Crypto prices surged overnight after a US court ruling on the right to launch a bitcoin exchange traded fund fuelled speculation the decision could unlock billions of dollars of investment into the world’s largest digital currency.
Bitcoin added 6 per cent to $US27,564 ($42,801) after investment manager Grayscale won its appeal against the US Securities and Exchange Commission to reconsider its application to list a bitcoin fund on public exchanges. A slew of other digital currencies including ethereum, cardano and solana also gained more than 5 per cent on the news.
“It’s hard to argue against the market reaction that the decision is overtly positive for crypto asset classes,” said Nick Bishop, the founder of crypto consultancy NotCentralised. “The big beneficiaries are players operationally levered to higher token prices and more trade flow.”
Dozens of traditional wealth management giants including BlackRock, Fidelity, Ark Invest, VanEck, JPMorgan and BetaShares have all signalled their desire to offer ETFs that track bitcoin’s price by buying the token on behalf of investors.
Proponents say an ETF that offers direct exposure to the cryptocurrency would dispense with much of the complexity in buying bitcoin, such as the need for an investor to open personal accounts at businesses with no brand name. It would also allay concerns over complex password requirements, or assets being stolen.
A Sydney-based spokesperson for BlackRock, the world’s largest asset manager, said exchange traded funds were about providing investors with access to “more parts of the markets”.
“BlackRock has received interest from clients in gaining access to digital assets, and enabling client access is core to [our] mission … whether that be to digital assets, gold, emerging markets or infrastructure. At the end of the day, ETFs are there to give investors choice.”
Terrible time for exchanges
The unlisted Grayscale Bitcoin Trust is estimated to own about 3 per cent of the world’s bitcoin supply on behalf of investors, and the legal ruling means the SEC must review Grayscale’s application to convert its $US10.6 billion trust into an ETF.
Grayscale’s Bitcoin Trust surged 21 per cent and shares in Nasdaq-listed crypto exchange Coinbase jumped 14.9 per cent on the landmark decision.
“It’s been a terrible time for crypto exchanges in the last 12 to 18 months,” Mr Bishop said. “There’s a few that have gone under, a few had to go cap-in-hand for material down round cap raises [at lower valuations], because they’re volume plays, they don’t really care what the price of the token is as they’re clipping a ticket on each transaction.”
In the US District of Columbia court, Judge Neomi Reo ruled the SEC had acted arbitrarily and capriciously in refusing to review Grayscale’s spot bitcoin ETF application on the basis that similar products are already available that track the price of bitcoin futures.
Futures ETFs don’t physically own bitcoin as the underlying asset and therefore technically avoid some of the regulators’ objections. Instead, they buy cash settled futures contracts over bitcoin to track its price for investors and allow them to potentially profit as the market price rises.
As easy as shares
Australian regulators including ASIC and the Australian Securities Exchange have consistently opposed spot ETFs because they would buy the token on behalf of investors, while appointing custodians to store it online or offline.
Martin Rogers, a venture capitalist at KTM Ventures and an investor in Australian cryptocurrency exchange Independent Reserve, said the US court ruling brought the industry one step closer to making cryptocurrency as easy to buy as shares.
“ASX are risk-averse, and I think will only approve an ETF by someone like BlackRock once it gets approved in America,” he said. “Regulators like the SEC have failed in their remit to protect investors by denying a bitcoin ETF. The gold ETF revolutionised ownership of gold and now around 40 per cent of gold ownership is in ETFs.”
However, Mr Rogers also cautioned that bitcoin prices could dash investor hopes for further gains if Grayscale was permitted to convert its giant trust into a public listing.
“In the short term this could be bearish as you’ll have a lot of bitcoin unloaded onto the market,” he said. “Grayscale has traded at a 20 per cent discount to its net asset value and investors have been stuck.
“The people in it may think, ‘I’ll sell now, as the fees are high at 200 basis points’. I think BlackRock will do one at 75 basis points and BlackRock could hoover the selling on the other side.”
Bitcoin remains subject to criticisms, including claims it needlessly harms the environment due to the amount of electricity required to mine coins. Other investors claim it’s nothing more than a social media-powered pump-and-dump or marketing scam, which enriches early adopters at the expense of later adopters. (AFR)