Grayscale Ruling Might Transform Crypto ETFs

Grayscale Ruling Might Transform Crypto ETFs

Like the SPDR Gold Trust, Grayscale's victory may mark a pivot point.

Reviewed by: Ron Day
Edited by: Mark Nacinovich

A federal court in Washington ruled in favor of Grayscale against the SEC in its efforts to bring a spot bitcoin ETF to market. That spurred a brief rally in cryptocurrencies but could be the impetus for bigger and longer-lasting gains in the future, just like the first gold exchange-traded funds led to gains in the price of the precious metal years ago. 

On Aug. 29, the U.S. Court of Appeals rescinded the SEC’s decision to deny the Grayscale’s application for a spot bitcoin EFT, citing a failure to “provide any substantive rationale for its initial rejection.” Grayscale is seeking to transform its GBTC trust fund from an over-the-counter product into an ETF to make it more accessible to more investors.  

GBTC had traded at a significant discount to bitcoin over the past years, but its shares exploded higher after the court’s decision was announced. While the ruling doesn’t guarantee a spot bitcoin ETF, it improves the odds that the Securities and Exchange Commission will approve. The court ruled that the SEC must reconsider Grayscale’s application. 

The prices of bitcoin, other cryptocurrencies and crypto-related assets lurched higher on news of the ruling, and GBTC’s discount to bitcoin narrowed. 

SPDR Gold Trust and Grayscale Crypto

In 2004, the SPDR Gold Trust (GLD) changed the gold market by allowing market participants to gain exposure to the precious metal in regular stock accounts. Gold has been in a multi-decade bull market since GLD’s 2004 listing. ETFs for spot bitcoin and other cryptocurrencies could similarly boost the burgeoning asset class. (ETFs that track bitcoin future contracts are already trading. The SEC has approved those.) 

When the court’s decision on Grayscale became public, GBTC jumped 20.6%. 

Bitcoin, meanwhile, rose 7.9% on Aug. 29. GBTC erased some of its discount to the underlying price of bitcoin after the ruling. Still, the prices fell back after their initial burst. GBTC fell 12.8% to $18.49 per share on Sept. 1 from its Aug. 29 high, while bitcoin at $25,620.57 declined 8.6% as GBTC’s discount widened during the correction.  

BITO and BITQ Post Gains 

ProShares Bitcoin Strategy EFT (BITO), which tracks regulated bitcoin futures traded in the Chicago Mercantile Exchange, rose 8.6% to an intraday high of $14.51 on Aug. 29, but retreated 9.4% to $13.14 on Sept. 1.  

The diversified Bitwise Crypto Industry Innovators ETF (BITQ), which owns shares in crypto-related companies including trading platforms, crypto miners and other firms tied to digital assets, gained 13.6% to $8.09 on Aug. 29, but fell back 8.9% to $7.37 on Sept. 1. 

Cryptocurrencies had a $1.03 trillion market cap as of Sept. 1. Bitcoin, the leading cryptocurrency with a market cap of $498.5 billion, was 49.7% of the asset class, while ether, the second-largest crypto with a $194.3 billion market cap, was 19.4% of the total. No other token has a market cap of over $83 billion.  

To put the cryptocurrency market into perspective, consider that Apple’s market cap is nearly $3 trillion, Microsoft’s is over $2.4 trillion, Google parent Alphabet’s is over $1.7 trillion, Amazon’s is above $1.4 trillion and Nvidia’s is over $1.2 trillion.  

Herd Buying May Be Coming 

Because crypto is a relatively small market, its explosive and implosive price action leads to illiquid periods. In illiquid markets, bids to buy tend to disappear during selloffs, and offers to sell can evaporate during rallies, leading to significant price moves. 

Bitcoin and other crypto ETFs could lead to a herd of buying as many investors avoid the asset class because they are uncomfortable holding the assets in personal wallets or on unregulated exchanges. Mt. Gox, FTX and other scandals have discouraged investment and trading.  

Regulated ETF products, however, would increase the addressable market for cryptocurrencies as investors and traders can hold them in standard stock trading and investment accounts. A herd of investment buying in an illiquid market could lead to another explosive crypto rally.  

GLD as a Model 

In 2004, the SPDR Gold Trust burst onto the scene, opening a new channel for gold investment without storage or other custodial concerns. There was a nearly two-decade bull market in gold and GLD. At around the $180 per share level on Sept. 1, GLD had $55.72 billion in assets under management, making it the most successful commodity ETF.  

The growing interest in cryptos and price volatility could attract many investors when bitcoin and other cryptocurrency ETFs are available. If GLD is a model, the next explosive rally in cryptos could be on the horizon. The small overall market may only continue to exacerbate the price variance. Stay tuned… 

Andrew Hecht is a Nevada-based writer and analyst covering stocks, bonds, foreign exchange, cryptocurrency and raw material markets. He has over four decades of experience in markets across all asset classes, concentrating on commodity markets. Hecht was a senior trader at Salomon Brothers in the 1980s and 1990s, running sales and trading businesses. In 2013, McGraw Hill published his book, “How to Make Money in Commodities."