First Mover Americas: Spot ETF Speculation Grips Bitcoin Market

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By Omkar Godbole

A day after the release of hawkish Federal Reserve minutes, the battered crypto market is reassessing prospects of U.S. regulators approving a spot-based bitcoin exchange-traded fund (ETF).

A spot-based ETF would allow investors to have exposure to bitcoin (BTC) through a regulated product without having to own the actual cryptocurrency, and is expected to boost institutional participation and bring trillions of dollars into the crypto market. The U.S. Securities and Exchange Commission (SEC) has time and again rejected spot-based bitcoin ETFs, citing a lack of market surveillance and risk of manipulation.

Some experts, however, are again hopeful, thanks to the SEC’s decision to greenlight Teucrium’s futures-based ETF filed under the Securities Act of 1933.

The 1933 act governing spot-based ETFs requires filing form 19B-4, detailing how the underlying asset is resistant to manipulation. Applications for the several futures-based ETFs approved since October 2021 were filed under the Investment company Act of 1940, which governs futures ETFs and doesn’t require submission of Form 19B-4. Last year, SEC Chairman Gary Gensler had said he favored futures-based funds over a spot bitcoin ETF, mentioning the 1940 act as appropriate for approving bitcoin futures-based instruments.

“The SEC approves Teucrium Bitcoin Futures ETF filed in 33Act structure. All previous BTC futures ETFs were in 40Act structure,” Bloomberg’s ETF analyst Henry Jim tweeted. “Bottom line: This increases chances of a ‘spot’ bitcoin ETFs being approved as it would only be able to use the 33Act structure.”

In a tweet thread, Grayscale CEO Michael Sonnenshein said that “if the SEC is comfortable with a bitcoin futures ETF, they must also be comfortable with a spot Bitcoin ETF. And they can no longer justifiably cite the ’40 Act as being the differentiating factor.”

Sonnenshein argued that the SEC, while approving Teucrium’s application under the 1933 Act, defined the underlying market as being restricted to the Chicago Mercantile Exchange (CME)-listed bitcoin futures. However, the CME futures are influenced by the unregulated spot market. So, the regulator can no longer deny spot-based ETFs, stating they are exposed to abuse. Grayscale’s parent company Digital Currency Group is also the owner of CoinDesk, which is run as an independent subsidiary with an editorial firewall. Grayscale has applied to convert its Bitcoin Trust into a spot-based ETF.

However, some observers are skeptical because overseeing the spot market, still dominated by whales, or large investors, on offshore exchanges remains a challenge.

“The SEC will continue to reject a spot ETF as their main reason is manipulation on unregulated spot crypto exchange that they cannot oversee,” Laurent Kssis, managing director and head of Europe at crypto exchange-traded fund firm Hashdex, told CoinDesk in a Telegram chat. Kssis has long held a belief that regulators would stay away from spot-based products while the cash market is unregulated.

“The CME is regulated and so they fulfill their obligations to the market and objectives to oversee regulated financial markets irrespective of underlying constituent contract,” Kssis added.

Jad Comair, founder and CIO of French ETF provider Melanion Capital, said, “The exchanges where bitcoin trades are less regulated than traditional financial exchanges, and this remains will remain an issue for regulators.”

However, regulation may be coming soon and that could keep hopes of a spot-based ETF alive, perhaps helping the market absorb shocks from Fed’s aggressive monetary policy tightening.

“With [U.S. President Joe] Biden’s executive order, the Chancellor of the Exchequer and Europe’s MiCA announcements and proposals, everything indicates that regulation will improve to a certain point where regulators will be confident approving crypto’s eligibility in retail products, like ETFs,” Comair noted. “At Melanion, we share Kevin O’Leary‘s vision [Wednesday] at the Bitcoin Conference [in Miami], that bitcoin is now a sector. Therefore, we have solved the bitcoin ETF quest by qualifying and weighting Equities that represent most of the bitcoin sector.”

By Omkar Godbole

Bitcoin’s 50-day simple moving average (SMA) has moved above the 100-day MA, confirming what is known as a bull cross in technical analysis.

The cryptocurrency saw extended gains following similar bull crosses in mid-August 2021 and early October 2020.

Moving averages are lagging indicators and are known to trap trend-following traders on the wrong side of the market.

Today’s newsletter was edited by Omkar Godbole and produced by Parikshit Mishra and Stephen Alpher.