The Breakdown - Oops! The BlackRock ETF Code IBTC Has Been Around Since August...

Episode Date: October 26, 2023

BTC markets this week have been sent in both directions around news that BlackRock's Bitcoin Spot ETF had a ticker on the DTCC (and then news that it was gone). It turns out, however, that the symbol had been there since August, and no one had noticed. 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 Wednesday, October 25th, and today we are talking about more weird quirks of this proto bull market. But before we get into that, 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.ly slash breakdown pod. Hello friends. Well, today we are following up on the story that we've been tracking all week, which is all of the intrigue and interest around a potential ETF being approved, which had a really

funny and weird little wrinkle yesterday. But before we get into that, as I was prepping this show, news broke that Sam Bangman-Fried would indeed be taking the stand in his own defense. Now, my feeling on this was that, of course he would. I have had nearly 100% conviction that this was going to happen, and it is only grown over the course of the trial. This is despite this being a very bad idea in general. It usually does not go well for the accused to speak in their own defense.

However, one, Sam is not a person who can really resist talking, and two, after what we've seen on this trial, it's sort of the only thing he has left. Martin Screlli summed this up last week. The former pharma exec who himself went to jail has been taking a close interest in the trial, and he wrote, The only chance SBF has to get acquitted is to take the stand. 11 out of 10 criminal defense attorneys would tell you it's a mistake, but while it's a Hail Mary, it's the only shot he has.

Taking the stand is an ambitious move by a defense. OJ famously did not take the stand. Neither did Michael Jackson or Casey Anthony. Lawyers don't like the uncertainty that comes with testimony, but specifically cross-examination. Another reason lawyers don't like it is that there are a stand. a high risk the defendant is less likable after testifying. That is a risk with Sam, but he's not your average defendant. This will be the last sale he has to make. Recency bias matters. If SBF can avoid choking and charm 12 people like he charmed VCs, they might just forget the first

five weeks of the trial. Riding that momentum into closing arguments is critical. On the stand, SBF has a simple story. Why would I want people to lose money? I didn't put any of this money in my pocket, I invested it. I was stupid, but that's not a crime. He can act surprise, even hurt at the idea he wanted to deprive anyone of their property. Virtually everything comes down to his state of mind and what he believed, which is really up to him and how well he can sell it. That's my take. If he doesn't take the stand, he will regret it forever. SBF isn't the kind of guy who leaves things like that on the table. He will get closure, a real chance to tell a story, and a fighting chance at winning over this jury who probably are ready to convict. For my money, that is the best

legal analysis you will read about this particular decision. Sam could testify starting as soon as tomorrow afternoon. Obviously, we will keep you abreast of any of those developments. But today, let's go back to this crazy Bitcoin spike that we're in the middle of and talk about a few interesting quirks. Of course, one of the biggest catalysts for Monday's Bitcoin spike was BlackRock being assigned a ticker symbol for its Bitcoin ETF on the DTCC website. The DTCC functions as the clearinghouse for most U.S. stock trading. So BlackRock's ETF being listed there was taken as a sign of progress towards an eventual SEC approval. That said, most analysts had warned that markets were getting ahead of themselves and that the inclusion of

BlackRock's ETF in the DTCC system wasn't much of an indication of anything. The only real information to be gleaned was that BlackRock were taking steps in preparation for a launch, not that an ETF launch was imminent. However, on Tuesday morning, Barron's cryptojournalist Joe Light noticed that the BlackRock ETF had been removed from the DTCC's website during the day's update. Markets erupted into pandemonium. Bitcoin immediately sold off by 3%. Traders furiously refresh the DTCC website, causing it to crash after likely experiencing more single-day traffic than it ever had before. Bloomberg Senior ETF analyst Eric Balcuna said, DTCC is definitely not used to this kind of attention or action. It lives behind the scenes, very boring. Speaks to the uniqueness

and intensity of this entire saga. Now, at around 6 p.m. that evening, the DTCC website was once again updated. BlackRock's ETF was back under the ticker symbol IBTC. The only substantive change was that the redemption and creation status had been changed from yes to no. Analysts said this was likely of no real consequence as the fund is not yet trading. Said Bloomberg's other ETF analyst James Safart, I personally don't think this means all that much if I'm being honest. Think it indicates BlackRock is getting everything ready to launch if and when they get an SEC approval,

and that the no just means it's not open for Create Redeem because it's not live yet. Now, later in the evening, a Reuters reporter took the drastic step of actually asking the DTCC what was going on. A spokesperson for the DTCC explained that, quote, It is standard practice for DTCC to add securities to the NSCC security eligibility file in preparation for the launch of a new ETF to market. Appearing on the list is not indicative of any outcome for any outstanding regulatory or other approval processes.

What's more, they noted that the symbol had actually been there since August, which of course caused a fair bit of bewilderment. Travis Kling tweeted, Just to make sure I'm tracking. Market thought BlackRock's IBT was listed on the DTC website yesterday. Price spiked and blew up a bunch of derivatives. IBT listing magically disappears today, then reappears a few hours later. Then it turns out that IBTC had been on DTCC since August?

Did I get that right? Bill King responded, just another day in paradise. Now, as another indicator of rapidly growing institutional interest in Bitcoin, open interest on the Chicago Mercantile Exchange or CME soared to record highs on Tuesday. The CME hosts a handful of crypto futures contracts and is the main trading venue for TradFive firms which shy away from offshore crypto exchanges. Open interest on crypto-native venues was crushed by Monday's volatile move. These offshore exchanges saw perpetual futures open interest decreased by almost 27,000 Bitcoin

throughout Monday. Conversely, CME's monthly Bitcoin futures contracts saw an increase in OI of over 4,000 Bitcoin. For the first time, CMEOI passed 100,000 Bitcoin worth around $3.4 billion. According to Vett Le Lunday, a senior research analyst at K33 Research, the CME market share for Bitcoin futures trading has reached an all-time high of 25%. The CME is now the second largest trading venue for Bitcoin futures, trailing only Binance, which still holds 29% market share. Unsurprisingly, however, Bitcoin's market share has been collapsing in the second half of this year, following regulatory lawsuits and difficulties

with payment infrastructure. Binance's futures trading market share topped out at around 37% in June. 24-hour trading volume for CME Bitcoin futures hit 1.8 billion between Monday evening and Tuesday morning. That's around 25% larger volume than any other 24-hour trading period over the past two months. Now, alongside the obvious benefits of having significant Bitcoin futures volume move to regulated and surveilled markets, monthly expiry structure on the CME gives us additional information on how markets are being traded. That's opposed to offshore where 80% of futures trading is using perpetual futures which don't expire. Currently, the one-month premium to spot Bitcoin prices is at 13% for CME futures contracts. There hasn't been a discount to spot prices since late August,

and the premium has been steadily climbing since then. 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, DBA, DBA, Cracken. Perhaps unsurprisingly, this week's price move has inspired some astoundingly bullish takes in investment research notes published this week. On Tuesday, Capriil Investments founder Charles Edwards wrote that after seven months of consolidation, Bitcoin melted the $32,000 resistance level like butter. He expects that upcoming monthly resistance will not present a serious barrier, adding that, quote, it would make sense to see either a rapid continuation to mid-range,

$43,000, or short-term consolidation between support resistance at 32 to 35K before continuation. Layer 2 Labs founder Paul Stork anticipates that weakness in stocks will help drive momentum traders to Bitcoin, stating that, I think we're seeing meaningful inklings of a broader decoupling of Bitcoin from equities. And this divergence of sorts has taken a lot of market participants by surprise. He noted the concern surrounding, quote, foreign conflict and rising macro uncertainty, expectations among traders had been focused on a forthcoming dip that ultimately didn't materialize. Now, Matrixport noted that during the 25% Bitcoin gain over the past month, the vast majority of price increases have come during U.S. trading hours. On Wednesday, Matrixport analysts

wrote, this is a significant development and shows that U.S. institutions and U.S. investors are embracing the news that a U.S. listed spot Bitcoin exchange traded fund appears imminent. Matrixport noted that of the roughly 420 million cryptocurrency owners worldwide, over half reside in Asia while only 12% live in North America. They added that although Asia has the largest owners, of crypto assets, quote, the buying power of U.S. traders and institutions is a magnitude larger. Now, perhaps the most bullish note of all came from Galaxy Digital. That firm anticipates over 14.4 billion in inflows for spot Bitcoin ETFs over their first year. Analysts claimed that a spot ETF would be a vastly superior investment product compared to

existing products such as trust and futures-based ETFs. Those rival products currently hold around $21 billion in value. Galaxy wrote that they expected inflows would ramp up to $27 billion in the second year, and all the way up to $39 billion by the third year. The report stated that, quote, the U.S. wealth management industry will likely be the most addressable and direct market that would have the most net-new accessibility from an approved Bitcoin ETF. As of October 2023, assets managed by broker-dealers, $27 trillion, banks, $11 trillion, and RIAs, $9 trillion, collectively totaled $48.3 trillion. The note pointed out that by gaining access to a vastly superior product, new investors could look to purchase their first Bitcoin via an

ETF, which offers, quote, greater efficiencies through fees, liquidity, and price tracking. While fees haven't been listed by Bitcoin ETF applicants yet, ETFs generally offer lower fees compared to hedge funds or closed end funds, and the high number of ETF applicants will likely aim to keep fees low to remain competitive. Now, as far as price predictions go, Galaxy suggests that inflows could lead to a 74% jump in Bitcoin prices over the first year. Still, you have to think that many people assume that as much hype and excitement as there is around a potential Bitcoin spot ETF approval right now, that it's likely going to be

a sell-the-news type of event. In other words, markets are more likely to be disappointed than enthused by the amount of capital that comes in at the beginning of trading, given how much hype surrounds it. Well, in an appearance on CNBC on Monday, EY's global blockchain lead Paul Brody explained why an ETF launch might not be a sell-the-news event. His interviewer suggested that a new Bitcoin ETF could experience a surge of hot money, keen to capture a short-term pump, but just as quick to leave on any price reversal. Brody dismissed that idea and explained that unlike gold, a surge in price cannot bring on new supply. He said, the issuance rate of Bitcoin is set. We might discover that pricing in Bitcoin is more inelastic compared to other types of assets.

Now, maybe most notable about this is not what Paul had to say, but the fact that we are firmly back in the part of the cycle, where people are going on CNBC and other cable news shows to explain Bitcoin 101 to boomers. Relatedly, Pomp was back on Squawk Box this morning. Now, a couple other themes that obviously are getting people excited as we head into the proto beginning of this next bull cycle. The acronym that is the leading contender to be a defining acronym of this cycle is RWA Real World Assets. While major European Clearinghouse, Euroclear, has unveiled its tokenized securities

issuance service. Tuesday's launch featured the first tokenization from Euroclear, a 100 million euro digital bond offered by the World Bank. The issuance will be used to finance sustainable development activities and will trade on the Luxembourg Stock Exchange. Euroclear's new digital securities issuance system seeks to assist with issuing, distributing, and settling fully digital financial assets on distributed ledgers. Leave Mostri, the CEO of Euroclear, said in a statement,

Today's launch marks an important moment for our clients and the potential of digital assets. We strive to deliver technology solutions that empower investors, foster market transparency, and support the growth and stability of all market participants. End quote. The bond offering used City as an issuing agent and investment manager while TD's security served as the dealer. The bond was issued on the Cordo blockchain, which is a private network operated by R3, which has also been used in NASDAX blockchain experimentation. In a report published earlier this month, 21 shares projected that the total market cap for tokenized real-world assets could be between

$3.5 and $10 trillion by the end of the decade. Now let's wrap with a couple legal updates. Coinbase have filed their final response in their efforts to dismiss the SEC lawsuit. The filing continues the theme that the SEC is attempting to expand the legal definition of a securities contract to massively expand their own jurisdiction, all without any congressional mandate. Coinbase stated that, quote, as the SEC now would have it, an investment contract exists if someone parts with capital and expected that her purchase will increase in value. The SEC proposes its departure from precedent in the service of a radical expansion of its

own authority. It claims authority over essentially all investment activity and thus the right to define its own regulatory ambit, constrained only by its own ambition. They continued, the SEC's authority is limited to securities transactions. not every parting of capital with a hope of gain qualifies. Where the SEC position accepted, countless software-driven services would be securities. That would be another radical expansion of SEC authority with no grounding in precedent. Finally, the filing also touched on issues of the major questions doctrine.

That legal theory holds that administrative bodies require express authorization from Congress to expand their jurisdictions into a new area of significant importance to the U.S. economy. Coinbase argued that, quote, The separation of powers concerns animating that question are at their most acute when an agency wields enforcement power without regulatory process, under the guise of enforcing a congressional mandate. Now that the written filings have concluded, the judge may ask for the parties to appear in court and make their arguments in person, and a decision is not expected until sometime in early 2024. Meanwhile, late on Tuesday, Binance filed a reply in their motion to dismiss a lawsuit

brought on by the CFTC. The filing accused the CFTC of using the lawsuit as a, quote, Trojan Horse to gain worldwide regulatory reach. The filing argued that, quote, the CFTC relies on new and broad arguments that would allow it to regulate any activity in cryptocurrency or other assets related to a derivatives product anywhere on the globe. The filing adds that the agency's complaint, quote, resorts to incendiary language against Binance and its CEO, CZ. And indeed, the CFTC's March lawsuit was notable in that it presented a wide range of allegations against CZ and finance, many of which would be more at home in a criminal case than a civil regulatory lawsuit about unregistered derivatives offerings. Still, in comments at an event on Tuesday,

CFTC Commissioner Summer Mersinger rejected Binance's arguments stating that, if there are U.S. persons, U.S. markets involved, we do have that authority to make fraud and manipulation charges. Anyways, friends, things continue to rip the energy is certainly back. We've got high drama heading into the end of this SPF trial. This October has certainly not disappointed for action. I want to say one more big thank you to my sponsor, Krakken for supporting the show. Go to crackin.com slash the breakdown. and see what crypto can be. Until next time, be safe and take care of each other. Peace.