ETF Approved, Just Kidding! But Really Though…
A spot Bitcoin ETF was approved, then it wasn’t. But we’ll probably get it today anyway. Gary Gensler’s SEC couldn’t look more ridiculous if it tried.
Well we knew this week would have fireworks and boy did it not disappoint Tuesday night. It has been widely expected that this week would be the week for a spot Bitcoin ($BTC-USD) ETF approval.
All yesterday, we kept seeing that the analysts and market participants expected approvals on Wednesday (today) with trading to begin Thursday. Then a curveball…
Which was soon followed by another curveball…
Roughly 15 minutes after the US Securities and Exchange Commission’s official Twitter X page announced the approval of Bitcoin ETFs, the agency’s chairman used his own account to say the information was incorrect. Hilarious considering the SEC said back in October that the agency is the best source for information about the agency:
For the first time in a long time, X was a lot of fun last night as the reactions to the SEC’s gaffe were injectable:
On that market manipulation point, obviously the price of BTC had a reaction.
Impact on Price
Naturally, after such a big news announcement, the price of Bitcoin went on a bit a of ride last night following the apparent ETF approval. At the time of the original tweet, BTC was trading at $46.7k. It quickly mooned up to $47.9k within four minutes:
But what’s interesting about all of this is the coin’s price tanked before Gensler’s correction at 4:26p. This would seem to imply what many have wondered for the last several weeks - namely, that approval will actually be a “sell the news” event. I don’t know. But what I do know is at $45.3k, the BTC price isn’t terribly far from where it was when the original tweet came out.
Why Spot Matters
Some of you might be wondering why any of this even matters. After all, there is already a futures Bitcoin ETF on the market called the ProShares Bitcoin Strategy ETF BITO 0.00%↑ that has about $2 billion in assets under management. Futures ETFs and spot ETFs are not the same for a few reasons. First, futures are contracts to buy or sell something not the actual underlying asset.
In the movie Trading Places, Louis Winthorpe and Billy Ray Valentine are trading orange futures contracts rather than the oranges themselves. A market player who wants to simply speculate on the future price of something may be totally content with using the futures contracts and then rolling them over without ever taking delivery. “Taking delivery” is important pertaining to commodities contracts because it means the buyer of the contract actually wants the underlying asset.
This is why the oil price briefly went negative at the beginning of COVID lockdowns. There was so little demand for oil at that time that speculators who went long oil but didn’t have the means (trucks) to take physical delivery of the asset had to pay someone else to take the contracts off their hands. This obviously illustrates the possible dangers of the futures market when it’s being used for speculation rather than producer hedging.
But getting back to Bitcoin; since Bitcoin doesn’t actually exist in the physical world, “taking delivery” via futures contracts is a lot more simple. You don’t need tankers or trucks. If you buy these contracts and hold to maturity, it would generally mean the BTC would be distributed to you when the contract matures. However, futures Bitcoin ETFs don’t do this. Instead, they cash settle and roll over the contracts in perpetuity. Meaning, when the February contract expires, that cash then gets rolled over to the next month. So BITO, as a Bitcoin “futures” ETF, never actually touches BTC ever.
A “spot” ETF is different because rather than holding futures contracts alone, the asset manager would buy the BTC directly and hold it, likely through a third party like Coinbase COIN 0.00%↑. This is the fundamental difference between the two. From an investment standpoint, spot is also more advantageous because the constant rolling over of futures contracts in the futures ETFs comes at a cost:
Fortunately, we can actually see a real-time comparison between how spot and futures ETFs for Bitcoin perform because Canada has spot ETFs. In the last year Canada’s Purpose Bitcoin ETF, which is spot, has performed far more closely to the actual asset than the futures ETF available in the US. It’s the combination of direct holding and fee reduction that makes the spot ETF so much more appealing to the futures ETF for many people. And this brings us to Gary Gensler once more.
Gary Gensler’s Legacy
Gensler has repeatedly rejected spot Bitcoin ETF approvals under the ridiculous rationale that the spot funds are easy to manipulate but the futures funds that would use the same exact pricing mechanism somehow aren’t easy to manipulate. It’s preposterous. If the price of BTC is manipulated, it would impact the futures and spot funds the same.
Look, if you’ve been reading this blog for longer than a few months my disdain for the way Gensler has rejected his duties as SEC chair has not been a secret. In my view, he has completely punted on policy clarity, regulated by enforcement action, shown an unwillingness to answer yes or no questions in front of the Financial Services Committee, and has essentially made a mockery of the agency through various notable failures:
He had behind the scenes meetings with Sam Bankman-Fried while the man was literally stealing from his customers.
He shook down celebrities like Kim Kardashian for pennies in a gross attempt to gain political clout while he also had personal connections to the real criminals (SBF) in the industry
He sued the industry’s good faith actors rather than offering them the clarity they’d been asking for
And, most importantly, he has lost every major crypto-related case in court when a judge has decided on the principles and the rULe oF LaW
Gensler has been an absolute disaster as SEC chair. Furthermore, given his at times terrific ability to understand and orate on the benefits of decentralized ledgers as a technology, handling the industry in this way is quite obviously a choice that he has made. I can only assume this choice has been a misguided effort to protect the traditional financial order at the behest of his friends in Washington. Possibly with eyes set on a certain Treasury position.
In my personal opinion, Gensler’s reign at the Securities and Exchange Commission has been deeply damaging to American innovation and to trust in the SEC as a reliable federal government agency. And this most recent debacle is the icing on the cake. I have no idea how an institution as important as the one that regulates financial markets in the United States - home to the world’s reserve currency - could be so incapable of securing its communication channels. Especially just 3 months after thumping its own chest on that same channel.
Gensler should approve these spot ETFs and resign. History will not remember him well and he should tap out now before this gets worse for him.
Disclaimer: I’m not an investment advisor. I’m long BTC. The email version of this post had an incorrect comment pertaining to Bitcoin’s current relationship to its pre-tweet price in the “Impact on Price” section. My Substack has NOT been compromised!
Our Gvt and it's agencies are ran by incompetent people.
This is the best article/stack you've ever written. I was dying laughing (from both an entertainment/clown-show perspective and also pure sadness) throughout. We are governed by absolute clowns and the fact that these elected officials are responsible for our monetary policy is nothing short of fascinating. Well-written!