The Breakdown - BITCOIN SPOT ETFS APPROVED! A New Era of Bitcoin Has Begun

Episode Date: January 11, 2024

NLW covers the WILD past few days getting to the moment we've all been waiting for. Today's Sponsor: Kraken Kraken: See what crypto can be - https://kraken.com/TheBreakdown Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Thursday, January 11th, and today is the show you've been waiting for when we can finally cap off and end our discussions of the Bitcoin Spot ETF. Before we get into that, however, if you were enjoying the breakdown, please go subscribe to it. Give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. All right, friends, well, first of all, I have to apologize for yesterday. I had gotten about halfway through recording a show when both my power and the internet went out

for a huge number of hours because of this East Coast ice storm we had. You can only imagine as a daily content creator how brutal something like that is. But in any case, I'm going to be basically combining the show that I was going to do yesterday with Today's show, so you will get some extra content. Now, we have a tendency to hyperboize in this space. Everything is the best or the biggest or the greatest or the worst, but truly the last couple days have been some of the craziest things I have seen. So to be clear, what we are talking about today is that almost 10 years after receiving the first application, the SEC has finally approved spot Bitcoin ETFs. At around 4 p.m. yesterday, all 11 issuers were approved, including

the grayscale uplisting. The products are listed across multiple U.S. exchanges and should be available on all stock trading platforms. As Pomp put it, the internet memed an asset onto Wall Street. Wild. Now, trading commenced this morning, and it's off to a booming start, which we will discuss in a moment. But to really tell this story, we have to go back to Tuesday. Now, it was on Tuesday afternoon that the moment that we had all been waiting for appeared to arrive. The SEC's official account tweeted, today the SEC grants approval for Bitcoin ETFs for listing on all registered national securities exchanges. The approved Bitcoin ETFs will be subject to ongoing surveillance and compliance measures to ensure continued investor protection. The tweet was accompanied by an official

looking quote attributed to Gary Gensler, which said, today's approval enhances market transparency and provides investors with efficient access to digital asset investments within a regulated framework. And so there it was slightly ahead of schedule, but nonetheless a Bitcoin ETF approval. Alas, it was too good to be true. Around 15 minutes later, Gensler himself came online to deny the announcement tweeting, the SEC Twitter account was compromised, and an unauthorized tweet was posted. The SEC has not approved the listing and trading of spot Bitcoin exchange traded products. The official SEC account reposted the same words 15 minutes later, presumably after the staff had regained control of the account. Now, speculation swirled around

two possibilities. Either the SEC had been hacked and a brazen attacker had posted the tweet to manipulate markets, or a tweet intended to be scheduled for Wednesday was erroneously put out ahead of time. Bloomberg Senior ETF analyst Eric Balcunis was in the latter camp. He wrote, yes, I think someone prepped the plan tweet and put the wrong date, because this tweet would have made perfect sense Wednesday at this time. The language sounds legit SEC-ish, in my opinion, versus a crypto-knucklehead pulling a prank, but I guess we'll see. Now, others did note that the SEC account had liked two replies to the tweet from random crypto Twitter users, and suggested that that might be evidence that there was in fact a hack.

The account had also published and quickly deleted a tweet which simply contained the Bitcoin hashtag prior to the false announcement. Now, those actions don't seem likely if it was a simple scheduling error, but it didn't rule out a disgruntled staff member going rogue. Balcunas later posted a poll, surveying the community on what they thought it happened, and 83% of voters thought the tweet came from inside the SEC. Still, many noted that regaining access to a Twitter account in under half an hour is basically a record response time even for high-profile accounts. Mark Moss wrote, was this really a hack? And the SEC got it back in minutes? My account was hacked in August and it took five months, 30 plus support tickets,

as well as reaching several people inside X to get it back. Now, in the meantime, some opponents jumped in to use it as an example of everything that they've been saying about why Bitcoin should not have a spot ETF. Better Market CEO Dennis Kelleher wrote, If anyone still thinks that Bitcoin and crypto markets were not full of speculators, predators, fraudsters, and criminals, today's market manipulation with the fake SEC approval tweet should convince them. Don't know the facts yet, but a $22 billion market move equals a lot of ill-gotten gains. You'll recall that better markets made a last-ditch attempt to derail the ETFs with a scathing comment letter on Friday afternoon. Now, part of why Kelleher was probably so up in arms

was that he had been actually live on Bloomberg when the news broke and was cut off mid-sentence during an anti-crypto diatribe. James Safar, another ETF analyst at Bloomberg wrote, part of me is like, yeah, he kind of has a point. This is a bad look. But at the same time, this is on the SEC for not having two-factor authorization on their account. Would it still be Bitcoin or Crypto's fault if the compromiser tweeted that the SEC was filing an enforcement action against Tesla? Now, interestingly, there was one live journalist who called it. The news broke live on Real Vision during an interview by veteran presenter Maggie Lake, and she was immediately in disbelief, stating, I'm so skeptical because there's just so much

deep fake AI bullshit around in the universe that even when we think the SEC is tweeting. I just want to say that we think it was approved, but I'm really cautious about that. I literally don't believe anything anymore unless Gary Gensler tells me himself. Now, by far, the biggest take was about SEC incompetence. Cryptotax guy wrote, they clearly run a real tight ship over there at the SEC. I am nomad tweeted SEC. We have trouble approving a Bitcoin exchange traded product because of possible international market manipulation. Also SEC. Hey guys, our Twitter was compromised. sorry for the international market manipulation. Crypto lawyer Jason Gottlie wrote,

Today's events underline, when the SEC speaks about a particular token, the SEC can radically affect its market value. How many billions of dollars of value has the SEC destroyed by declaring before any trial or settlement that specific tokens violate federal law? Now, ultimately, X did confirm that this was not the SEC. The safety account tweeted,

We can confirm that the account SEC was compromised and we have completed a preliminary investigation. Based on our investigation, the compromise was not due to any breach of X's systems, but rather due to an unidentified individual obtaining control over a phone number associated with the SEC account through a third party. We can also confirm that the account did not have two-factor authentication enabled at the time the account was compromised. We encourage all users to enable this extra layer of security.

Justin Slaughter, the policy director at Paradigm wrote, this is your periodic reminder that information security practices inside non-national security agencies aren't great, hacks are very common, and we really should have a whole of government effort at approving government information security. Now, as you might imagine, the security snafu was like catnip to GOP lawmakers who already have an axe to grind with the SEC. Senator Bill Haggerty was the first off the line tweeting, just like the SEC would demand accountability from a public company if they made such a colossal market-moving mistake, Congress needs answers on what just happened. This is unacceptable.

Summing up, Eleanor Territ from Fox Business wrote, Every GOP member of the Senate Banking and House Financial Services Committee were rubbing their hands together today when they heard the SEC made a colossal market-moving mistake. And indeed, on Wednesday afternoon, Patrick McHenry, together with other senior GOP members of the House Financial Services Committee, sent a letter to the SEC. They demanded a briefing from the agency to explain what happened, holding the SEC to the same cybersecurity disclosure standards imposed on public companies. And indeed, there really were some implications of this. The fake SEC tweet triggered violent

gyrations in the market. Bitcoin spiked up 2.5% on the initial posting before immediately plunging by 6%. The drop began to stabilize after Gensler disavowed the tweet, ultimately settling at a lower level around 46,000. The rapid move in both directions was over within 20 minutes and left a trail of destruction, liquidating more than 50 million in derivatives positions on both the long and short side. According to data from coin glass, Bitcoin open interest was down more than 3% for the day. High leverage venue saw up to 10% declines in open interest. That's the second largest flush out of leverage in the past week. Now, if that was all there was, it would be a crazy moment in history. But after all of this, it wasn't like yesterday was particularly

smooth sailing either. Today's episode is brought to you by Cracken. For far too long, the whole financial system has been standing still, too slow, only on for certain hours, overly designed for some types of people, but not for others. Crypto, at its best, represents progress. It asks the question, what if? It invites people in instead of leaving them out. It's on 24-7-365 and moves at the speed of real life. Not everyone believes it. We've got our fair share of detractors, but that's the way it always is when you're building something new. Cracken is a crypto company that has been through the highs and lows of the industry, facing forwards towards progress throughout. And now they're inviting us to see what crypto can be. Learn more at crackin.com slash the breakdown. Disclaimer, not investment

advice. Crypto trading involves risk of loss. Cryptocurrency services are provided to U.S. and U.S. territory customers by Payward Ventures Inc. PVI, BVI, BVA, DBA, Cracken. Earlier on Wednesday, there was confusion surrounding a filing from the CBOE. The exchange had requested accelerated listing and then withdrew their filing an hour later. The ETF approval documents were first posted to the SEC's website while markets were still open and were quickly removed. It's unclear whether the issue was increased internet traffic or this was another very public mistake from the agency. Either way, Bitcoin's price was again moved materially due to the bungled processes at the SEC. James Safart again tweeted,

Can pretty much guarantee that the SEC did not intend for anyone outside the SEC to get their hands on this document or link yet. I can confirm that I downloaded the document from the website and it's an approval order. I assume the SEC will repost shortly. Niaraj from Coin Center summed up, if I were charged with maintaining orderly markets, I would simply not cause days of chaos resulting in millions in investor losses. Pretty ironic that Gensler has run a sinners in the hand of an angry godlike campaign against crypto, while at the same time the agency and a major exchange under his authority can't seem to hack the most notable product launch in an industry he's lampooned for being amateurish.

Once we finally got stable access to the approval document, the analysis began. The SEC published a 22-page explanation of the reasons why the ETFs were being approved. The approval addressed the points brought up in the Grayscale Court Order specifically, in particular the correlation between futures and spot markets. It said, The Commission is able to conclude that fraud or manipulation that impacts prices in spot Bitcoin markets would likely similarly impact CME Bitcoin futures prices. The SEC acknowledged correlation analysis that had been entered.

into the record, likely referring to the mammoth report filed by Bitwise last September. It also mentioned the agency's own analysis. Paradigm policy director Justin Slaughter tweeted, there's going to be a lot of talk about ETF approvals and what they mean for crypto, but the real information in the ETF approval is this. The SEC did an analysis and found that Bitcoin futures market correlated 98.4% to spot hourly. In other words, the SEC agrees now that it's all one market. The section on market manipulation also concluded that existing surveillance sharing agreements with the CME, quote, can be reasonably expected to assist in surveilling for fraudulent and manipulative acts and practices. The approval notice was silent on the novel surveillance sharing

agreements with Coinbase, which had been removed from the latest round of filings. The topic was likely avoided, so the SEC did not accidentally harm its chances in litigation against the exchange. Now, while the approval notice covered the legal details, comments from the SEC commissioners were more emotional. Chairman Gary Gensler's statement can only, only be described as sour. He clearly conveyed his view that the commission had been forced to approve the ETFs by the Grayscale Court Order, calling approval, quote, the most sustainable path forward. Gensler acknowledged that investors already have a wide range of existing access to Bitcoin. He noted that these approvals would enhance investor protection by listing spot Bitcoin

products on registered securities exchanges. Throughout his statement, however, Gensler stood firm to his existing views on the crypto industry, presenting them as the views of the SEC. He poured some cold water on hopes of Ethereum ETFs to follow, writing, importantly, today's commission action is cabin to ETPs holding one non-security commodity Bitcoin. It should in no way signal the commission's willingness to approve listing standards for crypto asset securities. Gensler also noted that accepting the custodial arrangements in the ETF applications did not mean the SEC endorsed those custodians. However, the major statements surrounded the value

of Bitcoin. Gensler wrote, though were merit-neutral, I'd note that the underlying assets in the metals ETPs have consumer and industrial uses, while in contrast Bitcoin is primarily a speculative, volatile asset that's also used for illicit activity, including ransomware, money laundering, sanctions evasion, and terrorist financing. While we approved the listing and trading of certain spot Bitcoin ETP shares today, we did not approve or endorse Bitcoin. Investors should remain cautious about the myriad risks associated with Bitcoin and products whose value is tied to crypto. Lauren's Day lampooned the statement saying, they were in fact not merit-neutral. Sean Tuffy wrote, the SEC approval of the Bitcoins is official, but man, Gensler is salty about it.

Investor Nick Carter wrote, I used to flip the board over when I lost risk or monopoly, and even I wasn't this sore of a loser. Now, Blockworks, Mike I belito wrote, is there precedent for comments like these from an SEC chairman? The more I think about it, the more inappropriate it seems. Adam Cochran responded and said, the answer is no, and frankly, this behavior is why he should be recalled. Gensler's anti-crypto view isn't the problem. It's that he lets his personal biases to precede his job and his fair application of regulation. If the chair of the SEC felt that this asset was so unsafe, so criminal, and so risky, that he had grounds to not approve it, and should have been able to defend that denial in a court of law. Instead, courts found his arguments pedantic

and inconsistent. He approved not out of doing his job for the American people, but out of compulsion from the courts. He has failed at his job and has thrown a temper tantrum afterwards. How any elected official can in good faith think that Gensler has the insight, moral character, tact, or even emotional maturity to protect the American people is beyond me. His remarks today are a stain on his office, his legacy, and the very institutions which he represents. Now, although Gensler capitulated and voted in favor of approving the ETFs, both of his fellow Democrat commissioners dissented. Caroline Crenshaw published a lengthy statement explaining her reasons for voting against the products. She appeared to overtly disagree with the

Grayscale Court Order, writing, the D.C. Circuit was fundamentally correct to say that like products should be treated alike. These products, however, are not alike. It is today's action that departs from well-grounded precedent that bears characteristics of arbitration. decision-making and that will restrict our future ability to protect investors. Her dissent was littered with bad faith examples of market manipulation. Crenshaw referenced testimony from the Sam-Bankman-Fried trial, which claimed that Alameda Research attempted to hold Bitcoin below 20,000. She was apparently unaware that this referred only to a few days prior to the collapse of FTX and that the attempted manipulation was entirely unsuccessful. Crenshaw even referred to the SEC's Twitter account being

taken over earlier this week as an example of investor harm from price manipulation. Overall, though, as has always been the case, the real issue is just them not liking Bitcoin. Crenshaw wrote, I am aware of the grand claims made by proponents of these and similar products. They are disintermediating the financial system, banking neon banked, enhancing freedom, changing the world. And when I read the white papers, it can be hard not to buy in. Many of the goals of the crypto ecosystem are goals I support. How can you be against freedom and prosperity? But when I look at products like the ones at issue in today's approval, I have a simple question. Wasn't Bitcoin supposed to solve this? If the technology is so revolutionary, why do so many of

uses seem to revolve around recreating the existing financial system, except with less regulation, more opacity, fewer investor protections, and more risk. Scott Johnson wrote, Crenshaw dissents disagreeing with the core ruling of the D.C. Circuit. This seems like just a blatant disregard for the mandate of appeals court tasked with ensuring guardrails are in place for her agency's conduct. James Safart again wrote, this is a genuinely bad letter. There were ways to dissent and disagree here without doing it in bad faith. Ethan Kravitz wrote, Lul, Crenshaw's dissent is embarrassing. She's a Democrat and talks like a Warren Minimi, but she was appointed by Trump. She worries that the price of Bitcoin can move when U.S. securities

exchanges are closed. My God, the sky is definitely falling. And yes, she literally tried to use the SEC's Twitter account getting hacked as an example of how Bitcoin is too easy to manipulate. If this is the best they've got, we are definitely getting an ETHETF because they have zero bullets left in the chamber. Dave Weisberger, the co-CEO of Coin Routes, had a scathing comment on this saying, that dissent is so badly written, filled with logical and factual errors, that its author should be instantly disqualified for any job involved in financial markets. It repeats the same arbitrary and capricious arguments rejected by multiple judges, ignores the harms caused to GBT investors by a denial,

and cites outdated research while ignoring up-to-date data. Only a partisan, controlled by the anti-crypto army within the Democratic Party, who fear the disruption of the banking cartel, could have written such nonsense. I hate to brand the entire Democratic Party as Ryan Selkis did, but four more years of this administration and Senator Warren in control of financial services, and appointees such as these could be the death knell for U.S. capital innovation and personal economic freedom. On the flip side, Commissioner Hester Perce, Crypto Ma, the defender of the faith,

published her views on the actions of the SEC both now and over the history of Bitcoin products. She wrote, Today marks the end of an unnecessary but consequential saga. Perse reiterated that, quote, the logic of the long string of denials is perplexing. She noted the long list of inferior Bitcoin products currently trading in the U.S. and noted that by continuously denying spot Bitcoin ETFs, the SEC had, quote, driven retail investors to less efficient means of attaining Bitcoin exposure in the securities markets.

Purs noted that the stubbornness of the SEC had only been ended by judicial rebuke, and that the commission, quote, rather than admitting error, offers a weak explanation for its change of heart. She alleged that the SEC had allowed, quote, our prejudice against the underlying asset to get in the way. She lamented the wasted time, stating, we squandered a decade of opportunities to do our job. If we had applied the standard we used for other commodity-based ETPs, we could have approved these products years ago, but we refused to do so until a court called our bluff.

And even now, our approval only comes begrudgingly, as demonstrated by our continued insistence that these products satisfy a correlation test we have not demanded to prior commodity-based ETPs. Purse added, Today's order does not undo the many harms created by the disparate treatment of spot Bitcoin products. She listed, for example, the SEC's lost reputation in the crypto industry, and the millions of dollars in staff time lost to denials. She was also concerned that the SEC's role as a merit-neutral

regulator had been misunderstood, stating, we have abused administrative procedures to withhold investments that we do not like from the public. She also noted that the SEC had created an artificial frenzy around Bitcoin by delaying approval for so long. Finally, and perhaps most importantly, Purs wrote that the SEC's behavior had, quote, alienated a generation of product innovators within our space. Our unreasonable approach to these applications has signaled that regulatory prejudice against new products and services can lead us to sidestep the law and unreasonably delay product launches. The industry has logged hundreds of meetings, has filed submissions, withdrawals, and amendments that ultimately had to resort to a costly legal battle to get us to today.

In closing, Peirce wrote that it is time for a celebration. But that, quote, I am not celebrating Bitcoin or Bitcoin-related products. What one regulator thinks about Bitcoin is irrelevant. I am celebrating the right of American investors to express their thoughts on Bitcoin by buying and selling spot Bitcoin ETPs. And I am celebrating the perseverance of market participants in trying to bring to market a product they think investors want. I commend applicants' decade-long persistence in the face of the commission's obstruction. Investor Mike Duda summed up everyone's feeling in the crypto industry

responding to Hester, you are a legend. History will look kindly upon you. Defender of monetary and property rights, champion of self-sovereignty. Now, with approvals in the book, some asset managers took a moment to reflect on the occasion. In a long thank-you thread, Van Eck's CEO Jan Vanek wrote, I would like to personally thank the crypto community for its warmth and creativity.

From the whales to the youngest coders to anonymous posters, most have been genuine and sincere and willing to educate me. Yes, there are scammers too, but they are far outnumbered. We ETF sponsors also stand on the shoulders of giants. We didn't laugh but listen when Tyler and Cameron Winklevoss explained Bitcoin in 2013. Thank you, Satoshi for launching the most important financial freedom technology of the internet age. Still, Franklin Templeton definitely had the single best response when they switched the laser eyes on for their namesank Benjamin Franklin logo. Now, more than any other issuer, yesterday marked the end of a long road for Grayscale and seeking ETF approval, and the endorsement of the community was palpable across crypto Twitter.

Coinbase chief legal officer, Paul Grewell, wrote, this is a big deal, but keep in mind this almost didn't happen. We should all be grateful to Grayscale for pushing back against the SEC's arbitrary and capricious behavior and clearing the way for these spots. Bitcoin ETFs over the finish line. Now, this is a big moment. Garrett Skravenat, CoinDesk wrote, Bitcoin ETF approval is essentially the biggest IPO in history, basically a trillion dollar asset debuting on the largest regulated public markets. Then there was Doug Colquitt, founder at Ambient Finance, responding to people who said, maybe we shouldn't be as excited about this mass institutionalization as everyone is. He wrote, a lot of people questioning if we should really be celebrating an ETF as it relates to the original mission of crypto. I disagree. The corporate

purpose of decentralized consensus is to make the previously siloed financial and property rights system of the world as seamlessly interoperable as the internet made telecommunication networks. Having the largest crypto asset trade near directly on the world's largest equity markets is as big a deal as when AOL first started supporting email to the general internet in 1993. In both cases, it was easy to dismiss the new entrant as insufficiently decentralized, but in both cases it misses the broader picture about what a huge step it was to achieving the ultimate goal of a decentralized interoperability. Still, maybe my favorite tweet came from Red Phone from Delphi Labs who wrote,

I'd be lying if I said the approval of a Bitcoin spot ETF didn't make me emotional. I can't quit thinking about Satoshi, Hal Finney, Ross Ulbricht, and the countless others who gave up their identities, lives or freedom for this vision, a vision of a world with two forms of money, the money of the people. It's impartial money, tamper-proof money, money backed not by men, but by math, and algorithms. An infrastructure run not by military might, jail cells, an exorbitant privilege, but by incentives. When you launch a traditional Silicon Valley startup, you usually don't have to worry about hiding your identity, getting swatted, imprisoned, or even assassinated. And yet, many of Bitcoin's earliest devs looked at all

of those risks and said, F it, let's build. We've lost so much freedom in the world. There's a camera on every street corner. Our phones listen in on our conversations. Our bank accounts can get seized at any moment, and crypto is one of the only things on Earth pushing back. It's the last free frontier on Earth. We've built out uncensurable money, but more than that, unsensurable web storage, hosting, DNS, dexes, gaming, app stores, and more. Crypto is our escape. They've hemmed us in IRL, but they can't hem us in online. Satoshi, Hal, and Ross showed us a path to freedom. It's our job to protect it. Now, what about price? Well, after the market digested the SEC's false start, the result was a clear positive impulse. Bitcoin spiked to 47,500 before settling to 46,500.

There was no inkling of a sell-the-news event until much later in the evening when Bitcoin stumbled to 45-5. Ethereum outperformed, seeing a 5% pomp after the news was announced. In the minds of many traders, this ratified a view that capital already within the crypto ecosystem would rotate, looking for the next narrative. Of course, the big picture view is that the approval is just the beginning. We won't truly know how big an impact the ETFs will have on Bitcoin's price until the products are trading and the inflows begin, and frankly not even then. As of recording, Bitcoin had surged to 49,000, but was then back around 48,000 as I record this. Overall, we've seen over $2 billion in trading volume

so far, although what the total assets under management will be at the end of the day remains to be seen. Still, whatever happens today, the real importance of this is that a thing that deserved to exist and that needed to exist finally exists. We won't know the full significance for months or even years to come, but today, finally, a great phase in Bitcoin's life is over and a new one has begun. Big thank you, as always, to the sponsor of today's show Cracken. Go to crackin.com and see what crypto can be, and until next time, be safe, and trade some Bitcoin on securities exchanges. Peace.