BTC Spot ETF Timelines

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TLDR;

• The SEC's decision to delay several spot ETF approval decisions pushes the timeline to between October 2023 and March 2024.

• Grayscale's recent victory against the SEC in its lawsuit over the GBTC trust conversion takes us one step closer to these approvals.

• We estimate the chances of a spot ETF being approved before the end of the year at 85%.

Introduction

Exchange-traded funds (ETFs) are a type of investment fund that tracks an index or basket of assets. They are traded on exchanges like stocks and offer a number of advantages over traditional mutual funds, including lower fees, more liquidity, and increased transparency.

The first cryptocurrency futures ETF was approved by the U.S. Securities and Exchange Commission (SEC) in October 2021. The ProShares Bitcoin Strategy ETF (BITO) tracks the price of Bitcoin futures contracts on the Chicago Mercantile Exchange (CME). Since then, the SEC has approved two more cryptocurrency futures ETFs: the Valkyrie Bitcoin Strategy ETF (BTF) and the VanEck Bitcoin Strategy ETF (XBTF).

The approval of cryptocurrency futures ETFs was a major milestone for the cryptocurrency industry. It made it easier for investors to gain exposure to the price of Bitcoin without having to buy and store the actual cryptocurrency. It also introduced new avenues for institutional participation in the space.

Spot ETFs

Spot BTC ETFs are a type of ETF that would buy and hold actual Bitcoin directly. This would make them more closely linked to the actual price of Bitcoin than futures ETFs. However, spot ETFs have not yet been approved by the SEC, which continues to site a number of reasons for delaying and rejecting applications including:

• Concerns about market manipulation: The SEC is concerned that spot ETFs could be used to manipulate the price of Bitcoin. For example, a large investor could buy a large number of shares in a spot ETF, which would drive up the price of Bitcoin. Then, the investor could sell the shares and make a profit.

• Lack of regulation: The cryptocurrency market is not as regulated as the traditional financial markets. This makes it difficult for the SEC to ensure that spot ETFs would be properly regulated.

• Price volatility: The price of Bitcoin is very volatile. This means that the price of a spot ETF could fluctuate wildly, which could harm investors.

• Counterfeiting: There is a risk that counterfeit Bitcoin could be used to back a spot ETF. This would be a major problem, as it would undermine the integrity of the ETF.

The approval of a spot BTC ETF could have a significant impact on the market. According to a report by Fundstrat and Vetle Lunde, the approval of a spot ETF could lead to $400 billion in inbound flows into cryptocurrency. This estimate is based on the assumption that institutional investors would allocate 1% of their assets to Bitcoin.

Other estimates of inbound flows caused by BTC ETFs include:

• $200 billion: This estimate is from a report by JPMorgan Chase.

• $500 billion: This estimate is from a report by Citibank.

• $1 trillion: This estimate is from a report by Fidelity Digital Assets.

It’s clear that most institutional participants believe the approval of a spot ETF could have a major impact on the market, both long and short-term. It’s for this reason underlying prices have been sensitive to related headlines throughout 2023 and will remain so up until the launch of the first spot investment vehicle.

Current state-of-play

On August 29th, the U.S. Court of Appeals for the District of Columbia ruled in favor of Grayscale Investments in its lawsuit against the Securities and Exchange Commission (SEC). The court found that the SEC had not adequately justified its decision to deny Grayscale's application to convert its $16.2 billion Bitcoin Trust into an ETF.

The news initially sent the market rallying, as traders saw it as a step closer to the approval of spot Bitcoin ETFs. JP Morgan analysts even predicted that the SEC would be "forced" to approve multiple spot Bitcoin ETFs in the wake of the ruling.

However, the rally was short-lived. Just 2 days later, the SEC announced that it would delay its decision on whether to approve spot Bitcoin ETFs from iShares, Bitwise, VanEck, Wisdomtree, and Investco. This news has pushed back the timeline for any imminent approval, with some commentators now predicting that decisions will not be made until later this year or even early next year. This pushes the potential approval timeline out to between October 2023 - March 2024.

Around these dates, the market will likely see increased volatility, with options pricing already reflecting increased volatility around the deadlines. Given the SEC's current approach to these filings, we estimate the odds of an ETF approval before year-end at around 75%.

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