By now everyone is aware of how the SEC finally approved a Bitcoin ETF. After years of applications, we now see this trading.
Today, we watched the first one, ProShares, go live.
For those who are around the investing world, this is a name familiar to most. They have many ETFs available so it is not surprising to see them one of the early ones that got approved.
So now we are off to the ETF races.
Grayscale Leading The Way
Grayscale offered Bitcoin and other cryptocurrency funds for a number of years now. The firm was the first to be able to offer exposure to those crypto assets through things such as IRAs. Their funds, such as the Grayscale Bitcoin Trust (GBTC), openly trade on the exchanges. People can buy shares in this the same as they do stock.
There are no limitations unlike trying to use retirement accounts for cryptocurrency purchases. Direct acquisition is blocked out of these types of accounts. Thus, many were drawn to what Grayscale put together.
The firm was also very diligent in its process. It did not keep its intentions to eventually convert its funds to ETFs a secret. In fact, one of the steps it took was to become a reporting company to the SEC. This was a voluntary actions, meant to show it is in compliance with the regulations that are in place.
One of the best known investors in the Grayscale family of funds is Cathy Wood and Ark Investments. Due to regulations, her funds are prohibited from buying Bitcoin or Ethereum directly. Thus, she was forced to utilize Grayscale's services.
A lot is made of Grayscale's premium or discount to the underlying asset. For example, the GBTC fund is now trading at a 20% discount compared to what Bitcoin trades for. This is a problem for those who are holding long term since they are not keep pace with the underlying asset.
Of course, it is only a problem if one has the option of getting the Bitcoin directly. Since much of this money is barred, even at a reduced return, one is still gaining exposure to the moves in BTC.
Gensler's Bitcoin ETFs
Do you know what the discount or premium is to the ETFs that are being approved under the present SEC Chair?
The problem with trying to answer this question is that it is not relevant. The reason this is the case is the Bitcoin ETFs are not based upon the spot price. Instead, the ProShares ETF is based upon the futures' market. This is completely different than what Grayscale is doing.
Grayscale actually purchases the underlying assets. Therefore, each share is backed by Bitcoin (or whatever the fund is). The company is actually holding the cryptocurrencies in their possession.
ProShares is holding no Bitcoin. This is simply a "paper trade". The "value" of the ETF is based simply on futures contracts.
In other words, this is using derivatives as the basis for the ETF.
Grayscale Pushing The Envelope
Since it is the biggest, and best known name, we are headed for a showdown.
Grayscale recently submitted their application to convert their trust to an ETF. This means there is a 75 window where it has to reach a decision from the SEC.
Here is where the SEC is being put on notice. Chairman Gensler is going to have to explain why the SEC will not allow an ETF based upon the spot price of Bitcoin, as opposed to one based upon derivatives. So far, the indication appears to be fear of manipulation.
Of course, the futures market can be manipulated also so that defense might not hold justification. That said, the recently approved ETF is trading on CME, which is federally regulated. There is, however, no reason why Grayscale cant do something similar. Besides, the CME has seen its share of manipulation over the years.
For Bitcoin enthusiasts, what Grayscale proposes would actually entail the buying of Bitcoin, meaning that it would have a greater impact upon the price action. Instead of simply operating in the futures market, Grayscale would continue to add to its holdings as more investment was made.
For now, Gensler can stand by the decision. However, over the next couple month, the SEC will have to decide on Grayscale's application. There might be a major uproar if the best known company in this aspect of the industry is turned down.
Grayscale might be backing the SEC into a corner.
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