Major Crypto Developments for the week
- Grayscale wins lawsuit against the SEC regarding the spot ETF
- Bitcoin now sits below both its 200 day and 200 week moving averages
- MakerDAO Co-Founder Rune Christensen proposes create the project’s own blockchain by forking the Solana codebase, after which Ethereum co-founder Vitalik Buterin decided to sell $500K of MKR tokens
- Venture funding in crypto reaches its lowest level of monthly investment since October 2020
Grayscale Decision: Is a Bitcoin ETF imminent?
The biggest development of this week was the headline that a ruling has finally been made in Grayscale’s lawsuit against the SEC (Securities Exchange Commission) regarding their spot ETF conversion application. Grayscale, a company underneath holding company Digital Currency Group, is the organization that houses GBTC, which is a publicly traded Bitcoin trust (GBTC) with over 640,000 Bitcoin under management, which totals roughly 3% of the all of Bitcoin supply in circulation.
Given GBTC is a trust, the vehicle is unable to offer redemptions, and therefore rarely tracks the underlying Bitcoin that it is meant to offer exposure to for investors. Throughout most of GBTC’s existence the product will trade at a premium or discount to the underlying Bitcoin that it is meant to track. Despite the disadvantages of the trust’s structure, investors may include it as part of their portfolio due to compliance restrictions that don’t allow them to purchase spot Bitcoin itself.
While this trust structure is advantageous in some ways for Grayscale, who captures 2% of fees from the trust, on annual basis, the firm wants to convert the product into a traditional ETF for two reasons: On one hand they will be able to garner more volume and assets under management for the product, as well as the fact that if they are not one of the first movers to offering a spot ETF then the current trust structured product will be essentially made obsolete.
Back in June 2022 the SEC denied Grayscale’s application to convert the trust into a spot ETF, arguing that it did not meet anti-fraud and investor protection standards. However, Grayscale argued that this reasoning did not make sense as the SEC had approved a futures ETF the year before, which is a derivative of the underlying spot markets. Shortly after the denial, Grayscale filed a lawsuit against the SEC.
Fast forward to today, a decision was made by the courts last Tuesday, September 29th that sided with Grayscale. In the decision statement from the D.C. Court of Appeals, the government body stated: “The Commission’s unexplained discounting of the obvious financial and mathematical relationship between the spot and futures markets falls short of the standard for reasoned decision making”.
Past performance is not an indication of future results.
So where do we go from here?
While the court’s decision in favor of Grayscale is a huge win for the firm and the crypto industry, there is no guarantee that this decision means imminent spot ETF approval. From here, the SEC has the opportunity to appeal the court’s decision and bring the case to the supreme court for a final ruling, with a 45-day window to do so. The SEC also has the ability to now deny Grayscale’s ETF conversion application under a different set of reasons from the original reasons that they provided back in June 2022.
In conclusion, while the likelihood of ETF approval is now higher with the court ruling that the SEC’s original reasons for denial are unsatisfactory, there is still some more legal/regulatory friction between from and a potential ETF conversion for GBTC and Grayscale. In the meantime, the GBTC discount to net asset value has closed in from -48% in December 2022 to just below -20% today. This reflects positive sentiment from the market towards Grayscale’s odds at eventually getting approved from conversion from the current trust structure to ETF.
Age of Apathy for Crypto Markets
Past performance is not an indication of future results.
There is no other way to cut it; the crypto market remains in a state of apathy. On a multi-year view, there is capitulation in two ways; price and time. Capitulation through sharp price declines often wipes out a large number of market participants; but the ultimate test of conviction for investors is during periods of apathy and capitulation through time/boredom. Eyeballing the chart of Bitcoin’s price alone we can see this general idea, however there are a few other measures of this dynamic; some that we’ve mentioned before in prior weekly updates.
One way to identify this period of apathy is by looking at crypto volumes, which are at the lowest level that they’ve reached since 2020. In addition, Bitcoin’s implied and realized volatility both continue to decline.
Past performance is not an indication of future results.
Lastly, venture capital investment continues to decline, reflecting diminishing capital inflows, supporting the picture that we’ve painted using the chart of aggregated stablecoin supplies that we discussed last week. In this chart from crypto data provider DeFiLlama, we can see that venture capital investment during the month of July reached its lowest level since October 2020 at just $283 million according to their estimates. To put this into perspective, at the market’s peak in late 2021 there was over $7 billion of venture capital investment into crypto in just one month.
Past performance is not an indication of future results.
We hope you enjoyed this week’s crypto market update and look forward to touching base again next week! Thanks for reading.
The material in this blog post was created exclusively for eToro by Reflexivity Research.
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