Crypto jolted

On Tuesday, the U.S. Court of Appeals for the DC Circuit ruled that the Securities and Exchange Commission wrongly denied Grayscale permission to convert its Bitcoin-price-tracking closed-end trust fund, Grayscale Bitcoin Trust (GBTC), into an exchange-traded fund (ETF).

(Incidentally, ETF is the generic term for exchange-listed, publicly traded products that technically fall under the even-broader banner of “exchange-traded products,” or “ETPs,” which include “exchange-traded notes,” or “ETNs,” distinctions with some, but ultimately not that much, difference; note that Grayscale for its part uses the more generic term, “ETF.”) 

Okay, so the above jargon explainer was perhaps not ideally articulated – which actually cuts to the heart of Grayscale’s beef – as the court agreed with the digital money manager that the SEC failed to adequately explain why it approved the listing of a pair of BTC futures ETFs but not Grayscale’s proposed product. 

“The denial of Grayscale’s proposal was arbitrary and capricious," the court said. "In the absence of a coherent explanation, this unlike regulatory treatment of like products is unlawful." 

Bitcoin, stalled at $26,000 since a mini-crash late last week, shot up yesterday by as much as 7% in the wake of the ruling handed down late yesterday morning.  

As of Wednesday, at 9:10 a.m. (EST), the largest crypto was $27,370 on a gain of 5.3% over 24 hours.  

Ethereum, the second-largest crypto, jumped 4.6% to $1,720. Bitcoin SV rose 6%; Bitcoin Cash rose 12%. Total crypto market capitalization increased 4.3% to $1.13 trillion, according to CoinGecko. 

A U.S.-based money manager issuing a regulated ETF tied to BTC is seen as monumental step toward wider acceptance of crypto among large and small investors alike; wealth managers, including SEC-regulated RIAs and CFPs, are seen as potential entrants into the relatively much easier to access BTC ETF market should one arise. More than a few experts now predict it will. 

The SEC is said to be in the midst of reviewing other similar BTC ETF applications from the likes of BlackRock, Invesco and Fidelity. 

Yesterday's court decision, said Steve Kurz, global head of asset management at Galaxy, "reaffirms that a [spot] BTC ETF in the U.S. is a matter of when, not if.”

Starting in early 2021, the price of a share in GBTC began to trade (among participants in the so-called "over the counter," or “OTC,” market) at a discount relative to the price of spot BTC on exchanges. By late 2022, the value of the BTC inherently represented by 1 GBTC share was being discounted in the open market by as much as roughly 50%. 

Following Grayscale's landmark court victory, there's still a discount. But the gap has narrowed amidst hopes that GBTC will soon convert to a publicly traded ETF. 

This morning, the GBTC discount dropped to 18%, per Coinglass data, marking the lowest level in 18 months (Decrypt). 

“This is a historic milestone," Grayscale CEO Michael Sonnenshein said yesterday in a statement released after his firm prevailed in a lawsuit against the SEC over the issue of whether GBTC could be converted to an ETF. 

Sonnenshein insists the victory is on behalf of American investors, the Bitcoin ecosystem, basically anyone who has ever thought, hmmm, wouldn’t it be nice to obtain BTC exposure by way of a vehicle that enjoyed all of the added protections associated with ETFs deemed liquid, transparent and regulated? 

"It’s incredibly exciting that we are one step closer to making a U.S. spot BTC ETF a reality,” Sonnenshein said. 

The ruling “likely clears the path for a spot Bitcoin ETF,” Bernstein analysts said (CoinDesk). 

Now it's up to the SEC whether to delay, approve or deny such launch permission currently sought by a parade of asset managers. Potentially favorable - but still cloudy scenarios - are sort of coming into view. 

For example, the GBTC product doesn't just now automatically convert into an ETF; Grayscale just gets another look, and can expect to be treated along the same lines as all other applicants seeking approvals. Key to the floodgate-hatch equation is the expectation for regulatory treatment in accordance with products already approved. 

In ruling in favor of Grayscale, the court stated the firm “presented substantial evidence that Grayscale is similar, across the relevant regulatory factors, to BTC futures [products]." 

Best-case, blow-out-the-doors scenario: the SEC, as early as next week, approves all the current relevant spot BTC ETF applications together in one begrudgingly fabulous lump. 

Bernstein analysts have said they expect the spot BTC ETF market to eventually grow to become 10% of BTC’s market cap within about three years.