By Amy Castor and David Gerard
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As predicted, the SEC today approved several spot bitcoin exchange-traded funds — Grayscale GBTC, Bitwise, Hashdex, BlackRock iShares, Valkyrie, ARK 21Shares, Invesco Galaxy, VanEck, WisdomTree, Fidelity Wise Origin, and Franklin. [SEC, PDF]
Trading is likely to start Thursday morning. [Investor’s Business Daily]
All of the approved applicants settled for a cash-create ETF, where shares can only be bought or redeemed in cash. They would have preferred in-kind, where you could deposit or withdraw bitcoins directly — but the SEC was quite clear that wasn’t going to go through.
Pumping bitcoin for fun and no profit
Yesterday, someone hacked the @SECgov Twitter to say the ETFs had been approved. [Twitter, archive]
This wasn’t a draft announcement tweet being sent early — a hacker apparently got control of the phone number linked to the account. The SEC repudiated the first tweet half an hour later. Twitter says the account didn’t have two-factor authorization enabled. [Twitter, archive; Twitter, archive]
The price of bitcoin went up $1,000 on the hacked tweet, and dropped $1,000 on the repudiation tweet.
Nobody can work out what this was meant to achieve. Matt Levine at Bloomberg thinks a troll doing it for the LOLs is the most plausible theory. [Bloomberg, archive]
On the actual announcement today, the bitcoin price did … nothing in particular? It’s bimbling around $45,000 to 46,000. This is even with another billion tethers being deployed yesterday. Perhaps number will go up when the ETFs go live. [Twitter, archive]
Commissioner reactions
The SEC really didn’t want to approve a spot bitcoin ETF. SEC Chair Gary Gensler issued a statement explaining that the SEC was pretty much forced to approve by the court decision in Grayscale. He stresses that this stuff is still shaky trash. [SEC]
Days before the approval, Gensler warned investors of the dangers of crypto. It’s volatile and the space is filled with “fraud — bogus coin offerings, Ponzi & pyramid schemes, & outright theft where a project promoter disappears w/ investors’ money.” [Twitter, Nitter]
Friend of crypto Hester Peirce did a victory lap. [SEC]
Caroline Crenshaw was appalled that this garbage got through and voted against it. [SEC]
Some sort of news for Grayscale
Grayscale finally got its wish, maybe. It’s been wanting to convert its GBTC fund to an ETF for years now.
GBTC had largely been created by in-kind deposits — whales would deposit bitcoins directly and get GBTC shares they could dump on retail investors. This was remarkably profitable in 2020 when GBTC had a price premium over the bitcoins in it — even though at that time you couldn’t get the bitcoins back out.
The Grayscale shuffle didn’t work so well from early 2021 when the price of GBTC failed to keep up with rises in the price of bitcoin. GBTC shares have been underwater since.
We expect that GBTC as an ETF will trade much closer to the price of bitcoin. So the retail investors who listened to Grayscale ads saying this was a great retirement investment — yes, really — will be a little less unhappy.
Grayscale took a swingeing management fee on GBTC — 2% annually. Now it has competition, so the fee on the GBTC ETF will be 1.5%. But the other ETFs are charging much lower fees, some less than a quarter of a percent. Bitwise, ARK, and Invesco are offering 0% fees for the first six months.
Retail GBTC holders aren’t likely to dump their shares immediately, though — because they would have to pay taxes on the capital gains from the BTC price rise in the meantime.
The other reason that retail is slow to dump is ’cos it’s work and stuff. And if you offer them hopium — number go up!! — they’ll do the hard work of fooling themselves.
Even if there’s an institutional GBTC dump, we expect the ETF conversion was the less-worse option for Digital Currency Group, Grayscale’s owner.
DCG needs money urgently. The alternative was dissolving the trust, and returning the $29 billion in BTC to the holders, or allowing redemptions. Either of these would have likely crashed the crypto market.
The currently bankrupt Genesis, also owned by DCG, has a large pile of GBTC and an urgent need for cash to fill the hole in their accounts left by Three Arrows Capital collapsing. DCG tried to cover the hole with a ”promissory note” for a billion dollars, from its left pocket to its right pocket.
The billion-dollar hole is real — and DCG may end up having to cover it.
So GBTC going up will get DCG some way out of its bind. This is also good news for Gemini Earn customers, whose money is stuck in that same billion-dolllar hole.
How good is this news for bitcoin?
The ETFs will be money losers. Most are storing the bitcoins at Coinbase Custody — but the fee war means they won’t even make enough to cover Coinbase’s storage fees — 0.1% monthly, which is 1.2% annually.
The companies can run the ETFs as loss leaders for a while, but eventually they’ll have to raise the fees or quit.
They may be hoping for a bitcoin in-kind ETF down the road — but we think they’ll be waiting a long time.
This is good news for Coinbase Custody and not such good news for the Coinbase exchange itself. The ETF fees are far less than Coinbase trading fees on bitcoin, which are between 0.5% and 1%. Anyone who just wanted to buy and hold bitcoin would do better buying ETF shares. But Coinbase has been openly stating they think crypto trading isn’t coming back.
We still don’t think the ETF will bring a lot of cash into crypto. Even the notoriously pro-crypto CNBC doesn’t think the ETFs will bring fresh actual dollars into crypto that wouldn’t have come in before. [CNBC]
We expect the number to go up because Tether printed 4 billion USDT in the past week. That should be enough for a few hundred dollars on a Bart.
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Amy and David
I’m a patron of both of you for the same reason I’m a fan of Judge Jed Rakoff: brilliant, shnunking-coffee-outa-my-nose one-liners such as …
“ The other reason that retail is slow to dump is ’cos it’s work and stuff. And if you offer them hopium — number go up!! — they’ll do the hard work of fooling themselves.”
(I guess that’s a four-liner, but you get my point)
Keep it up!
I woke up thinking about this at 4am this morning, and since something didn’t seem right, I pondered it for a couple hours until the answer came to me.
The ETF’s have a weak point that effectively make them a “bucket shop” of the type that ran in the early part of the 20th century. What’s a bucket shop? Well, you had to have a lot of money to trade stocks with a broker in the early 1900s. A lot of people were too poor to have access, so they went to bucket shops that functioned like legalized gambling. You would buy and sell by using the stock ticker kept by the bucket shop. If the ticker said AT&T was $100 and all you had was $10, you’d place an order with the bucket shop operator for 1/10th of a share at $100 and he’d record it on his ledger.
No shares traded hands, this was a totally fictitious market. And you were at the mercy of the operator of the market. If he was too busy with his legitimate business to let you cash out when AT&T went to $150 and then it fell to $50, too bad. They’d also tempt you with leverage, as little as 1% or 5%, so even a small move could wipe you out. Sound familiar.
Anyway, I was thinking would these ETFs want to actually hold “physical” bitcoin? Like, a customer deposits $40,000 for 100 shares of the ETF at $400 ($40,000=1 BTC at the spot price. Would the ETF then try to buy BTC to hedge if the price went up?
HELL NO! The market is so thin that by the time they actually got hold of a bitcoin through…who? All the operators within the market have been shut down. Maybe Coinbase? Anyway, by the time they were able to buy that BTC it might be $50,000 and they’ve lost $10,000. You can’t hedge this market.
So they’re gonna be a bucket shop that trades ETF shares that track the market, but don’t actually trade in the Bitcoin market at all. If they tried they’d be disabused of that notion right away. The weird irony is that they’re the “well regulated market”, while the actual BTC universe is still the same wretched hive of scum and villainy it always was. As opposed to the Bucket Shops of the 1920s vs the actual stock market.
So you have two parallel markets that have an incentive never to interact. What will happen? Nothing. Absolutely nothing. The ETF’s will probably hedge with each other’s shares.
But the actual bitcoin market will go on like it has. Dirty fiat will drain out of it and the operators will increasingly wash trade and hypothecate money via tether until there is a large enough dumpster market to either crash BTC or freeze it so it never trades again. Or a third possibility, that the original bitcoin market becomes 100% fictitious as well, with no money going in or out. And another fictitious ETF market revolving around it.
Thank you for your support, Jim! That four liner came directly from David.
ed: should be dumpster fire not dumpster market
oh i dunno, i like “dumpster market”
Bitcoin ETFs are the last chance for “whales” to find the ultimate bagholder and cash out. But if they try to sell all at once, the price will crash. Who blinks first?