Bitcoin’s history tells us that a spot ETF approval is not without risks

• News around BTC Spot ETF has always affected its price.
• This shows that the prices of the shares that would make up a BTC spot ETF would remain prone to swings in the coin’s price.

During the intraday trading session on the 3rd of January, the price of the largest crypto asset by market capitalization, Bitcoin [BTC], plummeted by 10%. 

This decline came after the publication of a report by crypto investment services provider Matrixport.

The report stated that the U.S. Securities and Exchange Commission (SEC) may reject all applications before it for a spot Bitcoin exchange-traded fund (ETF) this month.

According to the analyst who authored the report, Markus Thielen, despite the series of meetings between applicants and the regulator and the updated S-1 prospectuses filed by them, all pending applications:

“Fall short of a critical requirement that must be met before the SEC approves.”

Thielen based this opinion on the current political landscape and the SEC’s general predisposition towards crypto.

“An ETF would certainly enable crypto overall to take off, and based on Gensler’s comments in December 2023, he still sees this industry in need of more stringent compliance. From a political perspective, there is no reason to approve a Bitcoin Spot ETF that would legitimize Bitcoin as an alternative store of value.”

Thielen’s report resulted in a double-digit decline in BTC’s value and the liquidation of $500 million worth of positions across derivatives exchanges within a day.

Notably, it came after a series of predictions in December 2023 about the high chances of the SEC granting its first approval by the 10th of January. 

In a former post on X (formerly Twitter), senior ETF analyst at Bloomberg, Eric Balchunas, had opined that there was a 90% chance that the SEC would grant its first spot ETF approval by this date.

People asking me if we changed odds. No, we still holding line at 90% odds of approval by Jan 10 (aka this cycle), the same odds we’ve had for months (before it was cool/safe). What we watching for now: more amended/final filings to roll in and clarity on in-kind vs cash creates https://t.co/uiWgfxOfzz

— Eric Balchunas (@EricBalchunas) November 29, 2023

Another Bloomberg analyst, James Seyffart, had noted that the amended Form S-1 filed by asset manager BlackRock could motivate the SEC to grant its approval to BlackRock’s ETF application in early January.

UPDATE: @BlackRock already submitted an updated/amended S-1 for their #bitcoin ETF. pic.twitter.com/sVAL9qVmiy

— James Seyffart (@JSeyff) December 22, 2023

These projections led to a surge in the positive sentiment in the BTC market, which sustained the coin’s price at an 18-month high in December.

According to data from CoinGecko, during the 31 days, BTC’s value rose by double digits to close the trading year above the $42,000 price mark. 

Maybe spot ETFs do not offer that much hedge against risks

With a BTC Spot ETF, investors have the opportunity to gain exposure to the coin’s price movements without having to own the coin itself. 

It works by an ETF issuer, creating shares representing ownership in the underlying BTC. These shares are then made available for purchase on designated exchanges.

Interested investors can buy and sell ETF shares at prices intended to closely track BTC’s current market price. 

BTC spot ETFs have been widely touted as avenues for investors to hedge against the risks associated with directly holding the coin.

But this time, the reaction of the coin to the series of news surrounding the potential approval of the investment vehicle has made this doubtful.

There is a consistent trend of instances where the speculation about the SEC approving a BTC ETF has impacted its price.

This has underscored the regulator’s apprehensions regarding the nature of the volatility of the BTC market and how “legitimizing” crypto by granting such approval would cause more harm.

The race to list the first spot-traded BTC ETF began in July 2013 when Cameron and Tyler Winklevoss filed to launch the Winklevoss Bitcoin Trust. The SEC gave its decision four years later, in March 2017 when it rejected the application. 

The New York Times reported:

“Within a few minutes of S.E.C.’s announcement, the price of a single Bitcoin tumbled more than 15 percent, to around $1,060.”

In March 2021, Cboe BZX Exchange Inc. filed a proposed rule change to list and trade shares of the VanEck Bitcoin Trust under the BZX Rule.

After a series of delays, the SEC rejected the rule-change application, claiming that the applicant failed to show that its “Bitcoin-based commodity trusts and Bitcoin-based trust issued receipts” had been designed in such a way as to prevent “fraudulent and manipulative acts and practices.”

As reported by Bloomberg,

“Bitcoin extended losses after the rejection but recouped some of them in mid-afternoon trading.”

By March 2023, the SEC had rejected all three proposals to list and trade shares of the VanEck Bitcoin Trust. 

Another notable incidence was how BTC’s price climbed following a decision given by the three-judge panel of the DC Circuit Court of Appeals in the Grayscale Investments case against the Securities and Exchange Commission [SEC].

In October 2021, Grayscale Investments sought SEC approval to convert Grayscale Bitcoin Trust (GBTC) into a BTC spot ETF. The regulator rejected the request, citing non-compliance with anti-fraud requirements and investor protection standards. 

Grayscale then appealed, arguing that the SEC’s denial was arbitrary and emphasizing its approval of “materially similar” Bitcoin futures ETFs.

By December 2022, the SEC defended its decision, stating the approved ETFs were based on futures contracts traded on the Chicago Mercantile Exchange (CME), unlike Grayscale’s spot ETF application.

Grayscale responded, asserting that SEC’s treatment was unjust and discriminatory.

In a decision given on the 29th of August 2023, the Court of Appeals sided with Grayscale, urging the SEC to review its decision. 

Following the court’s decision, BTC’s value rose by 6% in 24 hours, showing that sentiment improved and trading activity surged. 

This series of BTC price fluctuations experienced since 2017 suggests that a spot BTC ETF is not without its risk, especially concerning volatility in the coin’s price.  

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The shares and the underlying asset remain closely linked, such that when investors buy shares of a spot ETF, they are essentially gaining exposure to the actual price movements of BTC.

Therefore, if BTC’s price experiences swings, it can also lead to fluctuations in the value of the ETF shares.