🟪 All lined up for the Cointucky Derby

All lined up for the Cointucky Derby

First and foremost: Hats off to Bloomberg Intelligence analyst Eric Balchunas for coining the term Cointucky Derby.

And now for the important stuff: We could be just days away from a spot bitcoin ETF.  

The Securities and Exchange Commission is mulling over a dozen proposals — with BlackRock obviously the most high-profile. But if you even loosely keep up with crypto news, you knew that already.

Discussions continue between the SEC and the potential issuers, with BlackRock’s team meeting with officials at the regulatory agency a handful of times since November. 

It appears — between Balchunas’s reporting on conversations that the SEC is having behind closed doors with the potential issuers, plus the updated S-1s — that cash-only creations and redemptions are preferred to in-kind. 

The TL;DR of those two transactions are simply the following. Cash creations and redemptions means that participants create and/or redeem shares in exchange for cash. In-kind allows for the exchange of ETF shares for a similar basket of securities that reflects the ETF’s holdings.

But if you’re reading this and are still lost, there’s one main takeaway — this kind of discourse between the SEC and a potential ETF issuer means that it’s already getting down to the nitty-gritty details. 

And if we’re looking to read between the lines (trust me, we are), then this could spell out good news, because a number of applicants have updated their S-1’s to include cash creation over in-kind. Even Grayscale — a previous holdout — noted in a Tuesday filing that its proposed bitcoin ETF would create and redeem shares via cash transactions.

Clear language around cash-only transactions is just one requirement the SEC has, Balchunas argued in a Wednesday research note. The regulator has declined to comment on the subject.

While “the SEC is ready to approve spot bitcoin ETFs,” he added, firms will need signed agreements with an authorized participant.

Authorized participants create and redeem shares of an ETF, and can exchange ETF shares for cash or a similar basket of securities that reflect the holdings. These are the types of details that both analysts and those eager for an ETF are watching closely to see who can appease the SEC ahead of Jan. 10.  

Now let’s back up a beat and talk about the applicants.

Meet the contestants

As previously mentioned, Grayscale is grouped into the Derby, though it’s unclear if the firm will be allowed into the starting gate. 

While the firm began trying to convert its Grayscale Bitcoin Trust (GBTC) into an ETF in 2021, the SEC initially said no way. But appeals court judges handed the company a win in August, forcing the SEC to reconsider the application.

This doesn’t mean that Gary Gensler, the head of the SEC who believes the Wild West — I mean crypto — needs to be tamed, will let the conversion happen. There may be signs that Grayscale is getting closer, however, with the resignation of Digital Currency Group CEO Barry Silbert as the company’s chair, effective Jan. 1. 

BlackRock — an asset manager with a very trusty track record of getting ETFs approved — is also vying for a starting spot. Its S-1 amendments have gone down from over 20 changes to six, according to reporting from CryptoSlate. The perfect headline for anyone hopeful for some New Year’s news. 

Ark and 21Shares teamed up on their proposal — though not their first, since the two filed for a similar proposal back in 2021. The two, however, are first in line when it comes to deadlines. That Jan. 10 deadline everyone’s eyeing is based on this proposal, which requires an answer from the SEC in the new year. 

The rest of the proposals come from Bitwise, VanEck, WisdomTree, Invesco (with Galaxy), Fidelity, Valkyrie, Global X, Hashdex, Franklin Templeton and Pando Asset Management. One final proposal entered the race far behind the others: Tidal and 7RCC. The proposed ETF could differentiate itself from the other proposals by including carbon credit futures in its portfolio alongside bitcoin.

It’s unclear if Pando — if it gets the green light — will get its fund out the door at the same time as some of the other potential ETFs due to its late entrance into the Derby.

Over a dozen ETFs seems like a lot — and it is — but any approval from the SEC sets the stage for another race between issuers: The marketing wars. Bitwise is early out the gate in this regard. It dropped an ad featuring actor Jonathan Goldsmith, best known for his most interesting man Dos Equis ads. 

“You know what’s interesting these days?” Goldsmith asks the camera in a cozy bar setting. “Bitcoin.”

Maybe this will be the year of the bitcoin ETF Super Bowl ads. 

What people are saying

A lot of people, both in and out of crypto, think a bitcoin ETF would be a game changer for bitcoin, enough to thaw out the crypto winter that settled in. Ever bullish bitcoin bull Michael Saylor is one of those people. 

The Microstrategy chair announced that his company had purchased roughly 14,000 more bitcoin for $600 million in December, meaning that — in total — Microstrategy spent over $1 billion on bitcoin purchases since November. 

Ark Invest CEO Cathie Wood told Yahoo Finance that “something changed” with the SEC and they’ve received “thoughtful, detailed, technical questions” from the regulator which is, in her opinion, a positive sign. 

But don’t get too excited, because even Wood believes that there could be a “sell the news” move once the ETFs are given a green light as investors claw back profit. 

She’s not the only one, either. In a Dec. 13 note, analysts at JPMorgan said “excessive optimism by crypto investors arising from an impending approval of spot bitcoin ETFs by the SEC has shifted bitcoin to the overbought levels seen during 2021.”

The analysts, led by Nikolaos Panigirtzoglou, are skeptical of the two big arguments that have arisen from the bitcoin ETF discussion, one of which is that crypto markets will see new capital. 

“Instead of fresh capital entering the crypto industry to be invested in the newly approved ETFs, we see as a more likely scenario existing capital shifting from existing bitcoin products such as the Grayscale bitcoin trust, bitcoin futures ETFs and publicly listed bitcoin mining companies, into the newly approved spot bitcoin ETFs,” they wrote.

Their argument stems from the approval of such ETFs in other places, primarily Europe and Canada. The US, though the loudest, is not the first. 

As Blockworks previously reported, Bitwise’s chief investment officer Matt Hougan believes that the spot bitcoin ETFs could see $55 billion in net flows in the first five years. Galaxy Digital research associate Charles Yu sees inflows of $14.4 billion in the first year, according to an October report. VanEck analysts think there could be inflows topping $2.4 billion in the first quarter alone.

Either way, any approval for a spot bitcoin ETF is a step forward for the crypto industry since a handful of the applicants are not solely focused on crypto. 

But first, everyone has to make it to the starting gate.

– Katherine Ross 

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