The Journal. - Bitcoin's Long Journey to the Stock Market

Episode Date: January 16, 2024

The Securities and Exchange Commission has approved the creation of Bitcoin ETFs, exchange-traded funds that buy the cryptocurrency, allowing retail investors to buy and sell Bitcoin as easily as stocks. WSJ’s Vicky Ge Huang breaks down the 10-year battle to bring Bitcoin to Wall Street investors. Further Reading: -SEC Approves Bitcoin ETFs for Everyday Investors  Further Listening: -The Trial of Crypto’s Golden Boy  -Fidelity's Controversial Bet on Bitcoin  Learn more about your ad choices. Visit megaphone.fm/adchoices

One of the founding ideas behind Bitcoin was that it was outside the mainstream financial system, that it existed on its own, and financial regulators couldn't touch it. But that meant that if you wanted to buy some of it, you had to jump through some hoops. When you wanted to buy Bitcoin, it was a very complicated and risky process because the most popular crypto exchanges were the ones based offshore, outside of the U.S.

That's our colleague Vicky Huang. She covers crypto. covers crypto. And there were a lot of instances when the crypto exchanges just got hacked or blew up or the founders of those exchanges just took off with the investors' money. So to buy Bitcoin was extremely difficult and highly risky. Nowadays, buying Bitcoin is easy. There are popular cryptocurrency exchanges like Binance and Coinbase, and you can even buy it on PayPal. But one domain where Bitcoin has remained off-limits?

The stock market, the place where most Americans invest. Until last week, U.S. regulators ruled that investment firms can now create funds made entirely out of Bitcoin, which essentially means Bitcoin can now be bought and sold on the stock market, just as easily as shares of publicly traded companies. I think the crypto industry will look back on this moment as a milestone for the industry, just because this has been a more than a decade effort to bring a fund holding Bitcoin, the largest cryptocurrency, into market. I think it will be seen as a historic moment in crypto history.

Welcome to The Journal, our show about money, business, and power. I'm Ryan Knudsen. It's Tuesday, January 16th. Coming up on the show, the fight that brought Bitcoin to the stock market. On August 2nd, comes a new M. Night Shyamalan experience. Josh Hartnett. And Salika as Lady Raven. This whole concert, it's a trap. Trap, directed by M. Night Shyamalan. Only in theaters August 2nd.

Bitcoin is being brought onto the stock market through something called exchange-traded funds, or ETFs. ETFs are kind of like mutual funds, in that they let investors own a big chunk of the stock market. While many ETFs are filled with company stocks, others own single commodities, like wheat or gold. Crypto enthusiasts have been trying to create an ETF out of Bitcoin for more than a decade. It's technically known as a spot ETF, which just means it's an ETF that owns the underlying asset. The main reason that a lot of the crypto entrepreneurs

and companies wanted to launch an exchange traded fund holding Bitcoin was because of the ease of use that comes with buying and selling an ETF. ETFs are pretty common in our investing lives. in our investing lives. You can buy ETFs holding all kinds of assets, including the S&P 500, gold, and different companies. The first application to create a Bitcoin ETF was filed in 2013,

but the Securities and Exchange Commission turned it down. Why? Why did the SEC reject their application to create a Bitcoin ETF? The reasons the SEC gave for rejecting their application was that the underlying Bitcoin market is very susceptible to fraud and market manipulation. How so? The asset is highly volatile. It often goes up or down based on rumors or pump and dump scheme. So the price of Bitcoin, it doesn't really trade based on fundamentals. It swings wildly based on false rumors and other stuff. So but why would that be a reason for the Securities and Exchange Commission to reject the creation of a Bitcoin ETF? Well, the SEC's mandate is investor protection to protect

everyday investors from getting harmed. So an ETF holding an asset that they believe to be very vulnerable to cause investor harm and fraud and potentially losing their hard-earned life savings. That's their job. Without the SEC's approval, crypto companies started looking for workarounds. Companies like Grayscale. Grayscale is a crypto asset manager. And in 2013, it started what is now the world's biggest Bitcoin fund. It's called the Grayscale Bitcoin Trust. And at its peak, it was worth more than $40 billion. When Grayscale started its trust, it functioned a lot like a regular ETF. Investors bought shares of the trust, and with that money, Grayscale bought Bitcoin.

But eventually, the SEC cracked down and said Grayscale was violating its rules. The trust was still allowed to exist and take on new investors, but it was difficult for those investors to pull their money out without suffering big losses. Crypto entrepreneurs didn't give up, and they kept looking for a workaround. And eventually, they landed on one that the SEC did approve of. ETFs made out of Bitcoin futures contracts.

So futures contracts are derivatives that track the price of Bitcoin. They're not really Bitcoin. that track the price of Bitcoin. They're not really Bitcoin. A futures contract is basically an agreement to buy something in the future at a price that's agreed upon today. In commodities markets, it helps investors bet on the future price of stuff like oil

without actually owning it. An ETF made up of Bitcoin futures contracts doesn't actually need to buy Bitcoin. But it's not as good as a regular ETF. It doesn't track the price of Bitcoin as precisely. So the SEC allowed these futures-based Bitcoin ETFs to countermarket in 2021. Why did the SEC approve one kind of Bitcoin exchange-trad traded fund that was based off of these futures derivatives, but not ETFs that actually held Bitcoin? Bitcoin, but are not really Bitcoin because they trade on regulated exchanges like the Chicago Mercantile Exchange, which the SEC supervise.

That means that those exchanges can surveil any potential fraudulent or manipulative activities in the Bitcoin futures market and report them back to the SEC if they detect any such activities. In other words, the SEC was saying that because futures contracts are regulated, this kind of ETF was okay. For Grayscale, the company that created that Bitcoin fund, this didn't make sense. So it sued the SEC in June 2022 and asked the court to throw out the agency's decision. What was Grayscale's argument? that it's unfair and illogical to treat Bitcoin ETFs and futures-based Bitcoin ETFs differently

because they think that the Bitcoin futures market is very much correlated to the Bitcoin market. And if you can detect fraud and manipulative activities in the Bitcoin futures market, then it would be logical to say that you can detect those activities in the spot Bitcoin markets. Right. Like why allow trading of a derivative of something if you're not allowing trading on the actual thing itself? Yes, that's exactly what it is. And then in August last year, the Federal Appeals Court in Washington, D.C. officially ruled in favor of Grayscale,

saying that you cannot treat Bitcoin futures ETFs, which are already on the market, and Bitcoin ETFs differently. After the ruling, the SEC was forced to reconsider Grayscale's application, and other applications for Bitcoin ETFs flooded in. Technically, the SEC could have rejected their application again, but they would have to do so using a materially different reason than the reason they've been using

to reject these spot Bitcoin ETF applications, which is that the market is susceptible to fraud and manipulation. So rather than come up with a new rationale for rejecting Bitcoin ETFs, last week, the SEC voted to approve them. But just because the SEC approved Bitcoin ETFs doesn't mean the agency thinks they're good investments. That's after the break.

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To all the planners, now you can reserve your Uber ride up to 90 days in advance. See Uber app for details. After the SEC voted to allow Bitcoin ETFs, a flood of new ETFs hit the market and investors started pouring in. So the first day of trading for these Bitcoin ETFs were kind of a record in ETF trading history

just because all 10 of them had more than 4.6 billion worth of shares traded on the first day, which is a pretty big number. It shows that investors were pretty enthusiastic in buying and selling these ETFs. But the SEC didn't seem that excited. The agency said its approval of Bitcoin ETFs shouldn't be taken as an endorsement of Bitcoin. of Bitcoin ETFs shouldn't be taken as an endorsement of Bitcoin. scam people and commit crimes. But they're approving these funds because it's better for investors who want to access to Bitcoin to access them through a regulated investment vehicle like an ETF instead of going to an offshore crypto exchange to buy Bitcoin.

And even before the SEC announced the decision, there was an incident that showed how the Bitcoin market is still vulnerable. The date that everyone was watching was Wednesday, January 10th, when the SEC faced the final deadline to approve or reject one of the funds. But there was actually a big incident the day before.

That Tuesday afternoon, the day before the decision was expected, a tweet from the SEC's X account said that Bitcoin ETFs had been approved and the price of Bitcoin went up. But then the SEC said that it was actually a hack where someone hacked into the SEC's official X account and posted that unauthorized tweet about the ETFs getting approved. In many ways, it was a boost to the argument that the Bitcoin market is susceptible to

Bitcoin market is susceptible to manipulation because as soon as that tweet came out, Bitcoin initially surged a little bit. And then after the SEC said that the post was unauthorized and their account was hacked, Bitcoin pared back its gains. It isn't just the SEC that's skeptical of Bitcoin ETFs. The thing that overtook the story, I think, for the trading of these ETFs is that a lot of brokerages, including Vanguard, is not onboarding or making these spot Bitcoin ETFs available for their customers on their brokerage account. Hmm. Why not? So Vanguard said that these investments do not align with their investment philosophy. But basically, the short of it is that they think these spot Bitcoin ETFs are too risky and highly speculative and not suitable for everyday investors. risky and highly speculative and not suitable for everyday investors. So if this decision by the SEC now makes it easier for regular everyday investors to add Bitcoin ETFs into their brokerage accounts,

into their retirement accounts, is that a good thing? I mean, isn't that really risky? Is that a good thing? I mean, isn't that really risky? It is still really risky for everyday investors to buy Bitcoin. It could potentially open the door for more investors to get harmed, especially if even riskier cryptocurrencies are allowed to come to market following the approval of the spot Bitcoin ETFs. One of the main ideas behind Bitcoin was that it was going to be outside of the mainstream financial industry. And yet this decision seems like it puts it closer to the mainstream financial industry because now you can invest in it through the stock market. So what does that mean for Bitcoin itself? It's interesting that the crypto industry

is really cheering on the approval of these spot Bitcoin ETFs, many of which are offered by the biggest, most established Wall Street firms. But Bitcoin was actually created in the aftermath of the financial crisis. And it was pitched to be this unique asset that could cut out the middlemen, the Wall Street banks and democratize finance and bring more financial freedom to everyday investors. But now the industry is cheering on the launch of these ETFs that are sold by Wall Street

asset managers and hoping that the price of Bitcoin could go up further because Wall Street is accepting some of these crypto products and getting into crypto. It's a very interesting development. That's all for today. Tuesday, January 16th. The Journal is a co-production of Spotify and The Wall Street Journal. Additional reporting in this episode by Jack Pitcher, Alexander Osipovich, and Caitlin Ostroff. Thanks for listening. See you tomorrow.