Potential SEC Approval for Bitcoin ETFs Anticipated This Week: Everything You Need To Know

Forbes

Steven Ehrlich, the director of Forbes digital assets, joins ‘Forbes Talks’ to discuss the SEC possibly approving Bitcoin ETF applications as soon as this week.  0:00 Introduction 0:27 Where Are We On SEC approval? 3:51 What Is An EFT Spot And How Will It Differ In The Future? 6:46 What Will The SEC Application Results Tell Us 12:25 What Is Expected In Terms Of Bitcoin Pricing?  Read the full story on Forbes: https://www.forbes.com/newsletters/forbescryptoassetadvisor/2024/01/09/start-your-etf-engines/?sh=7d3c8f53763e  Subscribe to FORBES: https://www.youtube.com/user/Forbes?sub_confirmation=1  Fuel your success with Forbes. Gain unlimited access to premium journalism, including breaking news, groundbreaking in-depth reported stories, daily digests and more. Plus, members get a front-row seat at members-only events with leading thinkers and doers, access to premium video that can help you get ahead, an ad-light experience, early access to select products including NFT drops and more:  https://account.forbes.com/membership/?utm_source=youtube&utm_medium=display&utm_campaign=growth_non-sub_paid_subscribe_ytdescript  Stay Connected Forbes newsletters: https://newsletters.editorial.forbes.com Forbes on Facebook: http://fb.com/forbes Forbes Video on Twitter: http://www.twitter.com/forbes Forbes Video on Instagram: http://instagram.com/forbes More From Forbes:  http://forbes.com  Forbes covers the intersection of entrepreneurship, wealth, technology, business and lifestyle with a focus on people and success.

Transcript

00:00 Hi, everyone. I'm Rosemary Miller here with Stephen Ehrlich, the director of Forbes Digital

00:07 Assets here to tell us about the SEC possibly approving Bitcoin ETF applications as soon

00:14 as this Wednesday. Thank you so much for joining me today, Steve.

00:19 Thanks, Rosemary.

00:20 Absolutely. So, Steve, why do people think one is going to be approved as soon as this

00:26 Wednesday?

00:27 Right. So it kind of comes down to the SEC's calendar. Typically, when an issuer applies

00:34 to launch an ETF, the SEC has up until 240 days to give a go and no-go decision. Many

00:43 times it doesn't get that far. The SEC will approve something before then. Or if the issuer

00:48 or a proposed issuer senses that they're not going to get approval, they will withdraw

00:54 the application before they actually get the formal rejection. And that's happened over

01:00 and over again for Bitcoin. Going all the way back to 2013, when Tyler and Cameron Winklevoss

01:07 of Facebook fame tried to launch the first spot Bitcoin ETF, there's been dozens of potential

01:18 products that have gone before the SEC. And the SEC, every single time, has whacked them

01:23 down, has rejected them, claiming pretty much that they don't trust the underlying spot

01:28 Bitcoin market. They claim that the market is not free from fraud and manipulation, which

01:33 is obviously a very important tenet of investor safety.

01:37 However, things have changed this time around. It started with a company called Grayscale,

01:43 which is the asset management arm of Digital Currency Group, which is a kind of a well-known

01:50 sort of like crypto polyglot firm, for lack of a better term. They have proposed many

01:57 times to convert their $27 billion closed Bitcoin fund called the Grayscale Bitcoin

02:03 Trust into an ETF to make it just more user friendly for investors. The SEC has time and

02:09 time again turned them down. This time, however, Grayscale sued the SEC. They sued them last

02:16 year, claiming that the SEC erred in rejecting the application and a DC circuit, I guess

02:26 a group of DC appellate justices ruled very strongly in favor of Grayscale and pretty

02:32 much threw out the SEC's justification for rejecting spot Bitcoin ETFs under the sort

02:38 of the clause of fraud and manipulative markets.

02:42 And that sort of set off just this race to I think another analyst at Bloomberg called

02:49 it the Kentucky Derby, because the belief now is that the SEC has no more reasons to

02:54 reject spot Bitcoin ETFs. And there are currently 13 pending before them, many from blue chip

03:01 investment firms like Invesco, BlackRock and Fidelity. And the deadline for the very first

03:08 of this crop of 13 ETFs to get their final go/no-go decision is going to be this Wednesday,

03:14 January 10th. So going back to your original question, the reason why Wednesday is such

03:19 an important day is because the expectation is that the SEC is going to approve this first

03:25 application, which is proposed to be issued by ARK Invest and 21Shares. ARK Invest is

03:31 obviously led by superstar investor Kathy Wood. And in order to avoid sort of picking

03:38 and choosing winners, the expectation is that the SEC is going to let several ETF applications

03:44 launch and begin trading right away so that customers can choose which product they want

03:50 to purchase.

03:51 So I do want to know what exactly is a spot ETF and how does it differ from a futures

03:58 ETF in buying on the spot market?

04:02 That is a good question. And it sort of relates to why there's been so much anticipation for

04:07 the spot Bitcoin ETF. Anyone that's even casually followed crypto in recent years knows about

04:14 some of the security issues associated with it. The challenges that come from holding

04:19 your cryptocurrency in a wallet. And even if you patronize a service like Coinbase or

04:26 Kraken, Robinhood to hold your crypto, they're not FDIC insured. So if something happens

04:32 to the exchange, like what happened to FTX, customers are left without any sort of restitution.

04:39 And it's just, I wouldn't say completely unregulated, but it's not on par with traditional

04:44 banks or even regular brokers that are better regulated and have better oversight as far

04:50 as segregating and custodying assets. I know that's a mouthful. And basically what a spot

04:55 ETF will allow is for anybody to get exposure, direct exposure to Bitcoin or potentially

05:03 other assets if and when the SEC approves them through their account without having

05:07 to deal with the headache of actually setting up an account at an exchange and linking your

05:11 bank account and having to safeguard it yourself and worry about theft and so on and so forth.

05:16 All those things magically go off the table. Now, as you mentioned in your question, right

05:22 now, what we're looking for is a spot ETF, which basically means that one of these issuers

05:27 would buy Bitcoin, issue shares against it, and then those could trade on the market.

05:32 There are several Bitcoin ETFs already on the market. These are called futures ETFs,

05:37 specifically cash settled futures ETFs. And they actually launched in the fall of 2021

05:43 around the time of another big bull run. And these try as best as they can to mirror the

05:52 spot price of Bitcoin. They typically work by buying monthly Bitcoin contracts, I believe,

05:56 at the Chicago Mercantile Exchange. And then when those roll off, they buy them again and

06:00 again and again. The issue is that it's becoming harder, especially during periods of high

06:05 volatility to maintain parity with the price of Bitcoin, especially without incurring extra

06:11 costs for investors. Because remember, each time the each time the price of Bitcoin goes

06:17 up, that typically means that the futures contracts for that same amount of Bitcoin

06:21 are going to go up again. And if you have to keep buying it, that means you're paying

06:24 more for the same amount of Bitcoin month to month to month, as opposed to a spot Bitcoin

06:28 ETF where you just buy it and then you and then you hold it. So some of the issuers behind

06:34 these cash settled futures ETFs are starting to become a little bit less competitive. And

06:40 that I believe is a cause for concern for them moving forward if and when these spot

06:44 ETFs actually happen.

06:47 So going back to some of these applications possibly being approved as soon as this Wednesday,

06:54 who are likely to be some of the winners and who's likely to be some of the losers in this

06:59 scenario?

07:00 Well, one thing that I don't expect to happen is for there to be a winner take all scenario

07:05 like we saw with the Bitcoin futures ETFs. In that case, the ProShares Bitcoin futures

07:11 ETF got a couple week head start over everybody else. And they sucked up I believe more than

07:18 one billion dollars in AUM the first day, which set a record even bigger than GLD. And

07:25 basically every other issuer lost out. It just has a very, very small fraction of that

07:30 total amount, because when it comes to ETFs, that is a numbers game. The more volume you

07:35 have, that means the more liquidity you have, lower slippage. Theoretically, you can compress

07:39 freeze and fees and so on and so forth. So I don't expect that to happen here. When the

07:43 SEC approved several cash settled futures ETFs to begin trading last fall, I believe

07:48 they let five or six go off at the same time. And that's again, I think that's going to

07:52 happen here. As far as what things investors should think about as they're considering

07:57 these different ETFs, obviously fees is going to be a big one. Many of right now, I believe

08:04 that the average fee for an ETF right now is about 0.37 percent. And I actually have

08:10 it up on my computer right now. These are these are numbers from Bloomberg. And I mean,

08:14 for instance, for instance, BlackRock, I think is going to have 30 basis points with a starting

08:22 price of 20. There are several Invesco, I believe, ARK21 and Bitwise that are actually

08:30 going to be waiving their fees for a certain period of time. And many of the fees, I think

08:36 right now are going to be somewhere between 20 and 50 basis points. One major outlier,

08:40 however, is going to be Grayscale. They are the ones with GPTC. This is a fund that right

08:46 now houses six hundred and nineteen thousand Bitcoin worth, about twenty seven billion

08:50 dollars at today's prices. What this closed end fund has typically charged 200 basis points

08:57 or 2 percent management fee, which makes it very much a cash cow for the company. A big

09:03 question was what fee they were going to drop it down to once ETF started, because 200 basis

09:09 points is just frankly noncompetitive in the ETF world. And they announced that right now

09:14 they're only going to drop it down to one point five percent or one hundred and fifty

09:18 basis points, which is, again, about a hundred basis points higher than pretty much everybody

09:22 else. And that is really sort of curious to me. I mean, if you talk to to Grayscale and

09:28 they've said this to me on multiple interviews throughout the years, I mean, they typically

09:32 say that the operational experience matters, being able to deal with crypto, especially

09:40 during periods of uncertainty, for instance, if there's a fork in Bitcoin and just custodying

09:45 and just managing these these products, that is a premium service that they think will

09:51 justify the higher fee. Will customers agree? I don't know that that's a lot of money to

09:57 be leaving on the table when you can give your money to a blue chip firm like BlackRock

10:03 or Fidelity and get that reputational, get those reputational benefits and pay much lower

10:10 fees.

10:12 So how much money is expected to come in immediately?

10:16 It's really hard to tell. I mean, a billion dollars is sort of the goalpost, at least

10:23 as far as Bitcoin futures. I know that, I mean, the ETF industry is about eight trillion

10:28 dollars. I mean, the total capital markets is much, much more than that. Frankly, I am

10:36 not entirely sure. I would not be surprised if we are underwhelmed at the very beginning

10:41 where we see just a few hundred million dollars or it might take a little while to get to

10:45 a billion dollars, although I do think it's going to grow over time.

10:48 I mean, one of the things that's also worth keeping in mind, too, is that there's going

10:52 to be a difference between new money coming into crypto and just money being cycled around

10:57 into these products. I mean, for instance, ARK Invest has been selling some of their

11:01 Coinbase shares as a way of just kind of balancing portfolios that they offer. They recently

11:06 put a sizable chunk into ProShares' Bitcoin futures ETF, BITO, and the expectation there

11:11 is that they're going to then move it into one of these five ETFs. So clearly, AUM for

11:16 that could go up. That doesn't mean there's new money coming into the space. That said,

11:21 I do think the new money is going to come in over time as it finally has become easier

11:27 to get exposure. You can just direct your broker, so on and so forth, to put a certain

11:33 allocation into one of these products if you so choose.

11:36 One other thing that I think is also important to keep in mind is that for many, just because

11:43 the SEC has approved these products and they're trading on exchanges like NASDAQ or CBO or

11:50 the New York Stock Exchange, brokers are also going to be doing their own due diligence

11:54 on these products, too, before they're actually going to expose them to customers. And each

11:59 broker might be a little bit different. Some might offer right away, some might take a

12:02 few weeks or a few months to see how they operate before they're actually going to let

12:05 clients send money there. So that's one additional hurdle that I think is important to keep in

12:10 mind. It's not necessarily a stop sign, but it could be a little bit of a speed bump,

12:17 especially once we start talking about perhaps like pension funds and other endowments that

12:21 could make sizable allotments into the space.

12:25 Well, Steve, what can we expect with the price of Bitcoin?

12:30 That's another really good question, because there's a few things to consider here. In

12:35 the past, when there's been big moments like this, they've been very much by the rumor,

12:40 sell the news types of types of scenarios. What I'm referring to here, I mean, for one,

12:46 when Coinbase went public in April of 2021 through a direct listing, Bitcoin had, excuse

12:53 me, Bitcoin had approached $69,000, $70,000, and it went down after Coinbase went public

12:59 and Coinbase's stock is as far down since then. Bitcoin again approached $70,000 in

13:04 October 2021 when the Bitcoin futures ETFs were given approval by the SEC and it collapsed

13:10 again. Is that going to happen again this time? It's hard to. There's reasons to say

13:16 yes. There's reasons to say no. Reasons to say yes mean Bitcoin is up 50 percent over

13:22 the last three months, but in the last month, it's only up about 4 percent. So that signals

13:26 to me that the market is kind of waiting for a new direction. And it may come down to whether

13:30 or not people think that the Bitcoin ETF approvals are already priced in and it may again be

13:36 that its future direction may be determined by how much money actually comes in at the

13:42 same point. And this is a critical distinction to make when it comes to spot Bitcoin ETFs,

13:46 as opposed to the cash settled futures ETFs. If a company or an issuer is offering a spot

13:53 Bitcoin ETF, that means they actually have to go out and physically procure the Bitcoin

13:59 and then keep it at a custodian like Coinbase. I believe Fidelity is custodying its own assets,

14:04 but that's Bitcoin that has to be bought on the spot market and then has to be taken off

14:10 the market and held in reserve for redemptions. With a spot with a cash settled futures ETF,

14:17 that does not happen. That's just literally contracts where people are betting on the

14:21 price of Bitcoin one way or another. So if there is a surge and I know that one of the

14:26 big trends that we've been seeing over the end of last year is Bitcoin being taken away

14:29 from exchanges, which means liquidity on exchanges and exchanges are just one part of the total

14:35 liquidity picture for crypto. But if that's happening, that could lead to some some it

14:42 could accentuate moves in either direction. And if there is bullish demand, that could

14:45 lead to two further surges. But it's really hard to predict exactly what's going to happen.

14:51 My sense is that the price of Bitcoin is going to be pretty volatile over the next few weeks.

14:55 Well, as always, Steve, thank you so much for joining me today.

14:58 Thanks, Rosemary.

15:00 Absolutely.

15:01 Thanks, everyone.

15:02 Thanks, everyone.

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