Erik Weijers, 19 days ago

Will American courts allow a spot Bitcoin ETF?

The American financial watchdog SEC has for years denied a spot Bitcoin ETF. Without such an ETF, it is hard for institutional investors to get exposure to the 'magic internet money' called BTC. Currently, Grayscale is challenging the SEC's rejection of their ETF in court.

On Tuesday, the SEC was questioned by the judge why it has approved a handful of so-called futures ETF's (Exchange Traded Fund) but no spot ETF's. Futures markets allow trading of 'futures': financial instruments which are derivatives of the spot price of any asset, in this case BTC.  

Futures contracts originated in the nineteenth century. Instead of simply exchanging actual grain for the current market price (the spot price), companies could purchase the promise of grain delivery for a certain price at some date in the future. 

What are the SEC's arguments against a spot ETF?

Futures contracts make a lot of sense for agricultural and industrial products, but a bit less for Bitcoin. So why does the SEC like a future BTC ETF better than a spot ETF? That's because the SEC has a tight grip on the exchange where BTC futures ETF's are traded: the CME. Whereas it doesn't have a regulatory grip on the major spot exchange for Bitcoin: Binance. The SEC says it fears that the spot prices on exchanges could potentially be manipulated.

But if the futures prices are literally derived from (derivatives of) the spot price, why then approve a futures ETF and not a spot ETF? "It seems to me that the Commission really needs to explain how it understands the relationship between Bitcoin futures and the spot price of Bitcoin," the Judge wondered.

Why does this matter?

This all matters as one of the big areas of fear, uncertainty and doubt in the current market revolves around Grayscales' Bitcoin Trust. This trust is in trouble, with the stock price of the fund trading vastly below the price of the Bitcoin that it holds for its buyers (the difference with a ETF is that, unlike the trust, an ETF price always closely tracks the spot price of Bitcoin). The Grayscale Bitcoin Trust, which holds the staggering amount of 650 thousand Bitcoin, wants to convert to an ETF. In that case the price gap between the fund price and the Bitcoin price would close and its institutional customers would be happy again.

On crypto Twitter, analysts are cautiously optimistic about the verdict, which is expected between now and a few months from now. The feeling is that a lot of crypto's regulatory headwinds are unjust and unlawful and that the court system could undo at least some of those. 

It is likely that an American spot Bitcoin ETF would help the price of BTC, as it removes a big hurdle for institutional investors to invest.

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