A long struggle with the Regulator
In 2013, The Winklevoss brothers filed a registration statement to the SEC for the approval of the first spot Bitcoin ETF based on the price of the major crypto. This initiative was rebuffed by the SEC in 2017. The regulator as well as retail or institutional investors were not ready to adopt a financial instrument based on a cryptocurrency and Bitcoin was viewed at that time as a too exotic and volatile product. More recently, the company behind the Ripple protocol was sued by the SEC who objected that Ripple’s token, XRP, had to be considered as a security and not as a currency or a single mean of payment, which could result in some significant and additional regulatory constraints for the Ripple Organisation. Ultimately, Ripple emerged as the winner of the case in October 2023 after months of a legal battle. Nonetheless, the corporation could not definitely turn this victory into its own profit, the SEC still retaining some legal claims, should it reopen the case in the future. As a matter of fact, Ripple was still ranked among the top 5 during the latest crypto boom of 2021. Nevertheless, following the big slump of 2022, other cryptos and stablecoins managed to climb at the helm of the rankings and pushed Ripple out of the top league. Eventually, this judgment was mainly a turning point not just for Ripple but mainly for the major financial institutions, which were free of any regulatory constraint to develop and market their own cryptocurrency-based financial instrument. Finally, the legal victory of Ripple ultimately paved the way for the big financial institutions to follow the steps of the Winklevoss brothers 10 years ago and launch their own spot Bitcoin ETF.
What is a spot Bitcoin ETF ?
A spot Bitcoin ETF is like any other ETF except its underlying is simply based on Bitcoin. Briefly, the ETF’s price is correlated with the spot price of Bitcoin, roughly the price quoted on a real time basis on the main cryptocurrency platforms. It is not the first time that a financial product reflecting the price of Bitcoin has been structured and quoted on a financial market. Exchange Traded Products (ETP) based on the main cryptocurrencies (ETPs are wider than ETFs since they include exchange-traded notes -ETNs- and exchange-traded commodities -ETCs) were already available to investors for some time. However, the price of these products was not quoted throughout the day to reflect the current price of Bitcoin (ETPs are indeed pegged to a value of a derivative). The revolution introduced by the spot Bitcoin ETF is that its price is directly pegged to the fluctuations of Bitcoin . What makes Bitcoin so popular today beyond all the hype around the concept of a digital token, is the blockchain technology supporting it. Traditional actors of the Financial World ranging from big Consulting companies to World-size Fund managers were willing to monopolize that technology to develop a standard financial product aimed at becoming one day a commonly accepted listed product. A few months ago, running through the door opened by Ripple’s court victory, the biggest financial institutions positioned themselves with the SEC to be granted an agreement to market their own Bitcoin ETF: Blackrock, Grayscale, Van Eck, Invesco (…) were among the biggest names in the World of Asset and Fund Management to lead the race…
What impact on the future price of Bitcoin ?
The addition of the spot Bitcoin ETF instruments on the financial markets has big implications regarding the daily supply of Bitcoin to feed this new breed of instruments. The first constraint already impacting the availability of Bitcoin ETF is the finite stock of 21 million token governing the Bitcoin cryptocurrency. Just based on this specific feature, the price was already expected to rise on a long term perspective. Soon after the SEC granted the first approvals, it has been calculated that the new ETFs would require the supply of 10 or 12 times the current daily production of Bitcoin, which should logically lead to a shortage of the cryptocurrency. During the booming crypto year of 2021, a level of around $ 100-140k was frequently forecasted as a plausible target for the price of Bitcoin. Forgotten during the following year of 2022 due to a slump affecting all the cryptos, this level has resurfaced following the recent surge allowing Bitcoin to rally by more than 60% in 2023 (some cryptos experts now even talk about a possible target of $ 400K…). Last but not least, the ‘Halving’ of Bitcoin expected around mid-April should bolster this trend: the daily production of the token is expected to be divided by half due to the same reduction of the reward offered by the Bitcoin protocol to add a block to the chain. This shortage problem could then be exacerbated unless investors already pushing higher the price of Bitcoin until the event occurred, suddenly cut their position to drive down the price around $ 42 000, as expected by JPMorgan analysts.
