Crypto ETFs Surge as Court Deals Blow to SEC

What the latest crypto developments mean for the ETF world.

It’s been over a year since things have been this good for investors in crypto ETFs.  

A week that started with Grayscale Investments blasting the SEC for being discriminatory in the way it treats spot bitcoin ETFs ended with a U.S. court dealing a major blow to the SEC’s crypto regulation playbook.  

On Monday, Grayscale sent a letter to the court handling its appeal of the SEC’s decision to block the Grayscale Bitcoin Trust (GBTC) from converting into a spot bitcoin ETF. In the letter, it doubled down on its accusation that the SEC was acting arbitrary by approving bitcoin futures ETFs but not spot bitcoin ETFs. 

The letter pointed to the recent SEC approval of the Volatility Shares 2x Bitcoin Strategy ETF (BITX)—a leveraged, futures-based ETF—as further evidence of the SEC’s arbitrary discrimination against spot bitcoin ETFs.  

Then on Thursday, a district court judge handed down a shocking ruling in another case—the SEC’s lawsuit against Ripple Labs, issuer of the XRP token. 

The judge said that that the token wasn’t a security in and of itself, an idea that if taken to its natural conclusion would mean that most crypto tokens aren’t securities and that the SEC’s lawsuit against the largest crypto exchange in the U.S., Coinbase, has no merit.  

Crypto ETFs Surge 

Market participants and analysts saw the events of the week as resoundingly positive for the crypto space, with prices for crypto ETFs surging to reflect that bullishness.

The ProShares Bitcoin Strategy ETF (BITO), the largest bitcoin futures ETF, gained 3%, while the Amplify Transformational Data Sharing ETF (BLOK), the largest ETF targeting blockchain-focused companies, rallied 10%.

Meanwhile, higher beta crypto stock funds, like the Bitwise Crypto Industry Innovators ETF (BITQ), the Global X Blockchain ETF (BKCH) and the Valkyrie Bitcoin Miners ETF (WGMI) spiked by around 17% this week. 

Most of these ETFs are now trading close to their highest levels since early 2022.  

A Massive Win for Ripple XRP Token

Bullish price action aside, has anything changed for crypto assets and the prospects for a spot bitcoin ETF? 

For the crypto industry, the Ripple ruling is a massive win. By asserting that XRP is not a token per se, the ruling implies that much of the crypto industry lies outside of the purview of the SEC.  

It means that in many cases, tokens don’t have to be registered with the regulator and that exchanges where these tokens are traded don’t have to register either.  

However, some legal experts have cautioned that this ruling is merely one judge’s opinion and that future court cases, including the SEC’s likely appeal, could result in entirely different conclusions.  

Others have gone as far as to question the logic of the ruling, especially since it seems to run counter to conventional views with regard to what constitutes a securities offering.  

Spot Bitcoin ETF Hopes  

Meanwhile, this week’s letter from Grayscale doesn’t directly change the trajectory of its court case against the SEC, and thus, the likelihood of a spot bitcoin ETF.  

Bitcoin futures ETFs existed before leveraged bitcoin futures ETFs and the launch of the latter doesn’t materially strengthen Grayscale’s case against the SEC.

That said, taken together, the events of this week have certainly changed the narrative in the crypto space. Suddenly, the SEC is on the defensive and many in the crypto industry are convinced that the regulator has overstepped its authority and can be beaten in the courts.  

GBTC is currently trading at a 25% discount to its net asset value, the smallest level since May 2022, suggesting that investors are increasingly betting that a spot bitcoin ETF may be coming to market soon, regardless of how the SEC feels about it.  

Contact Sumit Roy at [email protected]