Spot Bitcoin ETF approval is inevitable, but it isn't that simple
Former US Securities and Exchange Commission (SEC) chair Jay Clayton has said that the approval of a spot bitcoin exchange-traded fund (ETF) is "inevitable" citing strong demand from asset managers who look after a combined $15 trillion until October.
"It is clear that Bitcoin is not a security. It is clear that Bitcoin is something that retail investors want access to, institutional investors want access to, and, importantly, some of our most trusted providers who are fiduciaries or have duties of best interest want to provide this product to the retail public. So I think [...] an approval is inevitable," Clayton told CNBC.
"The dichotomy between a futures product and cash product can't go on forever,” said Clayton.
Clayton’s comment comes days after a court ruling on August 29th favoring Grayscale Investments' spot Bitcoin ETF, potentially reshaping Bitcoin-related financial product regulations by reversing the initial rejection of their ETF proposal.
Bitcoin (BTC) prices surged by about 7% to over 28,000 levels following the court decision, as traders reacted to the anticipation of potential approval for the other spot ETFs in the US. But it quickly went down to 25,300 levels following news of the SEC postponing its decision on six spot Bitcoin ETF applications, including BlackRock's, until October.
What is a spot Bitcoin ETF?
It is like a fund that aims to copy the real-time price of Bitcoin as it's being bought and sold right now. In the world of cryptocurrency, the "spot market" refers to buying or selling Bitcoin for immediate delivery. With a spot Bitcoin ETF, investors can try to benefit from Bitcoin's price changes without actually owning any Bitcoin.
Why the Grayscale court ruling matters?
Simplified Bitcoin Investment - A big deal with a spot Bitcoin ETF is that it makes investing in Bitcoin easier for regular people. By introducing accessible investment options like spot Bitcoin ETFs, the ruling narrows the gap between complex digital asset ownership and the demand for simplified exposure.
Manipulation Concerns - The court's ruling subtly suggests that mechanisms used to monitor and mitigate manipulation within Bitcoin futures markets, under the oversight of established exchanges like the Chicago Mercantile Exchange (CME), could be adapted to the spot Bitcoin market.
The CME is one of the world's largest and most respected derivatives exchanges, offering a platform for trading various financial instruments, including Bitcoin futures contracts.
In the context of the court's decision, the application of CME's surveillance practices to the spot Bitcoin market is a crucial consideration. The court's perspective hinges on the notion that the surveillance practices employed by the CME could potentially be extended to the spot Bitcoin market. By drawing a parallel between the regulatory safeguards used in traditional financial markets and the evolving cryptocurrency landscape, the ruling introduces the concept of applying proven methods to address manipulation concerns in the spot Bitcoin market.
What's next for other applications?
Other requests for spot Bitcoin ETFs might also be affected by the court's decision. It might encourage big investment companies like BlackRock and Fidelity to improve their applications based on what the court thinks about keeping things secure and reducing risks.
Even though this ruling is a big change, there are still some things we're not sure about. Both sides have a month and a half to challenge the ruling, and we don't know what the SEC will do. Their decision will play a big part in how they treat financial products tied to cryptocurrencies.
More than just BTC, the wider implications of the case
This ruling doesn't only affect Bitcoin. If the SEC decides to be more open to financial products related to Bitcoin, it could mean other cryptocurrencies might be taken more seriously in regular financial markets.
The recent court ruling favoring Grayscale's spot Bitcoin ETF application is a big step forward in how regulators and cryptocurrency experts talk to each other. The ruling signifies a significant stride toward mainstream cryptocurrency adoption. This advancement makes cryptocurrencies more approachable to a wider range of investors.
It is not as easy as Clayton puts it
Our Sr. Analyst Marek Chajecki suggests caution in interpreting Clayton's statement as overly confident.
“While approval of a Bitcoin ETF may seem likely, the SEC can still find reasons to reject it, making the process potentially lengthy. It’s quite risky to buy BTC just based on Clayton’s comments even if he is right in the long run a lot can happen on the market in the meantime – including the scenario that BTC can go much further down. For long-term bulls, it’s important to plan the strategy accordingly, to be prepared for different short-term outcomes, and not get surprised,” Chajecki said.
He added that traders had been waiting for the court's decision for some time already. “They had been positioning rather long as there was asymmetrical risk/reward with a much higher probability of the move in case of positive decision for Grayscale than delay or negative decision,” he noted.
Chajecki explained that crypto had been weak before the court decision came out and market participants were desperately looking for positive crypto news and that’s what was delivered. “The court decision came as a surprise, causing a big market up-swing driven by euphoria, which faded away within the next few hours and it was used by smart money as an opportunity to sell,” Chajecki said.
“While there was also news the next day that the SEC delayed the decision on 7 BTC ETFs that added to the downswing in BTC prices, it’s important to notice that a big part of the pump induced by the court’s decision was erased,” Chajecki said.
“All of these means the market might not yet be ready for Clayton’s scenario,” Chajecki noted.
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