Bitcoin ETF Approval: What Does It Mean For Crypto Stocks

Summary U.S. regulators approve Bitcoin ETFs, allowing trading to begin today. SEC Chair Gensler reluctantly approves the products due to a court ruling and emphasizes the risks associated with Bitcoin. Approval may impact asset managers, crypto exchanges, and companies like MicroStrategy while creating potential value for smaller firms. U.S. regulators approved Bitcoin ( BTC-USD ) ETFs. The products are supposed to begin trading today. SEC head Chair Gensler made a statement specifically regarding these products. The statement is relevant to the broader crypto market. My reading of it is that the SEC is begrudgingly approving these products because of the ruling in the Grayscale case-an outcome I've deemed fairly likely since the end of 2022. Beginning under Chair Jay Clayton in 2018 and through March 2023, the Commission disapproved more than 20 exchange rule filings for spot bitcoin ETPs. One of those filings, made by Grayscale, contemplated the conversion of the Grayscale Bitcoin Trust into an ETP. We are now faced with a new set of filings similar to those we have disapproved in the past. Circumstances, however, have changed. The U.S. Court of Appeals for the District of Columbia held that the Commission failed to adequately explain its reasoning in disapproving the listing and trading of Grayscale's proposed ETP (the Grayscale Order). [1] The court therefore vacated the Grayscale Order and remanded the matter to the Commission. Based on these circumstances and those discussed more fully in the approval order, I feel the most sustainable path forward is to approve the listing and trading of these spot bitcoin ETP shares. In the statement, Gensler goes out of his way to show his displeasure. Take this part: The Commission is merit neutral and does not take a view on particular companies, investments, or the assets underlying an ETP. If the issuer of a security and the listing exchange comply with the Securities Act, the Exchange Act, and the Commission's rules, that issuer must be provided the same access to our regulated markets as anyone else. This is later followed up by: Though we're merit neutral, I'd note that the underlying assets in the metals ETPs have consumer and industrial uses, while in contrast bitcoin is primarily a speculative, volatile asset that's also used for illicit activity including ransomware, [4] money laundering, [5] sanction evasion, [6] and terrorist financing. [7] While we approved the listing and trading of certain spot bitcoin ETP shares today, we did not approve or endorse bitcoin. Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto. [8] I don't want to argue against Bitcoin being a speculative volatile asset (although the volatility has come down markedly). But I don't think this is a merit neutral statement. Bitcoin isn't primarily used as a means of payment but it can and is used that way. In fact, Gensler points out the illegal ways it is used exactly like that. It clearly has uses. Meanwhile, the vast majority of Gold is held as an investment asset (or speculative asset if you will). To an extent gold is bought by consumers in the shape of jewelry. However, I'd argue the least harmful of these products can tie a lot of their price back to the price of the commodity. I'll argue the "added value" in terms of design, craftsmanship, and Macy's markup of precious metals jewelry products has a tendency to erode over time. Gold or Silver in turn aren't very practical as means of payment. Gensler is pointing out the bad of Bitcoin (which we shouldn't sweep under the rug) but I can't call the statement merit neutral. This negative stance vs these crypto ETF launches is important. What I'm hearing here is that the SEC has been fighting the crypto sector and it is likely to continue to do so. Here is another quote that speaks to the work ahead: Importantly, today's Commission action is cabined to ETPs holding one non-security commodity, bitcoin. It should in no way signal the Commission's willingness to approve listing standards for crypto asset securities. In the last six months, investors have driven the discounts on Grayscale's suite of closed-end funds to narrow significantly. Many altcoin closed-end funds trade at a premium. The Ethereum Trust ( ETHE ) trades at a ~11% discount. This means the price of the fund is 89% of what the underlying Ethereum is worth on the crypto exchanges. But there is no exit liquidity, and the fund charges 2.5% per year. It makes sense it has a discount. I think traders have bid it up because they expect an Ethereum ETF as well. This SEC statement speaks to how difficult this could still be. I've been skeptical of this ETHE arbitrage because of the difficulties with staking and other concerns. I'm not arguing Ethereum is a bad trade but that ETHE may not be the right way to express a bullish view. Many of the other Grayscale altcoin trusts trade at large premia (which I think makes them attractive as a short coupled with a long position in the underlying). Ironically, this makes it less likely the premia will disappear entirely in the medium term because they are less likely to get competition within Tradfi markets. Other companies that I think may be affected by this approval are the asset managers that have ETF's approved. The Bitcoin ETF's approved are the following: Blackrock's iShares Bitcoin Trust ( IBIT ) ARK 21Shares Bitcoin ETF (ARKB) WisdomTree Bitcoin Fund ( BTCW ) Invesco Galaxy Bitcoin ETF (BTCO) Bitwise Bitcoin ETF (BITB) VanEck Bitcoin Trust (HODL) Franklin Bitcoin ETF (EZBC) Fidelity Wise Origin Bitcoin Trust (FBTC) Valkyrie Bitcoin Fund (BRRR) Grayscale Bitcoin Trust ( GBTC ) Hashdex Bitcoin ETF ( DEFI ) BlackRock ( BLK ), WisdomTree ( WT ), Galaxy Digital ( BRPHF ), Invesco ( IVZ ) and Bitwise ( BITW ) are publicly traded companies. Invesco and Blackrock are so large that I'm not sure the potential profitability is going to move the needle in a big way for them. They are more likely to gather assets as they're big brands in ETF's. It's going to be a race because the one that gathers the most assets is often the ETF that attracts a large share of future flows. For many of these companies, it also means getting a foothold into the asset class. If you're the company with the largest Bitcoin ETF it becomes more likely you'll win with additional crypto asset products. A class of companies that may suffer from the ETF approval are the exchange-listed crypto exchanges. The most famous one is Coinbase ( COIN ). Coinbase is also big in the custody business, which these ETFs require. However, the custody business is a business of making fractions of a percentage on assets. Meanwhile, the ETFs are likely to suck retail Bitcoin buying away from the company(a huge cash cow). MicroStrategy ( MSTR ) has historically been utilized as a proxy for Bitcoin exposure by traders. It didn't require a lot of margin as opposed to other products. The downside is that MicroStrategy often gets bid up where it arguably trades at a large premium to the Bitcoin it owns. Second, it is not a fund and if it were to sell there may be tax consequences. I'm not entirely sure about the effect on the Bitcoin price in the very short term. So far, things are looking good, and we could see it zoom to $50k. However, we could also see some selling during market hours as traders anticipated the event. In my view, the selling is likely to be short-lived because we're also about 90 days away from the halving. The Bitcoin halving is important because it reduces the rate at which reserved bitcoins are created and released into circulation as rewards for transaction verification. This event occurs approximately every ~4 years and historically the Bitcoin price tends to rally in anticipation. The positions I like based on the ETF approvals and the SEC statement are the following: Long Short Bitcoin Grayscale Ethereum Trust (ETHE)* Coinbase (COIN) MicroStrategy (MSTR)* *paired with a long in Ethereum**paired with a long in Bitcoin It is interesting to monitor the market share battle and if WisdomTree, Galaxy Digital or Bitwise would start to separate themselves from the crowd (in a positive sense) it could be interesting to evaluate them closely as investments as a successful Bitcoin product could create a meaningful amount of value for these smaller firms.