven by innovative factors such as RWA/intent are emerging, accumulating new application innovations; in terms of funding, if Bitcoin spot ETF is approved, it will bring a huge amount of incremental funds.

2. Bitcoin spot ETF application enters peak period

2.1 Why is Bitcoin Spot ETF important?

Bitcoin spot ETF is a compliant investment tool for traditional capital market investors to hold Bitcoin as an underlying asset. Bitcoin spot ETF is an exchange-traded fund based on Bitcoin as the underlying asset and is an index fund. Bitcoin ETF allows investors to gain exposure to Bitcoin and related assets without the need to research, purchase, or store actual cryptocurrencies (or derivative assets), making it suitable for a wider range of capital markets and investors in terms of compliance, cost, liquidity, and management costs.

Compared to Bitcoin spot ETFs, the underlying assets of Bitcoin futures ETFs are Bitcoin futures contracts. The core difference between Bitcoin futures ETFs and spot ETFs lies in their underlying assets. From the perspective of price fluctuations, spot ETFs and futures ETFs are very similar, both aiming to accurately track the price of BTC and help investors gain BTC exposure. Typically, futures ETFs have higher fees because they also involve futures contract operations, which are more complex. Therefore, the market has been eagerly awaiting the approval of Bitcoin spot ETFs by the US SEC.

According to Coinglass data, as of November 5th, the Bitcoin balance of the top 20 mainstream cryptocurrency exchange wallets was 1.835 million, and 40 listed companies held approximately 208,000 Bitcoins. According to Galaxy Digital's estimation, as of September 30th, the total amount of Bitcoin held by Bitcoin investment products (including ETPs and closed-end funds) was 842,000. If calculated based on the Bitcoin price of $35,200 on Coinbase (COIN) exchange platform on November 5th, the total value of these Bitcoins is approximately $29.6 billion.

Existing Bitcoin investment products suffer from high fees, low liquidity, and tracking errors. More importantly, these products also face compliance and convenience issues for traditional investors with larger capital. Managing Bitcoin personally involves administrative burdens such as wallet/private key management, self-custody, and tax reporting. Therefore, a Bitcoin spot ETF would be a more ideal investment tool.

2.2 The Bumpy Road of Bitcoin ETF Applications

The BTC spot ETF can be traced back to 2013 when the Winklevoss twins (Cameron and Tyler) attempted to launch a BTC spot ETF. They applied for it several times over the years, but were unsuccessful, and the plan is still on hold. At that time, in 2013, Bitcoin reached the peak of its first bull market, with a price of $1,163. As of November 5th of this year, the price of Bitcoin has exceeded $35,000. The attraction of the constantly rising price is the most direct factor that the capital market pays attention to the Bitcoin spot ETF. Therefore, many institutions have tried to launch a Bitcoin spot ETF in the following years.

In the past, the Bitcoin spot ETFs submitted by the US capital market have been rejected by the SEC multiple times, mainly due to insufficient protection for Bitcoin market investors. On October 16th local time, industry media Cointelegraph posted a message on X (formerly Twitter) stating that the Bitcoin spot ETF product iShares applied for by BlackRock has been approved by the SEC. This news stimulated Bitcoin to soar from $27,900 to $30,000. After it was confirmed to be fake news, it fell back to around $27,900, causing nearly $100 million worth of cryptocurrency positions to be liquidated in less than an hour. Similar situations are not uncommon in the cryptocurrency market, so the SEC's concerns are not entirely unfounded.

The US Securities and Exchange Commission (SEC) has postponed its decision on WisdomTree, Invesco Galaxy, Valkyrie, Fidelity, VanEck, Bitwise, and BlackRock's Bitcoin spot ETF applications. The latest review time for the 11 major Bitcoin spot ETF applications will be concentrated in mid-October, with a final deadline of March 2024. It can be said that the application of Bitcoin spot ETFs in the US market has entered a peak period, and the approval of this spot EFT has become the most concerned focus of the industry, especially with the Bitcoin halving expected to take place at the end of April 2024. Compared with ten years ago, this batch of Bitcoin spot ETF application institutions has included traditional mainstream financial investment institutions such as BlackRock. In other words, the entry of traditional financial institutions into Bitcoin spot ETFs has become a trend. If approved, the funds entering cryptocurrency investment are expected to be mainly traditional financial capital, which is different from the past.

2.3 Gray wins SEC lawsuit brings confidence to the market

Before the approval of Bitcoin spot ETF, Grayscale's Bitcoin and other cryptocurrency trusts are alternative products for traditional financial market investors to invest in cryptocurrency assets. As of November 4th, Grayscale has launched a variety of cryptocurrency trusts, including BTC, ETH, and cryptocurrency market index.

Products like GTBC can be purchased and traded directly on the secondary market by investors, but as a closed-end fund, there are currently no clear redemption rules. For a long period of time, GTBC has maintained a negative premium. In order to solve the liquidity problem, Grayscale attempted to convert GBTC to an ETF. On June 29, 2022, the SEC rejected Grayscale's application to convert its Bitcoin Trust (GTBC, Grayscale Bitcoin Trust) to an ETF. After Grayscale appealed, on October 23, 2023, the Washington DC Circuit Court of Appeals made a final ruling ordering the SEC to cancel its decision to reject Grayscale's application for a Bitcoin spot ETF, stating that the SEC's decision to reject Grayscale's attempt to convert its $17 billion Grayscale Bitcoin Trust fund (GBTC) to a spot ETF was "arbitrary and capricious." This means that the SEC must re-examine Grayscale's application to convert GBTC to a spot ETF, and while there is still a possibility of rejection, the SEC must provide new and convincing reasons. To demonstrate the importance of ETFs to Grayscale, Grayscale has created a litigation page on its official website, displaying its lawsuit with the SEC in a timeline format, which also reflects Grayscale's persistence and determination for a Bitcoin spot ETF.

Although Grayscale's victory in the lawsuit does not mean that GBTC will immediately convert to an ETF, the market believes that a Bitcoin spot ETF is getting closer. This victory has injected a lot of confidence into the market. As a result of this series of news, as of November 4th, the Grayscale Bitcoin Trust's negative premium rate continued to narrow to 12.77%.

The victory of Grayscale indicates that the launch of Bitcoin spot ETF does not have any "hard injury" at the legal level, which has brought great confidence to the market. Therefore, the application for Bitcoin spot ETF has entered a peak period, and the market's expectations for this are also showing considerable enthusiasm.

3. What is the current Bitcoin ETF market like?

3.1 Bitcoin Spot ETF Situation

Although the application for a Bitcoin spot ETF in the US market has not been smooth, several other capital markets in other countries have actually approved Bitcoin spot ETFs ahead of the US. The top-ranked Bitcoin spot ETFs include:

·Funding: If the Bitcoin spot ETF is approved, it will bring a huge increase in funding.

Therefore, we believe that from the perspective of the three-party driving model, if the Bitcoin spot ETF is approved, it is expected to bring positive factors to the market.