One article sorts out the key information of BTC spot ETF - the key moment of ETF decision is approaching: the countdown to the sharp fluctuation of BTC price

1. Maverick engine starts

On October 13, the U.S. Securities and Exchange Commission (SEC) announced that it would not appeal a court ruling on Grayscale's lawsuit against its refusal to convert GBTC into a spot ETF, which occurred in August this year, arguing that the SEC erred in denying Grayscale Investments' application to convert GBTC into a spot bitcoin exchange-traded fund (ETF).

It was this key event that ignited this round of the market (as can be seen from the CME position in the chart below, it began to rise sharply on October 15, CME BTC OI). During this period, with Fed pauses, the BTC market continued to be hot. The arrival of the application nodes of Hashdex, Franklin and Global X, and the extension of the "window period" on November 17 only provided a reason for the market to adjust. From the perspective of the timeline, the most critical time point is to look at the final decision date of this round of applications of Ark &21shares on January 10, and the market has the strongest bet sentiment for this node. At present, the result of whether it will pass or not will be available as early as next Wednesday (January 3).

2. Can a spot ETF pass in its current state?

Spot ETF According to market expectations, James Seyffart, an analyst at Bloomberg ETF, believes that there is a 90% chance that a Bitcoin spot ETF will be approved by January 10 next year. As the closest insider to the SEC, his views are widely conveyed by the market.

Griffin Ardern, head of the BloFin Options Desk & Research Department, a crypto integrated financial services institution, has published a study on potential AP (Authorized Participants) seed fund buyings of spot BTC ETFs that may pass in January.

Griffen's research concluded that from October 16 to the present, an institution has transferred $1.649 billion to Coinbase, Kraken and other compliant exchanges through the same account to continue to buy BTC and a small amount of ETH, and there are only a handful of institutions that can buy $1.6 billion in cash in the entire crypto market.

Seed funds theoretically have no limit on size, they only need to prove that sufficient liquidity can be provided on the day of the trade. Traditional seed fund purchases are carried out 2-4 weeks before the ETF launch and not too early to reduce the position risk of AP (Authorized Participants) such as market makers or ETF issuers, but due to the impact of the December holiday and delivery, purchases may also start earlier. From the above evidence, it is reasonable to speculate that the BTC spot ETF passed in January, but it cannot be used as a basis for whether it will be passed.

From the perspective of the ETF approval process, the maximum time is 240 days, and the SEC must make the final approval, and Ark&21 shares, as the earliest applicant, must present the approval results of this round of application to the SEC The deadline is January 10, 2024. If ARK is approved, then there is a high probability that the following companies will be approved.

If it is rejected, ARK will need to resubmit the materials, which is theoretically another round of applications for 240 days, but in practice, if any of them are approved in March-April 2024 or later, ARK may also be approved early.

In terms of the SEC's attitude, the SEC previously rejected the proposal to convert Grayscale GBTC into a Spot ETF for two main reasons:

One is concerned that cryptocurrencies are traded on unregulated trading platforms, making it difficult to monitor, and pointing to market manipulation as a long-standing problem in the spot market. Although the SEC has approved crypto futures ETFs, these ETFs are all traded on platforms that are regulated by U.S. financial regulatory authorities. The second is that many investors in BTC spot ETFs use pensions, pensions, etc. to invest, and they cannot afford ETF products with high volatility and high risk, which may lead to losses for investors.

However, the SEC did not appeal Grayscale again, and the SEC's more active communication during the ETF application process reflected a higher probability of approval. The day before yesterday, the SEC's official website disclosed two memorandums (Memorandum), one of which showed that on November 20, Eastern time, the SEC and Grayscale Corporation (Grayscale) discussed proposed changes to the rules for the listing and trading of Grayscale Bitcoin Trust ETF. On the same day, the SEC and BlackRock, the world's largest asset management company, held a meeting to discuss proposed changes to the rules for the listing and trading of the iShares Bitcoin Trust ETF. The memo is followed by a two-page PowerPoint presentation by BlackRock, which shows two types of ETF redemption methods: the In-Kind Redemption Model or the In-Cash Redemption Model. The in-kind redemption model means that the ETF holds Bitcoin shares are ultimately redeemed, while cash redemptions replace Bitcoin shares with cash equivalents, while BlackRock seems to prefer the former (which has agreed to In-Cash's terms so far). As of the 20th of this month, the SEC has held 25 meetings with ETF applicants. This also means that two new conditions have been negotiated in multiple meetings, including 1) the need for the ETF to be created with cash and remove all physical redemptions, and 2) the SEC expects the applicant to confirm the AP (Authorized Participant, i.e., underwriter) information in the next S-1 update. If these two conditions are met by the expected approval time of January 10, it seems that all processes are in place. These are positive signs that the SEC's attitude may have shifted.

From the perspective of multi-party games, the Spot BTC ETF is a game of interests between asset management giants such as SEC, CFTC, and Blackrock, which are dominated by Democrats, and important lobbying forces in the industry such as Coinbase

Coinbase's choice as the custodian of most asset managers is widely considered to be beneficial for its revenue growth, but the actual custody fees (generally ranging from 0.05%-0.25%) are not significant compared to the new international perpetual trading revenue and the new spot trading income. But Coinbase remains one of the industry's biggest beneficiaries as a spot BTC ETF and has become a major government lobbying force in the U.S. crypto industry after the collapse of FTX.

BlackRock has launched a cryptocurrency-related equity fund, the iShares Blockchain and Tech ETF (IBLC). However, even though the fund has been launched for more than a year, its asset size is just under $10 million. BlackRock also has enough incentives to push spot BTC ETFs through.

In addition, traditional asset management giants such as BlackRock, Fidelity and Invesco have entered the market to play a unique role in government regulation, and BlackRock is the world's largest asset manager with about $9 trillion in assets under management. Blackrock has been in close contact with the U.S. government and the Federal Reserve. U.S. investors are eagerly awaiting legal holdings of crypto assets such as Bitcoin to combat the inflation risk of fiat currencies, and institutions such as BlackRock have fully recognized this and used their political influence to put pressure on the SEC.

In the political game of the 2024 general election, cryptocurrencies and artificial intelligence have become hot issues in the 2024 election cycle.

The Democrats, Biden, the White House, and the current regulators appointed by the president (SEC, FDIC, Fed) seem to be largely opposed to cryptocurrency. However, many young members of Congress within the Democratic Party support cryptocurrency, as do many of their voters. Therefore, there is also a possibility that there will be a turnaround.

Republican presidential candidates are more likely to support crypto innovation. Republican leader Ron DeSantis has already said he will ban CBDCs and support innovations related to Bitcoin and crypto. As governor, DeSantis has made Florida one of the most crypto-friendly regions in the United States.

Trump has made negative remarks about Bitcoin in the past, but he also launched an NFT project last year. And its main support states, such as Florida and Texas, largely support the crypto industry.

The biggest uncertainty comes from the Democratic SEC leader Gary Gensler. Gensler believes that with the exception of Bitcoin, most token transactions on Coinbase are illegal. The SEC, under the leadership of Chairman Gary Gensler, has taken a tough stance on crypto. Coinbase is in the midst of an SEC lawsuit against its core business practices. Binance is facing a similar lawsuit and is defending it in court. In the worst-case scenario, a regulatory crackdown could cut Coinbase's revenue by more than a third, according to Mark Palmer, an analyst at Berenberg Capital Markets. "There is little hope of changing the position of the majority of SEC members in the short term,"

Instead of waiting for a court ruling, Coinbase and others hope that Congress will take crypto out of the securities rules. Executives at companies like Coinbase have been pushing bills that limit the SEC's regulatory powers over tokens and establish rules for "stablecoins" such as USDC, a digital dollar token in which Coinbase holds a stake.

Crypto firms are also trying to defend – lobbying against bills that require them to comply with anti-money laundering requirements, which executives say are expensive or impossible to comply with in a decentralized world based on blockchain assets and transactions. However, with every ransomware attack or terrorist attack that leverages the token's partial financing, their task becomes even more daunting. Before and after the attack on Israel, Hamas-linked organizations sent it requests for crypto donations.

There are a few bills that are moving towards the goal. For example, the House Financial Services Committee has passed a bill on crypto market structure and stablecoins, which is backed by Coinbase, paving the way for a full House vote. But there has been no indication yet that Senate Democrats will introduce the bill or whether President Joe Biden will sign a crypto bill.

With this year's spending bill likely to be a major priority for Congress, which will go into election mode in 2024, the controversial crypto bill may struggle to make progress for some time.

The collapse of FTX was a setback, but some in Congress recognized that crypto was inevitable," said Kristen Smith, CEO of the Blockchain Association. For now, the industry may have to settle for Bitcoin exchange-traded funds, while its lobbying army continues to work for a bill that will push it to the finish line next year.

According to a recent study by Grayscale, 52% of Americans, including 59% of Democrats and 51% of Republicans, agree with the notion that cryptocurrencies are the future of finance, and 44% of respondents said they want to invest in crypto assets in the future.

For the SEC, the most important reason for opposition and contradiction with cryptocurrencies is that the endogenous manipulation of BTC cannot be fundamentally resolved. However, we will soon be able to get an outcome on whether the SEC will be pressured by the gaming forces of all parties to pass the BTC spot ETF.

3． Spot BTC ETF&BTC price impact敏感性分析

Although the U.S. has yet to launch an ETF that is directly linked to spot Bitcoin, investors have already participated in the Bitcoin market through the existing product structure. The total assets under management of these products have reached more than $30 billion, of which about 95% are invested in spot Bitcoin-related products.

Prior to the emergence of spot BTC ETFs in the United States, BTC's investment methods and product structures included trusts (e.g., Grayscale Bitcoin Trust GBTC), BTC futures ETFs, spot ETFs that had been launched outside the U.S. (e.g., in Europe and Canada), and other private equity funds that allocated BTC. GBTC alone has an AUM of $23.4 billion, the largest BTC futures ETF BITO AUM is $1.37 billion, and Canada's largest spot BTC ETF BTCC AU is $320 million. The allocation of BTC in other private placements is not transparent, and the actual total amount may be much greater than $30 billion.

Spot ETFs have lower tracking error than trusts/closed-end funds (CEFs) (BITO, BTF, and XBTF returns lag by 7%-10% per annum compared to the Bitcoin spot price), better liquidity than private funds, and the advantage of lower potential management fee costs (compared to GBTC), such as Ark's 0.9% rate in its application filing.

Potential inflows

• Stock demand
• It is foreseeable that before the GBTC fee structure is changed for the better, there will be an outflow of AUM from GBTC, but this will be partially compensated by the demand for new ETFs. Assuming that 1% of the current wealth management AUM of 58,440bln flows into BTC, of which 5% is inflow in the first year, then it will bring 58,440*1%*5% = $29 billion of existing financial management funds to the inflow. Let's say 10% of the funds come in on the first day. It can bring 2.9 billion buying pressure (10% * 29 billion US dollars), these inflows combined with the pressure level pulled up by BTC, the BTC market value on October 13 is 557 billion US dollars (BTC price=26500), and the price in will start on October 13, The price of BTC takes into account the inflow of funds from spot ETFs and does not consider other factors, with a target price of $53,000 (the main consideration is the upward pressure level, and the impact of the inflow factor on price changes is difficult to predict due to the dynamic changes in market trading volume). However, due to the complexity of market sentiment, it is very likely that there will be a pull-up and then a fall.

Analogous to the AUM of the gold ETF 209 billion, the total market capitalization of BTC is 1/10 of gold, so assuming that the AUM of the BTC spot ETF can reach 10% of the AUM of the Gold ETF 209 billion, that is, 20.9billion, then assuming 1/10 * 20.9bln fund inflow in the first year (about 1/ 10 total AUM, AUM gradually accumulated, the second year AUM was 1.2 times that of the first year, and the largest inflow was experienced in the 6–7th year, after which the AUM began to decrease. The remaining buying pressure will be cashed in a few years), i.e. a net inflow of $2.1 billion in the first year.

Therefore, if we compare SPDR Gold (an ETF issued by State Street Global Advisors in the United States, which is the largest and most popular one), we can see that the AUM of SPDR is 57billion, and assuming that the AUM of BTC spot ett can reach 10%-100% of SPDR 57billion AUM, that is, 5.7billion-57billion (assuming 1/10* of the first year* 5.4billion = 540mln-5.4billion inflows, about 1/10 of the total AUM retained in the first year after the adoption of the gold ETF, AUM gradually accumulated, the AUM in the second year was 1.2 times that of the first year, and the largest inflow was experienced in the 6th to 7th year, and then the AUM began to decrease. The remaining buying pressure will be cashed in a few years), and the $5.4 billion to $5.4 billion inflow of BTC in the first year using the gold SPDR is a conservative estimate.

Using a very conservative class of gold and a method of inflows into BTC using 1% of the wealth management AUM of 58,440bln, the BTC spot ETF is expected to have inflows of around $5.4 billion to $29 billion in the first year after its approval.

If the new demand from the retail side is taken into account, the BTC holdings in the United States are 5%, 7%, 8%, 15%, and 16% respectively from 2019 to 2023, ranking 21st among all countries. The passage of spot BTC ETFs is likely to continue to increase this ratio. Assuming that this proportion increases to 20%, adding 1,320w retail customers, based on an average household income of $120k, assuming that the average person holds $1,000 in BTC, that is, generating $13 billion in new demand.

4. Conclusion

As more and more investors begin to appreciate the benefits of Bitcoin as a store of value asset or digital gold, combined with the increasing certainty of ETF launches, the combined impact of the approaching halving and the Fed's halt in raising interest rates, there is a high probability that the price of BTC will be pushed to the 53,000 level in the first half of next year.

The Ethereum spot ETF is likely to be passed much later than the BTC spot ETF by combining the 240-day application process of the BTC spot ETF and the qualitative controversy of Ethereum compared with BTC.