Spot bitcoin ETF might soon be here
Ric Edelman: It's Wednesday, August 30th. Big news for bitcoin. Yesterday, the D.C. Circuit Court of Appeals has ruled against the SEC and in favor of Grayscale. This is great news for everyone who owns the Grayscale Bitcoin Trust and for everyone who owns bitcoin. I'm going to tell you what this is all about and why you should care.
But before I start, I want to mention that this is all the latest news in a long running saga. In fact, just last week I told you that I've published a new white paper on all this and you can download it and read it for free at DACFP.com. The link is in the show notes and I've just updated my white paper to include all of this latest news.
Here's the situation. Bitcoin has been around for almost 15 years and a lot of people are interested in it, but there's no real easy, convenient way to buy bitcoin because there's no bitcoin ETF available. It's like gold. You might be interested in owning gold, but going out and buying gold bullion, where do you get it? Where do you store it? How do you know if you're getting a good price from a good dealer? This is why so many people who want gold don't buy gold. They buy a gold ETF. We all love ETFs, exchange traded funds. They're the cheapest investment fund available. They're highly liquid. Their shares trade every business day, all day long. You have full transparency. Taxes and recordkeeping are easy and they're so convenient.
You get them from your financial advisor in an ordinary brokerage account, and it's easy to dollar-cost average and to rebalance and to do tax-loss harvesting. And just like people like to buy their gold investments and their real estate investments and their foreign investments, as well as their stocks and bonds all through ETFs, we want to be able to do the same thing with bitcoin and the crypto community has been asking the SEC to let us do exactly that for almost ten years
Nearly 50 times, fund companies have filed applications with the SEC to launch a bitcoin ETF, and every single time the SEC has said no, but the SEC has said yes to lots of other investment funds, bitcoin grantor trusts, bitcoin hedge funds, even bitcoin futures ETFs. But no, to spot bitcoin ETFs. It doesn't make any sense. How can you say yes to futures which are derivatives of bitcoin but not to bitcoin itself?
It's like saying you can eat ketchup but you can't eat tomatoes. Makes no sense. That's why Grayscale filed a lawsuit against the SEC. Grayscale runs the Grayscale Bitcoin Trust, GBTC. It's a grantor trust. It owns bitcoin just like an ETF would. But because it's in the form of a grantor trust, it doesn't have the advantages of an ETF. Instead of costing half a percent a year, GBTC costs 2% a year, four times more. Instead of shares trading at net asset value or NAV, the price trades for 30 to 50% less.
So Grayscale asked the SEC for permission to convert GBTC into an ETF, so it would immediately cut the cost of the fund by 80%, and that 30 or 40% discount would evaporate instantly, giving investors about $6 billion in locked up value in an instant.
But the SEC rejected Grayscale's request. This makes no sense to anyone in the crypto community or to lots of members of Congress either. So Grayscale sued and yesterday the court ruled in Grayscale's favor. The court wrote, “The denial of Grayscale's proposal was arbitrary and capricious because the SEC failed to explain its different treatment of similar products.”
The court noted that the SEC must not permit unfair discrimination between consumers, issuers, brokers or dealers, and since Grayscale's Bitcoin ETF would be similar to bitcoin futures ETFs, the SEC is obligated to explain why a bitcoin ETF is materially different from a bitcoin futures ETF, and since it has said yes to the futures ETF but not to the spot ETF, well it makes no sense. And the SEC has failed to offer those explanations of why they said yes to one, but no to the other.
In fact, the court noted that Grayscale provided the SEC with substantial evidence that its proposed bitcoin ETF is in fact similar to bitcoin futures ETFs that the SEC had already approved. And therefore the court said the SEC should have given the same regulatory treatment to Grayscale.
So for the SEC to say that Grayscale's application is denied while others are approved is, at its core, an inconsistent treatment of similar products. And the court noted that in fact the SEC did not dispute Grayscale's evidence that the spot market and the futures market for bitcoin are 99.9% correlated. The two are essentially the same. The court blasted the SEC, calling its actions unreasonable.
You see, the SEC has been claiming that bitcoin prices are impossible to verify, but if the bitcoin prices can't be verified, then how can you verify bitcoin futures prices after all the prices of the. Futures contracts are based on the spot prices. So if the spot prices are questionable, how can the futures prices be certain? The SEC's position doesn't make any sense, and the court raised that exact point in the ruling.
Judge Neomi Rao wrote, “Because the spot bitcoin market and the bitcoin futures market are so tightly correlated, a price distortion in the spot market will be reflected in the price of the futures market. After all, futures are derivatives of the spot market. The SEC failed to explain why a bitcoin futures ETF protects investors from potential fraud but not Grayscale's proposed bitcoin ETF.”
The court also said that the SEC offered no compelling reason why it felt that a measure for assessing the potential for fraud and manipulation was necessary for bitcoin ETFs but unnecessary for bitcoin futures ETFs.
Bottom line: The court said, “The SEC failed to reasonably explain why it applied the listing of two bitcoin futures ETFs, but not Grayscale's similar proposed bitcoin ETF. And without such explanation, inconsistent treatment of similar products is arbitrary and capricious. This, unlike regulatory treatment of like products, is unlawful and we therefore grant Grayscale's petition and vacate the SEC's order.”
Cheers immediately erupted throughout the crypto community yesterday. Within minutes, bitcoin's price was up over 8% and the discount in Grayscale's Bitcoin trust, which has been as large as 60%, has shrunk dramatically. GBTC stock price rose over 15% and investors are expecting it to soon convert to ETF status. When that happens, the discount will evaporate completely and immediately.
But the story is not over yet.
The SEC could appeal the ruling, an action it often takes when it doesn't get the ruling it wants, when it loses in court or the SEC could acquiesce. That doesn't mean the SEC will approve Grayscale's spot bitcoin application. The court didn't order the SEC to do that. It merely said the SEC's rejection was invalid because the SEC failed to explain why it rejected the application.
So the SEC might decide to issue those explanations along with a new rejection letter to Grayscale that would restart this entire legal process. Or the SEC could in fact, admit that it is wrong and approve not only Grayscale's spot bitcoin ETF application, but many of the other applications as well that would unleash hundreds of thousands of financial advisors into action, potentially allocating hundreds of millions of dollars, perhaps tens of billions into bitcoin and other digital assets.
The price of bitcoin would be expected to surge. The fact that it rose 8% within minutes of the court ruling is an early indication of the results of SEC approval of the spot bitcoin applications. The crypto community is both excited about this ruling and hopeful that it will soon lead to those ETFs becoming available to US investors.
Nothing is certain right now, but the court's ruling is the most bullish signal for crypto in years. I encourage you to read my new white paper so you can understand what's going on. There's a tremendous investment opportunity here and if you're going to miss it, I at least want you to miss it on purpose and not accidentally.
This is all a big deal because three quarters of financial advisors say they have not been recommending bitcoin to their clients simply because there's no bitcoin ETF. But now it looks like there soon will be maybe as soon as this week. If you are an advisor, you need to learn all about this right now. And if you're an investor, you need to start talking about this with your advisor. My white paper is the best, fastest way for both advisors and investors to get up to speed on this. This is the most bullish event for crypto in years. Don't miss it. The white paper is available at DACFP.com.