The Breakdown - Delay Ends Mass BTC Spot ETF Approval Dream

Episode Date: November 17, 2023

There was a very small window where the SEC could have approved all the Bitcoin Spot ETF applications at once. That window is now once again closed as one of the applicants was delayed. 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, November 16th, and today we are talking official ETF delays. Before we get into that, however, if you are 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.L.Y slash Break, Break. down pod. Well, friends, yesterday the theme of the show was the ETF narrative running out of Steam, and sure enough, that was well and confirmed, as the SEC has delayed its decision on a Bitcoin ETF application from hashtags. Now, this likely signals that applications for spot

Bitcoin ETFs from Franklin Templeton and GlobalX will also be delayed by their respective deadlines on Friday and next Tuesday. Notably, unlike most of the other applications, hashtagsdex is seeking to operate a mixed Bitcoin ETF, which will include both spot and futures exposure. This could be a meaningful distinction for the SEC, but that's pure speculation arising from a lack of clear information. Now, as we covered on yesterday's show, this delay begins a public comment period for the hashtag's application, closing the window where all ETF applications could be approved as a batch with no active comment periods.

Hashtex and Franklin Templeton applications will now have another interim deadline on January 1st. However, the more meaningful deadline is likely to be on January 10th, which is the final deadline for a decision on the Arc 21 shares application. If the SEC wants to deny the approval of spot Bitcoin ETFs in a way that is consistent with the Grayscale Court Order, they will need to come up with a novel reason by that date. Asset managers have ensured that this group of ETF applications fully addresses previous SEC concerns, including market manipulation. They are also reporting productive engagement from SEC staff, which is a behavior shift from previous rounds of rejection. Bloomberg analysts are still predicting with 90% odds that January 10th will function as the de facto approval date for the entire batch of spot Bitcoin ETFs.

There are currently a dozen applications waiting to be approved, including the proposed BlackRock fund. Now, analysts have noted that this deadline only applies to 19B4 filings for rule changes, and that the SEC could drag their feet a little longer on approving S1 disclosure filings. This means the current best guess on when spot Bitcoin ETFs will begin trading is sometime in February, but there's very little certainty around that. prediction. Ryan Rasmussen from Bitwise actually did a great threat on this, which I will excerpt now, just so you can wrap your heads more fully around this process. Ryan writes,

To understand the efforts to launch a Spot Bitcoin ETF, one must first understand how ETFs get to market. Most ETFs are registered under the Investment Company Act of 1940. These 1940 Act ETFs have a fairly simple pathway to approval. Issuers file an application with the SEC, and the filing automatically goes effective after 75 days unless the SEC blocks it. Spot Bitcoin ETFs, however, like all Spot commodity ETFs, are filed under the Securities Act of of 1933 Act structure. The key feature of the 1933 Act structure is that filings do not automatically go effective after 75 days. Instead, the SEC must affirmatively approve a 1933 Act filing before it can launch, which typically takes up to 240 days. How does the 1933 Act

review process work? First, the ETF issuer files a prospectus with the SEC, describing the fund it wants to launch. Then, the stock exchange where the ATF will trade, such as the New York Stock Exchange, files a 19B4. The 19B4 filing is a petition to the SEC to allow the ETF to list and trade on the exchange. Up to 15 days after the 19B4 is submitted to the SEC, the filing is published to the Federal Register, the U.S. government's official record of government actions. From that moment, the SEC has up to 240 days to approve or reject it. It's worth noting that a filing's progression from one stage to another does not imply that it has an increased likelihood of approval. Therefore, when the SEC extends its review, it should not be read in a

positive or negative light. It's just part of the process. Now, interestingly, we're starting to see a little bit of a tone shift, whereas for most of the last few months after grayscale, the question of a spot Bitcoin ETF has been more of a when than an if, and there are some who are breaking away from that. During a TV appearance on Monday, Shark Tank's Kevin O'Leary, of course, a former FTX endorser as well, said he doesn't expect approvals for another 18 months. He said there's not going to be any Bitcoin ETF until there is an exchange that is compliant with the SEC. Now, of course, this group of ETF's liens on Coinbase as a compliance partner for market surveillance. However, with that exchange currently embroiled in litigation with the SEC, like it or not, there could be some logic to O'Leary's

thought, although, like I said, it's far from the consensus opinion. Bloomberg senior ETF analyst Eric Balcunis is keeping an eye on public statements from the SEC for any clues about their current thinking. Last week, SEC Chair Gary Gensler released a video discussing the role of the division of corporate finance. This is the division which has been working with ETF applicants to polish up their risk disclosures. Gensler focused on the SEC's mandate as a disclosure-based regulator, which is not concerned with judging the merit of an investment. This was viewed as similar to communications from the SEC just prior to the launch of Bitcoin futures ETFs, effectively functioning as a disclaimer, and implying that the SEC doesn't necessarily endorse Bitcoin as a sound investment,

but reminding the public that the regulator has no role in making those kinds of determinations. On Wednesday, Gensler released another episode talking through the role of the Division of Investment management. He explained that the division makes recommendations to the commission on updates to the, quote, rules of the road given rapidly evolving technology and business models. This could be a reference to controversial regulations being considered regarding crypto custody and the use of AI and financial advising. Balcunis is looking out for the next episode, which might cover the other division involved in decision-making on the Bitcoin ETFs. He wrote in a Twitter thread, if his next one is for trading in markets, I think that could be a wrap. Approval is a done deal.

He's essentially doing videos on all the pertinent departments that are involved in approving ETFs and ETPs. Again, only one missing is trading in markets. Now, fascinatingly, given that crypto markets had seemed to go down on the waning of the ETF narrative, they seemed to roar back to life on Wednesday, with Bitcoin capturing a new 18-month high just shy of 38,000. Wednesday's Bitcoin price action saw a slow build-up in the morning moving into a rapid short squeeze of 2.2% at 1pm. Price cooled slightly into the evening coming off the highs, but closed out with a still significant 5% gain for the day. Ethereum trailed slightly, putting in a 3.5% percent. percent gain and recapturing the psychologically important $2,000 level. Interestingly, Bitcoin did not

allow news of an ETF delay to ruin its day. The gap down was filled within 15 minutes and the uptrend continued intact. With Bitcoin trading about 35,000 for a week, we are now firmly above the highway mark back up to all-time highs. Charlie Morris, founder of advisory firm Bightree said, Bitcoin's trend is not only strong in dollars, but strong against other key assets. This is important for institutional adoption because they don't buy alternative assets unless there's a little extra return. Now, staying on market performance for just a moment, Solana continues to be perhaps the most startling outperformer of this rally. After shrugging off fears of the FTX liquidation and hand-ringing about the lack of on-chain use, Wednesday ended with Solana of 15%, adding gains

which have seen token price more than double over the past month. Trading volumes have also increased significantly going up by 70% since the start of November. There has been no obvious major catalyst other than the removal of concerns. And this is apparently given traders the confidence to step back in and put a relentless bid under Solana. 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.

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U.S. territory customers by Payward Ventures Inc. PVI, DBA, DBA, Cracken. On-chain analysts keeping track of the FTX estate sales have formed the opinion that the liquidation is over. It's a little hard to be certain because some tokens were deposited into exchanges in order to transact, but the thing we can be sure about is that FTX wallets have been emptied out. Over 280 million in Solana has been transferred out of FTX wallets over the past few weeks, alongside more than 150 million in other assets. That's the entirety of Unlock Salana, which was held by the FTX estate. Now we don't have solid information on what is likely to happen into the remaining lock supply, but the likely worst-case scenario seems to be that it will be

transferred in that state via over-the-counter deals. Bottom line, any selling pressure hitting the open market from the FTX liquidation now appears to be in the rearview. On the institutional side, ARC CEO Kathy Wood included a little nod to Solana growing in importance during Tuesday's press tour. She said, Ether was faster and cheaper than Bitcoin. Solana is even faster and more cost-effective than Ether. Still, I think some of the most interesting developments of the week have to do with the rebound of the options market. This month saw Bitcoin Options Open Interest hit a new all-time high, exceeding anything seen during the peak of the last cycle.

In terms of open interest, the Bitcoin Options market has now overtaken the futures market. There is now $17.4 billion locked in active options contracts, exceeding the total futures open interest by 10%. That's $6 billion in additional options contract available compared to the end of September. Cryptonative platforms like Deribit remain by far the largest market for Bitcoin options, but U.S.-based institutional venues have seen a disproportionate increase. Earlier in the month, the CME overtook Binance as the largest venue for Bitcoin futures trading, and the CME Options market has also grown massively over the past year.

Open interest is now three times larger than anything seen prior to this year. Luke Stryor's, the CCO at Derivet said, The surpassing of BTC Options Open Interest over Futures OI is a clear sign of the market maturing. This shift indicates a growing preference for options as tools for strategic positioning, hedging, or access to the recent rise of implied volatility, reflecting the market's evolving sophistication. end quote. Now speaking of institutions and maturity, a new report from K33 highlighted strong institutional demand for crypto. Asset's under management for Bitcoin exchange traded products have hit an all-time high on the back of continuous strong inflows. The CME continues to hold on to the top spot for

futures open interest commanding a 25% market share, and the report noted that ether futures are trading for a premium compared to Bitcoin futures for the first time since August, driven by excitement surrounding BlackRock Spot Ethereum ETF filing. The report said, odds for Ether Spot ETFs are slightly worse than Bitcoin Spot ETFs, due to technical nuances related to Grayscale's SEC lawsuit. Nonetheless, CME premiums and burgeoning activity represent a solid market signal, favoring continued relative strength in Ether. In a scenario that this week passes without the SEC approval of Spot Bitcoin ETFs, analysts wrote, Momentum might slow in the crypto markets as there would likely be multiple weeks to wait for significant news related to the

ETFs. Still, traders on the CME have retained a bullish stance, with premiums on both Bitcoin and Ethereum futures running above a 15% annualized rate for the past three weeks. Indeed, we are now firmly in the season for bullish predictions, and Marcus Theelian, the research head at Matrixport, has recently written that Bitcoin will reach 40,000, if not even 45,000 by year's end. He supported this prediction by citing Options Market positioning and a dovish outlook at the Federal Reserve, which seems likely to have reached the end of its rate hiking cycle. He noted that traders piling into bullish options bets has left market makers exposed to higher prices. As marketmakers have to take the opposing side to clients' trades, they can be

forced to buy spot Bitcoin to hedge their positions as prices rise. The alien wrote, We have two colossal options expiries on November 24th and December 29th, with 3.7 billion and 5.4 billion open interest outstanding. There are 85% more calls outstanding than puts, with the 40,000 strikes having the most significant open interest. The closer we get to 40,000, the more people will have to buy Bitcoin to hedge themselves. He added, there will be a broad interest in pushing prices to this $40,000 level. The odds are high that we reach this level. A couple more small bullish stories to round this out. Commerce Bank, which is the fourth largest bank in Germany, has been granted a crypto custody license. According to the announcement,

the license will allow the bank to offer a broad range of digital asset services, with, as they put it, particular emphasis on crypto assets. Commerce Bank says this makes them the first full-service bank in Germany to obtain the license. Over the course of this year, digital asset custody services have been announced by larger German rivals Deutsche Bank and DZ Bank. Those two are focused on tokenizing securities, however, having not yet obtained the appropriate licensing for crypto assets. Commerce Bank's chief operating officer Dr. Jorge Olivier de Castillo-Schultz said now that we have been granted the license we have achieved an important milestone, this highlights our ongoing commitment to applying the latest technologies and innovations,

and it forms the foundation for supporting our customers in the areas of digital assets. Over in startup land, asset tokenization firm SuperState has raised 14 million in venture funding to continue their work on regulated on-chain funds accessible to U.S. investors. The funding round was led by coin fund and distributed global, with a laundry-lust, of Crypto Venture firms participating. Superstate will use the funding to build out its offering of private funds for institutional investors and crafting a framework to eventually launch public funds. Earlier this year, Superstate filed to create a fund holding short-term U.S. government bonds similar to a money market fund. The regulatory workaround to bring the fund on chain was to

use a dual system of recordkeeping for share ownership. According to the prospectus, share transactions would be recorded in the traditional asset system with Ethereum being used as a secondary recordkeeper. The idea was to transition to using blockchains as the primary ledger for shared ownership over time as regulations permit. Robert Leshner, the founder of Superstate and, of course, of compound, said in a press release, the first generation tokenized funds fall short. They either function within private blockchains or exist in offshore entities, removing access for U.S. investors. So I think you can see, although this is a startup, it is very clearly on this institutional theme that is driving so much attention right now. Anyways, guys, that is the story from here.

It seems we are unlikely to get that mass bunch of approvals that I for one didn't really think was going to happen, but more or less it's on to the next thing, and the bullishness remains. And so until next time, be safe and take care of each other. Peace.