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Significant event yesterday in the industry, as Grayscale secured a victory against the SEC to convert its Bitcoin fund into an ETF. Grayscale’s flagship Bitcoin fund, the GBTC, manages $16 billion in assets. An appeals court ordered the SEC’s denial of Grayscale’s Bitcoin spot ETF to be reviewed, as the SEC did not provide a coherent explanation for the rejection. This paves the way for new opportunities for investors and may prompt other major firms to submit their own Bitcoin spot ETF requests. Following this news, Bitcoin’s price surged by 5% within an hour, and other cryptocurrencies also saw a rise. The SEC and Grayscale have 45 days to appeal the decision. This marks a significant turning point for cryptocurrencies, as the SEC has long declined to approve Bitcoin spot ETFs citing market manipulation concerns. Grayscale filed a lawsuit against the SEC after its conversion of the Bitcoin fund into an ETF was rejected. The appellate court’s decision challenges the SEC’s rationale and could pave the way for increased institutional adoption of cryptocurrencies via these ETFs.
Cryptocurrency exchanges observed significant inflows of nearly 30,000 BTC just before Grayscale’s victory over the SEC, according to analytics firm Santiment. Prior to this pivotal decision, nearly 30,000 BTC, valued at $822 million at the current rate of $27,400, were moved to addresses linked to centralized exchange platforms. This decision led to a 6% increase in the price of Bitcoin, pushing the cryptocurrency to $28,000. It seems some traders anticipated this rise and prepared accordingly by moving their coins to the platforms. Typically, investors transfer their cryptocurrencies to platforms when they plan to sell or use their coins as margin for derivative trading. Therefore, an increase in inflows to platforms is often seen as a sign of price volatility.
The U.S. District of Columbia Court of Appeals’ decision was met with enthusiasm by the crypto community. However, some question the real impact of this decision. While Adam Cochran of Cinneamhain Ventures described the decision as a “total rebuttal” of the SEC’s arguments, and other influencers also expressed their joy, the initial excitement was tempered by a more sober assessment of the decision’s scope. Craig Salm, Grayscale’s legal director, pointed out that the case simply posed a question of equality under the law. Analysts are speculating on how the SEC might respond: accept the decision or challenge the judges’ opinion. Jake Chervinsky of the Blockchain Association believes the SEC might choose to accept the decision to save face after this legal setback. They could find a graceful way out and justify their future acceptance of Bitcoin ETFs based on this legal decision. Gabriel Shapiro of Delphi Labs is less optimistic, noting that the SEC has often contested unfavorable court decisions. Finally, Austin Campbell of Zero Knowledge Consulting emphasizes the high cost of litigating with the SEC for companies, both financially and strategically.
Grayscale’s victory against the SEC led to an increase in the stock price of its Bitcoin trust, thereby narrowing the gap with the underlying asset’s price. The gap between Grayscale’s Bitcoin Trust (GBTC) price and Bitcoin’s value reached its lowest level since December 2021, at 18.06%, according to Coinglass data. Since February 2021, GBTC shares have traded at a price lower than Bitcoin’s market value, reaching a nearly 50% gap in December 2022. This is due to the inability to easily convert GBTC into Bitcoin, reducing its demand compared to other products. Europe also recently launched its first cash Bitcoin ETF. Although the court ruled in favor of Grayscale, the final decision to approve a Bitcoin ETF still rests with the SEC. Grayscale’s CEO, Michael Sonnenshein, stated that this legal win brings the company a step closer to realizing a U.S. cash Bitcoin ETF.
The SEC’s first decisions following this twist could come quickly. It is nearing its initial deadlines to decide on seven spot Bitcoin ETF applications. Investment firm Bitwise will find out on September 1st whether its ETF application is approved by the SEC. BlackRock, VanEck, Fidelity, Invesco, and Wisdomtree will all await the SEC’s decision for their funds by September 2nd, while Valkyrie will receive a response from the SEC on September 4th. This, after the U.S. appeals court ruled that the SEC’s rejection of Grayscale’s request to convert its Grayscale Bitcoin Trust (GBTC) into a cash Bitcoin ETF was “arbitrary and capricious”. James Seyffart, ETF analyst at Bloomberg, said in an interview that Grayscale’s win undoubtedly boosts the chances of success for future applicants. However, he also mentioned that the SEC might delay its decisions. After the August 29th decision in favor of Grayscale, the SEC now has 90 days to appeal to the U.S. Supreme Court. If the SEC does not appeal, the court will need to specify how its decision will be executed. Seyffart believes the SEC essentially has two options: either they acknowledge their defeat and approve Grayscale’s GBTC conversion and other applications or they further delay the process.
Grayscale’s victory over the SEC was beneficial for the cryptocurrency sector, with a positive trend in the markets. Concurrently, Coinbase’s stock also climbed, recording a 15% increase at the close on Tuesday, outperforming the performance of Bitcoin itself. Following the decision of the US appellate court to ask the SEC to reconsider Grayscale’s request to convert its Grayscale Bitcoin Trust (GBTC) into a spot Bitcoin ETF, Coinbase could benefit significantly from a potential approval of Bitcoin ETFs. Paul Grewal, Coinbase’s Chief Legal Officer, highlighted the company’s key role as a preferred custodian, ensuring the protection of client assets. Major firms, such as BlackRock, have chosen Coinbase as their custodian for their Bitcoin ETFs. Additionally, Coinbase has established surveillance-sharing agreements with exchanges such as Cboe BZX Exchange and Nasdaq, thereby strengthening their ability to detect potential Bitcoin market frauds.
Mastercard and Visa have terminated their crypto card partnerships with cryptocurrency exchange Binance. Starting September 22, Mastercard will cease its crypto card offerings in countries such as Argentina, Brazil, Colombia, and Bahrain, said the company’s Senior Vice President of Communication, Seth Eisen. This decision comes a year after the launch of a Bitcoin reward card in Argentina by Binance and Mastercard. On its part, Visa had already ended its crypto card partnership with Binance in July. Binance also announced the end of its crypto card in Latin America and the Middle East. Although Mastercard ended its card partnership with Binance, the company will continue to offer other products and services in the cryptocurrency realm.
The market capitalization of the stablecoin USDC, the second-largest on the market, has dropped to its lowest level in two years, now standing at just under $26 billion, far from its peak of $56 billion last June. In comparison, Tether (USDT) recently hit a new record of $83 billion. Several main reasons explain this drop: firstly, a major depreciation event earlier this year where, following a regional banking crisis in the US, Circle (the company behind USDC) revealed having $3 billion locked up, dropping USDC to $0.87. Tom Wan of 21Shares mainly attributes this drop to this banking crisis, which affected USDC much more than USDT. Additionally, the steady rise in interest rates means that holding USDC equates to giving up a secure return of 4% to 5% per year, making holding USDC less financially attractive.
Sue Ennis, Vice President of Hut 8, a major Bitcoin mining company, believes that Bitcoin could reach $100,000 by capturing only 2 to 5% of gold’s market capitalization. Despite the approach of the upcoming Bitcoin “halving” event, which should theoretically lead to a rise in BTC’s price, the lack of recent influxes into the crypto market and the current economic situation make this theory less convincing in the short term. In an interview with Paul Barron, Ennis expressed her optimism about Bitcoin’s price rising beyond $100,000 in the coming year. She highlighted unique dynamics in the mining sector, such as the continuous increase in the hash rate despite the stabilization of Bitcoin’s price. She also mentioned the growing interest of Middle Eastern governments in Bitcoin mining, using renewable energy sources. Ennis suggests that to thrive after the halving, miners will need to diversify their revenue sources, including exploring artificial intelligence applications or offering industrial-scale ASIC repair services.
Grayscale’s legal victory over the SEC and the disappointing US labor market data support Bitcoin’s rise. However, the bullish scenario is not risk-free. The SEC can still reject Grayscale’s attempts to convert the trust into an ETF. Furthermore, the persistent weakness in US data might stir recession fears and weigh on risk assets. In the short term, yesterday’s surge allowed the BTC price to close above its critical 200-day average. However, it is quickly being retested as of writing. Will it act as support or resistance? The answer should be forthcoming. For a rare time in Bitcoin’s existence, the 200-day and 200-week moving averages are virtually at the same spot, around $27,500. The current area is therefore of crucial importance for what’s to come.
Rivemont Investments, manager of the Rivemont Crypto Fund.
The presented information is as of August 30th, 2023, unless otherwise indicated and is provided for information purposes only. The information comes from sources that we believe are reliable, but not guaranteed. This statement does not provide financial, legal or tax advice. Rivemont Investments are not responsible for any errors or omissions in the information or for any loss or damage suffered.
