{"id":26219,"date":"2023-12-22T21:57:05","date_gmt":"2023-12-22T21:57:05","guid":{"rendered":"https:\/\/davidgerard.co.uk\/blockchain\/?p=26219"},"modified":"2023-12-23T01:26:25","modified_gmt":"2023-12-23T01:26:25","slug":"bitcoin-etfs-coming-soon-but-in-cash-only","status":"publish","type":"post","link":"https:\/\/davidgerard.co.uk\/blockchain\/2023\/12\/22\/bitcoin-etfs-coming-soon-but-in-cash-only\/","title":{"rendered":"Bitcoin ETFs \u2014 coming soon! But in cash only"},"content":{"rendered":"<p><em>By <strong>Amy Castor<\/strong> and <strong>David Gerard<\/strong><\/em><\/p>\n<ul>\n<li>Help our work: if you liked this post, please <strong><em>tell just one other person<\/em><\/strong>. It really helps!<\/li>\n<li>You can also send us money! Here\u2019s<a href=\"https:\/\/www.patreon.com\/amycastor\"> Amy\u2019s<\/a> Patreon and here\u2019s <a href=\"https:\/\/www.patreon.com\/davidgerard\/\">David\u2019s<\/a>. For casual tips, here\u2019s<a href=\"http:\/\/ko-fi.com\/amycastor\"> Amy\u2019s<\/a> Ko-Fi and here\u2019s<a href=\"https:\/\/ko-fi.com\/A1529D5\"> David\u2019s<\/a>.<\/li>\n<\/ul>\n<blockquote><p>\u201cIt\u2019s my turn, Sam.\u201d<\/p>\n<p style=\"text-align: right;\">\u2014 <a href=\"https:\/\/twitter.com\/BarrySilbert\/status\/1463333799912255489\">Barry Silbert<\/a>, Digital Currency Group, to Sam Bankman-Fried, November 23, 2021<\/p>\n<\/blockquote>\n<p>The SEC is expected to rule on a spot bitcoin ETF by January 10 \u2014 the deadline to decide on the application from ARK 21Shares.<\/p>\n<p>The SEC doesn\u2019t like to be a kingmaker \u2014 so crypto is hoping the commission will approve a slew of bitcoin ETFs in one go.<\/p>\n<p>The big institutional money will pour in and number will go up! Apparently. We\u2019re not so sure.<\/p>\n<p>&nbsp;<\/p>\n<p><a href=\"https:\/\/davidgerard.co.uk\/blockchain\/2023\/12\/22\/bitcoin-etfs-coming-soon-but-in-cash-only\/gensler-number-go-up\/\" rel=\"attachment wp-att-26221\"><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter size-full wp-image-26221\" src=\"https:\/\/davidgerard.co.uk\/blockchain\/wp-content\/uploads\/2023\/12\/gensler-number-go-up.jpg\" alt=\"\" width=\"510\" height=\"315\" srcset=\"https:\/\/davidgerard.co.uk\/blockchain\/wp-content\/uploads\/2023\/12\/gensler-number-go-up.jpg 680w, https:\/\/davidgerard.co.uk\/blockchain\/wp-content\/uploads\/2023\/12\/gensler-number-go-up-300x185.jpg 300w, https:\/\/davidgerard.co.uk\/blockchain\/wp-content\/uploads\/2023\/12\/gensler-number-go-up-348x215.jpg 348w\" sizes=\"auto, (max-width: 510px) 100vw, 510px\" \/><\/a><\/p>\n<p style=\"text-align: center;\"><small><i>SEC chair Gary Gensler with Zeke Faux\u2019s<\/i> Number Go Up<\/small><\/p>\n<p>&nbsp;<\/p>\n<h3>The long, sad story of bitcoin ETFs<\/h3>\n<p>An exchange-traded fund, or ETF, is a security that tracks a basket of underlying assets \u2014 commodities,\u00a0 securities, or a mix of both. ETFs trade on securities exchanges like regular stocks. Ordinary mom-and-pop investors can buy them.<\/p>\n<p>Coiners have long dreamed of bitcoin having a spot ETF. There\u2019s a myth that the moment there\u2019s a bitcoin ETF, the big institutional bucks will flood in!<\/p>\n<p>Cameron and Tyler Winklevoss submitted the first proposal for a bitcoin spot ETF \u2014 the Winklevoss Bitcoin Trust \u2014\u00a0in July 2013. Bitcoin was trading at $90 at the time. The SEC shot them down twice, once in 2017 and <a href=\"https:\/\/davidgerard.co.uk\/blockchain\/2018\/07\/27\/news-intelligence-squared-podcast-sec-rejects-bitcoin-etf-emusic-are-broke-ethereum-ponzis-incompetent-as-well-as-bad-brock-pierce-on-australian-tv\/\">again in 2018.\u00a0<\/a><\/p>\n<p>On August 22, 2018, the SEC rejected nine bitcoin ETF applications in a single day. They were concerned about the \u201cpotential for fraudulent or manipulative acts and practices in this market\u201d \u2014 particularly <a href=\"https:\/\/davidgerard.co.uk\/blockchain\/2023\/12\/06\/bitcoin-goes-up-can-5-billion-unbacked-tethers-kickstart-a-fresh-crypto-bubble\/\">via Tether<\/a>.<\/p>\n<p>But then in October 2021, the SEC approved a bitcoin futures ETF, based on the Chicago Mercantile Exchange bitcoin futures. We were surprised they let this one through, as the bitcoin prices that CME was using were just as manipulated as any others. We suspect the SEC couldn\u2019t really refuse the ETF \u2014 CME was already highly regulated, and its bitcoin futures product was fine with the CFTC.<\/p>\n<p>Grayscale\u2019s GBTC, which debuted in September 2013, was for many years the closest thing to a spot bitcoin ETF \u2014 only it wasn\u2019t one. Unlike an ETF, GBTC is a closed-end fund. Once bitcoins went into the trust, there was no way to get them out.<\/p>\n<p>Since Grayscale halted GBTC issuance in March 2021, they could have switched to redemption mode \u2014 but they chose not to. With GBTC\u2019s ridiculously high 2% management fee, why would they?<\/p>\n<p>Because it\u2019s a roach motel for bitcoins, GBTC has never traded in line with the actual price of bitcoin. GBTC traded higher than BTC in 2020, because of <a href=\"https:\/\/amycastor.com\/2022\/04\/19\/welcome-to-grayscales-hotel-california\/\">shenanigans<\/a> \u2014 but current holders are underwater. As of September 30, 2023, there are 622,657 BTC stuck in the trust \u2014 and a lot of angry GBTC holders.<\/p>\n<p>Grayscale applied to convert GBTC into an ordinary two-way ETF in October 2021, in the hope of bringing the price of GBTC back up. The SEC rejected their application in June 2022. Grayscale appealed, on the basis that the CME bitcoin futures ETF was allowed \u2014 if their fraud prevention arrangements were OK, the same should hold for Grayscale\u2019s proposal.<\/p>\n<p>In August 2023, the appeals court agreed that the SEC had unfairly blocked the Grayscale bitcoin ETF. The panel called the order \u201carbitrary and capricious,\u201d because the SEC never explained why it approved similar products. The SEC would need to further review Grayscale\u2019s bid for an ETF. [<a href=\"https:\/\/www.cadc.uscourts.gov\/internet\/opinions.nsf\/32C91E3A96E9442285258A1A004FD576\/$file\/22-1142-2014527.pdf\"><i>Opinion<\/i><\/a><i>, PDF<\/i>]<\/p>\n<p>The SEC decided not to appeal, and Grayscale issued a fresh filing in the form of an S-3, a shortened version of the typical S-1 filing used to offer new shares. [<a href=\"https:\/\/www.sec.gov\/Archives\/edgar\/data\/1588489\/000119312523258940\/d569843ds3.htm\"><i>Grayscale S-3<\/i><\/a>]<\/p>\n<p>The SEC still has a low opinion of crypto. SEC chair Gary Gensler told CNBC that crypto was saturated with fraud \u2014 but on ETFs, he said, \u201cWe\u2019re taking a new look at this based upon those court rulings.\u201d [<a href=\"https:\/\/www.cnbc.com\/2023\/12\/14\/cnbc-exclusive-cnbc-transcript-sec-chair-gary-gensler-speaks-with-cnbcs-money-movers-today.html\"><i>CNBC<\/i><\/a>]<\/p>\n<h3>This year\u2019s model: cash only<\/h3>\n<p>About a dozen companies have recently submitted filings for a bitcoin ETF. In addition to Ark 21Shares, there\u2019s Grayscale, BlackRock, Bitwise, VanEck, Wisdomtree, Invesco and Galaxy, Fidelity, Valkyrie, Global X, Hashdex, and Franklin.<\/p>\n<p>But here\u2019s the catch: if the SEC is forced to approve a spot bitcoin ETF, it wants it to use in-cash creation. When new ETF shares are created or redeemed, that process would take place only in cash \u2014 and not in bitcoins. Only the company issuing the shares could touch a bitcoin.<\/p>\n<p>Most ETFs of stocks allow in-kind redemption, where you put in or take out whatever asset the ETF is tracking directly. But the SEC doesn\u2019t want broker-dealers to handle cryptos directly. So bitcoin ETFs will not allow in-kind creation or redemption \u2014 only cash will go in or out, and absolutely not actual bitcoins.<\/p>\n<p>Valkyrie is the latest to agree to in-cash creation, following BlackRock, Fidelity Investments, Ark Invest, and Invesco. Grayscale doesn\u2019t seem to have come to the party yet.<\/p>\n<h3>How in-cash creation works<\/h3>\n<p>Authorized participants (APs) \u2014 typically large financial institutions \u2014 create or redeem shares of an ETF based on demand from retail investors in the secondary market.<\/p>\n<p>Like other single-commodity ETFs, such as gold, silver, or a currency, a bitcoin ETF would be structured as a grantor trust. The physical asset is stored in a vault \u2014 or, in the case of bitcoin, at a custodian. The trust issues shares representing beneficial interests in its net assets. Investors typically receive grantor trust letters with their tax information instead of it being included on their 1099.<\/p>\n<p>When ETF shares are created or redeemed, the AP is the only one who can create and redeem shares directly with the issuer. APs make their money selling to retail investors \u2014 who buy through their brokerage on the secondary market.<\/p>\n<p>In-kind ETFs are known for their tax efficiency for the APs. When an AP redeems shares, the ETF issuer simply pays the AP in assets from the underlying holdings of the ETF itself. Since the AP isn\u2019t selling the underlying assets, there are no capital gains. They don\u2019t have to worry about gains until they sell their actual shares.<\/p>\n<p>A cash-create ETF erases most of that tax advantage. Creation or redemption in kind doesn\u2019t create a taxable event, but doing it via cash does. So cash-based ETFs are less efficient for the APs. The ETF is also more complicated for the issuer to manage. [<a href=\"https:\/\/www.bloomberg.com\/news\/newsletters\/2023-12-14\/bitcoin-btc-etf-redemptions-pose-a-taxing-challenge-to-issuers\"><i>Bloomberg<\/i><\/a><i>, <\/i><a href=\"https:\/\/archive.ph\/acY5L\"><i>archive<\/i><\/a>]<\/p>\n<h3>So much for that GBTC premium<\/h3>\n<p>If the SEC does approve a cash-create ETF in 2024, we should expect the agency to provide reasoning on why it is not approving an in-kind ETF. We expect them to push back hard on in-kind ETFs \u2014 specifically because of odd behavior around Grayscale\u2019s GBTC.<\/p>\n<p>In the past, the only AP for Grayscale trust products was its fellow Digital Currency Group company Genesis.<\/p>\n<p>A lot of the bitcoins flowing into GBTC via Genesis came from bitcoin whales who wanted to dump their coins for shares they could sell for cash,\u00a0and from hedge funds, such as Three Arrows Capital, taking advantage of <a href=\"https:\/\/amycastor.com\/2022\/04\/19\/welcome-to-grayscales-hotel-california\/\">the lucrative GBTC arbitrage.<\/a><\/p>\n<p>Until 2021, GBTC traded at a significant premium to NAV. The game was this: borrow BTC from Genesis, exchange it for GBTC directly from Grayscale, and sell the GBTC for 20% more to retail investors on the secondary market. It was an easy way to make 40% returns in a year. The GBTC arbitrage also <a href=\"https:\/\/amycastor.com\/2022\/06\/26\/how-2020-set-the-stage-for-the-2021-bitcoin-bubble\/\">contributed to the 2021 bitcoin bubble<\/a>.<\/p>\n<p>That arbitrage won\u2019t be there this time. APs like Genesis won\u2019t be able to exchange hard-to-track bitcoins for securities.\u00a0 With a cash-create ETF, the AP would only be able to send cash to Grayscale for new GBTC, leaving an actual money trail. This may be why Grayscale hasn\u2019t yet changed its ETF application to cash-create.<\/p>\n<h3>Who\u2019s buying?<\/h3>\n<p>Even if the SEC is pressured to let through a bitcoin ETF, we still don\u2019t think that just having a spot bitcoin ETF exist in the US is going to magic up fresh demand.<\/p>\n<p>Bitcoin ETFs already exist outside the US \u2014 and they noticeably haven\u2019t unleashed any pent-up demand for bitcoins. (Though the Purpose Bitcoin ETF in Toronto seems to be what sent GBTC underwater.) US dollars are somewhat special, but we don\u2019t think they\u2019re <i>that<\/i> special.<\/p>\n<p>Investment firm Needham surveyed registered investment advisors and found that retail investor interest in crypto just wasn\u2019t there \u2014 as <a href=\"https:\/\/davidgerard.co.uk\/blockchain\/2023\/11\/07\/coinbase-q3-earnings-regulatory-clarity-is-all-we-need-and-a-miracle-or-two\/\">Coinbase has already told us.<\/a><\/p>\n<p>The advisors who Needham surveyed suggested that 5% to 10% of their clients might buy into a bitcoin ETF. But these clients were already crypto holders and would just be moving their holding around. \u201cAny person that has not purchased bitcoin already is currently unlikely to buy a bitcoin ETF,\u201d said John Todaro of Needham. [<a href=\"https:\/\/www.cnbc.com\/2023\/12\/16\/advisors-may-drive-bitcoin-etf-flows-amid-widespread-disinterest-in-crypto-says-needham.html\"><i>CNBC<\/i><\/a>]<\/p>\n<p>JP Morgan concurs that demand for a bitcoin ETF is likely to come from existing investors \u2014 holders of GBTC, CME bitcoin futures, or shares in bitcoin mining companies. And anyone buying into bitcoin miners <a href=\"https:\/\/amycastor.com\/2022\/08\/04\/bitcoin-mining-in-the-crypto-crash-the-mining-companies-creative-accounting\/\">deserves everything that follows.<\/a> [<a href=\"https:\/\/fortune.com\/crypto\/2023\/12\/14\/jpmorgan-ethereum-ether-bitcoin-etf-hype\/\"><i>Fortune<\/i><\/a><i>, <\/i><a href=\"https:\/\/archive.ph\/TFcwk\"><i>archive<\/i><\/a>]<\/p>\n<p>JP Morgan also suggests that GBTC holders are likely to cash out while they can, removing maybe $2.7 billion from the fund.<\/p>\n<h3>What happens next<\/h3>\n<p>We think the SEC hates crypto and considers it a hive of scum and villainy, and so doesn\u2019t want to allow a bitcoin ETF.<\/p>\n<p>If the SEC is forced to hold its nose and permit a bitcoin ETF, it will (a) make any bitcoin ETF cash-only and (b) approve multiple ETFs at once \u2014 meaning cut-throat competition on fees.<\/p>\n<p>A bitcoin ETF will also drain institutional investors from exchanges such as Coinbase \u2014 because the fees will be so much lower.<\/p>\n<p>The way to protect investors from dodgy bitcoin salesmen is to make the financial products suck. Fortunately, that only requires making them follow long-standing regulations.<\/p>\n<br><br><div align=\"center\"><p><a href=\"https:\/\/www.patreon.com\/bePatron?u=8420236\"><img src=\"https:\/\/davidgerard.co.uk\/blockchain\/wp-content\/uploads\/2021\/10\/become_a_patron_button.svg\" alt=\"Become a Patron!\" title=\"Become a Patron!\" width=217 height=51><\/a><br><p style=\"align:center;\" class=\"patreon-badge\"><i>Your subscriptions keep this site going. <a href=\"https:\/\/www.patreon.com\/bePatron?u=8420236\">Sign up today!<\/a><\/i><\/p><\/div>","protected":false},"excerpt":{"rendered":"<p>The SEC hates crypto and doesn\u2019t want to allow a bitcoin ETF. But it may have to.<\/p>\n","protected":false},"author":1,"featured_media":26221,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false,"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[1],"tags":[3016,2231,21,1505,783,282,288,2031,1047,2062,3687,1105,2060,3093,2890,2818,1799,3686,3684,3689,75,3688,33,3685,1461,328,3683],"class_list":["post-26219","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-uncategorised","tag-3ac","tag-ark-invest","tag-bitcoin","tag-bitwise","tag-blackrock","tag-cme","tag-coinbase","tag-dcg","tag-etf","tag-fidelity","tag-franklin","tag-galaxy-digital","tag-gary-gensler","tag-gbtc","tag-genesis","tag-global-x","tag-grayscale","tag-hashdex","tag-invesco","tag-john-todaro","tag-jpmorgan-chase","tag-needham","tag-sec","tag-valkyrie","tag-vaneck","tag-winklevoss-twins","tag-wisdomtree"],"jetpack_featured_media_url":"https:\/\/davidgerard.co.uk\/blockchain\/wp-content\/uploads\/2023\/12\/gensler-number-go-up.jpg","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/posts\/26219","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/comments?post=26219"}],"version-history":[{"count":22,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/posts\/26219\/revisions"}],"predecessor-version":[{"id":26242,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/posts\/26219\/revisions\/26242"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/media\/26221"}],"wp:attachment":[{"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/media?parent=26219"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/categories?post=26219"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/tags?post=26219"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}