Bottom-line
U.S. investors are catching up with the rest of the world by getting access to Bitcoin through regulated financial instruments. It remains to be seen if the extended pool of investors will really influence the price of Bitcoin. Coinbase will play a key role as the main intermediary for ETF issuers, but this could be a double-edged sword, as it could cannibalize part of its lucrative revenue from retail traders. We expect other digital assets to also be available within a U.S. ETF wrapper, sooner or later. In the meantime, the next big catalyst for Bitcoin remains the halving.
What happened
On 10 January 2024, The U.S. Securities and Exchange Commission (SEC) approved the applications of 11 spot Bitcoin ETFs. Trading of these ETFs will already start on 11 January 2024.
This decision marks a significant development in the cryptocurrency world, as it broadens access to Bitcoin through regulated financial instruments.
Reading through the lines, the decision of a federal court ruling in August 2023 that the SEC had “no grounds” to reject the conversion of the Grayscale Bitcoin Trust into an ETF accelerated yesterday’s decision.
Impact on our Investment Case
Why is this approval a game-changer?
This decision represents a dramatic policy shift by the SEC, which had consistently denied all such applications since an initial filing in 2013 by the Winklevoss twins (famous for their lawsuit against Mark Zuckerberg). The primary reason for rejecting all applications throughout the years was the risks of market manipulation. But increased adoption during the Covid period has resulted in a surge in market activity and now it is not uncommon to have daily traded value >$30bn on Bitcoin. In this respect, the market has matured and significant funds are required to move the market today.
Another concern by the SEC is that the ecosystem is rife with scams. The SEC Chair Gary Gensler repeated it on X on Monday. Being late in the FTX story and other collapses that adversely impacted investors was a cause of criticism of the SEC, especially in Washington D.C. By providing access to Bitcoin through regulated financial instruments, investors will have no more excuses if they adventure on unregulated platforms that turn out to be fraudulent.
With these ETFs, investors can bypass the complexities of self-custody and fund transfers to digital asset exchanges. In particular, institutional investors will not need to go through extended due diligence as they can integrate Bitcoin into their portfolios through traditional banking channels to gain access to the unique risk-reward profile of Bitcoin.
To some extent, the approval of the ETFs is a deviation from Bitcoin’s original ethos of challenging the traditional financial systems. However, we believe that the securitization of Bitcoin is a necessary and welcome step for the democratization and institutionalization of the asset class. With the approval of the ETF, the SEC confirms that the United States cannot continue to leave cryptocurrencies on the side. Bitcoin is here to stay, and may now be considered as a fullyfledged financial asset for U.S. investors.
Implication for Bitcoin’s price
Nobody knows what the long-term impact will be on the Bitcoin price, often referred to as digital gold. However, we would avoid drawing direct comparisons with the 2004 launch of the SPDR Gold ETF (GLD), which quickly amassed significant assets.
Our conviction, developed in our 2024 Outlook for Fintech, is that the market was already pricing the approval with a high probability. Bitcoin has remained flattish on the approval, while Ethereum surged as it could be the next digital asset to get its ETF.
Short-term price volatility is expected as the market adjusts to investors' demand for these new products. In the long run, the ETFs could significantly expand Bitcoin's investor base. Given Bitcoin's fixed supply, even a modest increase in investor allocation could markedly influence its price. However, it's worth noting that U.S. investors already had access to Bitcoin, albeit with some additional effort. And for the rest of the world, this should have a limited impact as similar products already exist in other jurisdictions.
Impact on blockchain-related stocks
At AtonRâ, our focus is on companies leveraging and enabling blockchain technology, rather than direct cryptocurrency investments. Our dedicated AtonRâ Blockchain & Digital Assets strategy, along with allocations in our Fintech strategy, reflect our belief in the long-term value of blockchain technology and the diversification potential of cryptocurrencies.
A key point of discussion is the role of Coinbase Global Inc in the wake of the ETF approvals. The leading exchange will serve as a crucial service provider for the majority of the approved Bitcoin ETFs, acting as the qualified custodian, trading counterparty, and ensuring market surveillance. ETF issuers will become dependent on Coinbase. As of today, there are no other U.S. entities capable of fulfilling all these roles with the same reputation and willingness to comply with regulations as Coinbase. This is a bit sarcastic, considering the ongoing legal battle between the SEC and the exchange for its alleged role of acting as a broker-dealer and an exchange without proper authorizations.
However, it is important to keep in mind that the total expense ratios of the ETFs are low. Coinbase will only charge a few basis points on the invested assets. The risk for the firm is to see some retail investors favoring the ETF rather than trading Bitcoins directly on its platform, where it charges heavy brokerage fees.
Another interesting development is the divergent performance of Microstrategy Inc and Bitcoin. With approximately 175’000 Bitcoins on its balance sheet, MicroStrategy has been a proxy for the digital asset. This proxy will not be needed anymore, as investors will have an easier vehicle to get direct exposure to the Bitcoin, and this has shown in the recent price move of Microstrategy Inc. Nevertheless, any additional price decrease in the stock price will be an opportunity to add, especially if the discount between the market capitalization and the fair value of the Bitcoin holdings widens significantly.
For Bitcoin miners, the approval of the Bitcoin ETF should have no direct impact. They are currently more sensitive on the steps (i.e., investments in mining, capital increase, and acquisitions) they take to meet the next big catalyst for Bitcoin, the halving: in April 2024, miners will see their rewards cut by 50% from 6.25 to 3.125 Bitcoins for each block successfully mined, an event that happens about every 4 years.
Finally, we must admit that the approval of the ETFs is a victory for traditional asset managers and exchanges. While they still need providers within the crypto ecosystem to offer crypto solutions like the ETF, they demonstrate their ability to adapt their offering to new asset classes. The SEC would probably not have approved the filings if it came from the crypto players rather than from the likes of Blackrock or Invesco. But given the fee-rate competition between all the issuers, the Bitcoin ETF is not expected to have any material impact in terms of revenues for any of the big houses, at least in the short term.
Our Takeaway
The SEC’s approval of the Bitcoin ETFs is a landmark decision that represents a significant shift in the regulatory landscape of cryptocurrencies in the United States. We hope this decision will pave the way for better regulatory clarity, and eventually a legislative solution to crypto regulations in general.
Investors are the true beneficiaries of the SEC’s decision, as they will get easier access to Bitcoin. The next step is naturally to expand the range of U.S. ETFs to Ethereum and other cryptocurrencies.
Regulatory clarity and adoption are required for the institutionalization of the asset class. Moreover, the media attention surrounding this decision could also contribute to spurring further innovation in the blockchain ecosystem. With the Bitcoin halving event on the horizon, 2024 is shaping up to be a significant year for digital assets.
