Client Access 
Communications
We are now exactly 14 days away from the deadline for the SEC to make its decision on approving a Bitcoin spot ETF. All indications point towards an imminent acceptance of such a product, with technical details seemingly in the final phase of settlement. It appears clear that redemption will be in cash only, without the option of in-kind procedures. More details will follow.
Yesterday, we witnessed a correction in Bitcoin’s price concurrent with fears over the start of the repayment plan for creditors of the defunct Mt. Gox exchange. The platform faced a technical issue resulting in double payments to some creditors. This malfunction was discussed on the Reddit forum r/mtgoxinsolvency, where users reported receiving double the funds from the Mt. Gox Rehabilitation Fund. In response, the fund requested the repayment of the additional payment, citing a legal obligation to return this money due to the system error. While acknowledging the error, some Reddit users expressed frustration, highlighting previous difficulties in recovering their funds. Indeed, after the platform’s hack, which resulted in the loss of over 740,000 Bitcoins (valued at about $460 million at the time and now estimated at over $31 billion), it took nearly a decade for creditors to receive a settlement and start receiving payments. The payments began on December 26, mainly via PayPal. This incident raises questions about error management in the cryptocurrency ecosystem and highlights potential risks for users and involved institutions.
Fears of the impact of such a repayment on the markets – although the majority of these repayments will be in cash and not in bitcoins – coupled with these technical problems, led to a downward movement yesterday. Margin traders suffered losses of $190 million as Bitcoin retreated following the apparent repayments made by Mt. Gox. About $45 million came from altcoin futures contracts in an unusual movement, while Bitcoin liquidations accounted for only $36 million. These liquidation figures are the highest in recent weeks following a purge of nearly $500 million in early December.
Despite this, the bullish trend remains fully intact, in an increasingly clear ascending triangle. The 30-day exponential moving average has been precisely respected since it became support in mid-October.
The U.S. Securities and Exchange Commission’s (SEC) approval process for Bitcoin ETFs faces a major final hurdle before the January deadline: clarifying the roles of authorized participants. According to Bloomberg Intelligence analyst Eric Balchunas, each Bitcoin ETF candidate must clearly define the parameters of authorized participants in its S-1 form to be considered for approval. Authorized participants, usually large banks or financial institutions, are crucial for the creation and redemption of ETF shares. Their presence ensures increased liquidity, enabling the creation or reduction of shares according to market needs, to keep the share price in line with the underlying asset, here Bitcoin.
The cryptocurrency sector has been seeking approval of a Bitcoin spot ETF for U.S. investors for over a decade. However, the SEC has consistently expressed reservations, notably due to market manipulation risks and the reliability of price discovery. Balchunas revealed that, although some candidates allow for creation of shares in cash or in-kind, the SEC does not seem comfortable with in-kind share creation, as this would involve the use of Bitcoin by registered brokers, which is not permitted. Cash creation of shares, where the issuer directly manages the Bitcoin, could be a solution to this issue.
About a dozen companies, including Ark 21Shares, Grayscale, BlackRock, Bitwise, VanEck, Wisdomtree, Invesco, Galaxy, Fidelity, Valkyrie, Global X, Hashdex, and Franklin, have recently filed applications for a Bitcoin ETF. However, the SEC wishes these ETFs to be created with cash contributions rather than bitcoins, meaning only the issuer of the shares would handle bitcoins. Unlike stock ETFs that allow in-kind redemptions, the proposed Bitcoin ETFs would only allow cash transactions, without direct manipulation of bitcoins. Valkyrie, following the example of BlackRock, Fidelity Investments, Ark Invest, and Invesco, has agreed to the principle of cash creation. Grayscale, initially reluctant, followed suit yesterday.
Cash creation works as follows: authorized participants, usually large financial institutions, create or redeem ETF shares based on retail investor demand on the secondary market. Like other ETFs on a single commodity, a Bitcoin ETF would be structured as a trust mandate, with the physical assets securely stored or, for Bitcoin, with a custodian. Investors typically receive trust mandate letters with their tax information. Regarding in-kind ETFs, they are known for their tax efficiency, as capital gains are not generated during redemptions. However, a cash ETF loses this advantage, making transactions taxable and complicating management for the issuer.
If the SEC approves a cash-based ETF in 2024, it will have to justify its decision not to approve an in-kind ETF. The SEC might be particularly reluctant regarding in-kind ETFs, partly due to unusual behaviors observed around Grayscale’s GBTC. Previously, GBTC traded at a significant premium compared to the net asset value, facilitating lucrative arbitrage, especially for Three Arrows Capital. This premium should no longer exist with a cash ETF, limiting arbitrage opportunities and creating a clearer financial trail. This could explain Grayscale’s initial hesitation to alter its ETF request to a cash creation.
Barry Silbert resigned from his position as the chairman of Grayscale Investments, a major cryptocurrency investment firm, as indicated in a recent filing with the SEC. Silbert, also the CEO of Grayscale’s parent group, Digital Currency Group (DCG), will be replaced by DCG’s CFO, Mark Shifke. This change comes at a critical time for Grayscale, as the SEC’s approval of the first spot market Bitcoin ETF is imminent. This approval could be a turning point for Grayscale, potentially introducing $1 trillion of institutional investment into the crypto markets. Silbert’s resignation and leadership changes at Grayscale come after a turbulent year for DCG in 2023. The company faced legal proceedings involving the New York-based cryptocurrency exchange Gemini and fraud allegations of over one billion dollars by the New York Attorney General. The exact reasons for Silbert’s departure remain uncertain, with some analysts suggesting it might be a strategy to facilitate the approval of Grayscale’s Bitcoin ETF.
The excitement for Bitcoin has reached record highs among institutional investors and savvy market participants, in anticipation of a possible approval by the US SEC of a Bitcoin-based exchange-traded fund. According to data from the Taiwanese tracking site MacroMicro, the Bitcoin futures index for “smart money” climbed to a record level of 13,711 last week. This phenomenon occurs just before the SEC’s expected decision on spot ETF applications. Bitcoin futures contracts, traded on the Chicago Mercantile Exchange (CME) and representing 5 BTC each, are seen as a barometer of institutional activity. These contracts allow investors to expose their capital to Bitcoin via a regulated platform, without having to own the cryptocurrency directly. A long position in these contracts indicates a bullish perspective, while a short position suggests the opposite. The sharp increase in the smart money index this quarter reflects expectations of a Fed rate cut in 2024 and the possible approval of one or more spot ETFs.
Why does a spot ETF generate so much hope among investors? The reasons are manifold. First and foremost, it would be a validation of the asset itself, which seemed like a far-fetched wish just a few years ago. Such a product would also easily enable older generations, who hold the majority of investment capital, to enter the market. If numerous products were to be approved simultaneously, fierce advertising competition could be expected, bringing Bitcoin back to the forefront of the general public in the United States. Naturally, this green light from regulators would also alleviate investors’ fears regarding the sagas of recent years involving unregulated exchange platforms.
On December 25, the Bitcoin hash rate reached a record of 544 exahashes per second (EH/s), according to Blockchain.com, with confirmation by Bitinfocharts reporting a peak in average hash rate over the weekend. This comes as network hash rates have more than doubled this year, increasing by 130% since January. A high hash rate can be beneficial for theoretical pricing models such as the implied hash price, but it’s not good news for miners who must work harder to secure the next block. The hash price, a measure of profitability, dropped last week as the frenzy of BRC-20 registrations calmed. The hash price is currently $0.09 per terahash per second per day, according to HashrateIndex. Profitability has dropped by 34% since its 2023 high of $0.136/TH/s/day on December 17. Hash price often increases during high demand, leading to high transaction fees, as seen during the recent registration frenzy.
The trial involving Craig Wright, who claims to be the inventor of Bitcoin under the pseudonym Satoshi Nakamoto, has seen significant developments in the United Kingdom. A British judge has asked Wright to prove that he is indeed Satoshi Nakamoto. This order is part of the case Wright, Wright International & Others vs. BTC Core & Others, supported by the Bitcoin Legal Defense Fund. This fund, created by Jack Dorsey, CEO of Block, aims to assist Bitcoin developers facing legal actions by Tulip Trust Limited, Wright’s company. The case revolves around the identity of Satoshi Nakamoto and Wright’s alleged possession of 111,000 Bitcoins. The judgment requires Wright to provide tangible evidence, including documents dating back to 2007, to support his claims. COPA, a party involved in the case, challenges Wright’s credibility by highlighting inconsistencies in his claims, particularly concerning Samsung USB keys purchased well after the period covered by his claims. In addition to this requirement for proof, the judge ordered Wright to pay approximately $992,000 in additional costs to COPA and the Bitcoin developers involved in the case. Initially scheduled for January 2024, the trial has been postponed by at least a year to allow Wright’s legal team to prepare. Wright, known for his multiple controversial lawsuits since 2016, including against those who publish the Bitcoin whitepaper, has expressed on Twitter his desire to now focus on his family and the realization of his ideas.
Matthew Hyland, a popular cryptocurrency market commentator, recently predicted imminent bullish movements for Bitcoin, based on three key BTC price indicators. According to his observations shared on the X platform (formerly Twitter), Bitcoin is showing classic signs of an upcoming price increase. The first two indicators, the Bollinger Bands and the Relative Strength Index (RSI), have historically signaled a potential increase in Bitcoin’s price. The Bollinger Bands, a volatility indicator, are currently tightening, suggesting an upcoming period of volatility. This situation is similar to what was observed before recent bullish movements of BTC through the $30,000 and $40,000 thresholds. As for the RSI, it has recently been reset, establishing itself well below the overbought line, indicating a possible undervaluation of BTC. The third indicator, the Moving Average Convergence Divergence (MACD) on three-day periods, however, shows a potentially bearish signal. Despite this, Hyland notes that there are still several days for this signal to prove inaccurate due to price changes.
In conclusion, despite a slight slowdown during the Christmas period, where Bitcoin’s price slightly decreased, these indicators suggest that significant price movements for Bitcoin could be imminent, potentially marking a dynamic start to the year for Bitcoin investors.
The presented information is as of December 27th, 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.
