News broke late yesterday of what could prove a landmark court ruling for bitcoin.
Even the Financial Times, which has been talking bitcoin down for over ten years now, called it “a big win”.
The Greyscale Investment Trust (OTC:GBTC), which listed in 2013, buys and holds bitcoin. So in buying the trust - which you buy or sell as you would any other security (unless you are British, thanks to FCA rulings) - you are, in effect, buying bitcoin, or at least getting exposure to the bitcoin price. GBTC now has something like $17 billion under management.
However, being a trust, you cannot sell your GBTC shares and redeem them for bitcoin. You can only sell your shares in the trust to someone else. This means in effect that the trust cannot sell its bitcoin: the amount of bitcoin in the trust can only increase (as it issues more shares).
At first, the trust traded at a considerable premium to the bitcoin price - as it was the only way investors could own bitcoin via a broker. At times GBTC traded at double the value of its bitcoin holdings. However, in recent years, this reversed, so that by December last year the trust was trading at a 50% discount to the bitcoin price. What was the point of owning the trust then, if it doesn’t track the bitcoin price?
Greyscale had a problem. The solution was to convert the trust into an ETF and for years Greyscale has been trying to get permission. Thus would it be able to buy and sell bitcoin according to market demand. But the US Securities and Exchange Commission (SEC) rejected its application.
The SEC has repeatedly ruled against other bitcoin ETF applications too. There have been so many. The Winkelvoss brothers tried to get one listed. So did Cathie Wood. They were all rejected. There are currently at least half a dozen other proposals under consideration from the likes of BlackRock, WisdomTree and Fidelity, but the short of it is that the SEC, like the FCA here in the UK, does not like crypto. Indeed, SEC Chair, Gary Gensler, has issued a plethora of regulatory actions against the likes of Coinbase and Binance, the latter being the largest crypto exchange in the world.
(To be balanced, the SEC has greenlit ETFs based on bitcoin futures, but it has argued, and not so unreasonably given its remit, that bitcoin trades on unregulated exchanges and can be prone to market manipulation).
Yesterday, however, a federal appeal’s court in Washington ruled that the SEC was wrong to reject the Greyscale’s bitcoin ETF application brought last year. “The denial of Grayscale’s proposal was arbitrary and capricious because the Commission failed to explain its different treatment of similar products,” said one of the three judges.
The Grayscale appeal focused on one simple question: whether it could offer a spot bitcoin ETF that would expose retail investors to the real-time price of bitcoin.
The fact is there is a lot of demand for a bitcoin spot ETF, not just in the US but worldwide. We shall see if the SEC now appeals, but the short of it is that a spot bitcoin ETF now looks a lot more likely.
What are the implications for the bitcoin price?
An ETF will open up entirely new markets for bitcoin both at the retail and the institutional level. It will bring a lot more money into bitcoin. With bitcoin’s limited supply that has to be very bullish.
It also opens up the door for ETFs in the likes of ethereum, litecoin and bitcoin cash. And all three rallied strongly on the news.
By way of example, you just need to see what happened to bitcoin cash when it listed on EDX Markets in June, opening up the door for a lot more money to come into the sector. The price went up 200%. I think a lot of buyers might have thought they were buying bitcoin, but the price still rallied.
A word of warning, however. And I’ll bet you this is what happens when we eventually get a bitcoin ETF.