January 2024
Deutsche Bank Guide explores repercussions of US approval for spot bitcoin ETF
On 10 January 2024, the SEC made a landmark ruling in favour of the first-ever spot Bitcoin ETF. Marion Laboure and Cassidy Ainsworth-Grace, Research Analysts for Deutsche Bank Research, examine what this means for the digital assets
In a keenly anticipated decision, the US Securities and Exchange Commission (SEC) issued its approval on Wednesday 10 January 2024 for the listing and trading of a total of 11 spot bitcoin exchange-traded product (ETP) shares. This includes the applications submitted by BlackRock and Ark Invest, the first to file in June 2023. Other firms, including Fidelity Investments, Invesco, VanEck, and WisdomTree, also filed their respective applications in 2023 and have now received approval.
As SEC Chair Gary Gensler noted, between 2018 and March 2023 the Commission had previously disapproved more than 20 exchange rule filings for spot bitcoin ETPs, but “circumstances had changed” and the U.S. Court of Appeals for the District of Columbia had ruled that the Commission had failed to adequately explain its reasoning for continued opposition. In particular, among the most recent filings it cited one made by Grayscale for the conversion of Grayscale Bitcoin Trust into an ETP.1
As the SEC “acts within the law and how the courts interpret the law”, the Commission had decided that approving the listing and trading of the spot bitcoin ETP shares was “the most sustainable path forward” said Gensler although the approval is limited to ETPs holding one non-security commodity bitcoin and the ruling makes clear that the SEC continues to have major reservations about crypto assets in general.
Bitcoin becomes more easily accessible for investors
Anticipating the SEC’s decision, widely regarded as a watershed moment for both the world’s largest cryptocurrency and the broader crypto industry, Marion Laboure and Cassidy Ainsworth-Grace, Research Analysts for Deutsche Bank Research, have prepared a short white paper And the Spot Bitcoin ETF is Approved by the SEC about the new ETF, which offers standardise access to Bitcoin as an investment.
According to the authors, “the SEC's decision in favour of the spot Bitcoin ETF marks a significant milestone” as it is set to enhance accessibility to Bitcoin investment for both retail and institutional investors. While the first Bitcoin futures ETF was approved in the US in October 2021, a spot Bitcoin ETF offers key advantages because – as it holds Bitcoin – it allows participants direct exposure to underlying spot price movements, the authors explain.
“With a spot ETF, investors can gain indexed Bitcoin market access through a familiar share-trading structure on regulated exchanges. No longer do they need to navigate a digital currency infrastructure to participate in Bitcoin price action. It creates an easier onboarding ramp for mainstream investors still hesitant about handling Bitcoin themselves outside of traditional financial systems.”
Source: Deutsche Bank, Bloomberg Finance LP
Yet, the authors expect volatility and further price increases in the coming year to persist – for three reasons. First, the approval could drive large inflows into the market. “Bitcoin's supply is limited, so increased demand amid constrained supply would put upward pressure on prices. We've already seen prices climb significantly this year on anticipation of the decision.” Second, central banks rate cuts in 2024 will drive more investors to invest in crypto for higher return.
Third, comprehensive regulation is on the horizon with the EU Markets in Crypto Assets (MiCA) regulation coming into effect in 2024. The stablecoins rules kick in from Q1-2024, with the full application of all the MiCA rules by Q3 2024. “We perceive regulation as a net positive for the industry as it will: (i) increase adoption as a clearer regulatory framework should drive more corporate adoption, higher liquidity (and less concentration); and ultimately (ii) partially help address volatility.”
However, they warn, one should not conflate price gains with broader predictions of cryptocurrency overtaking traditional finance. At its core, a spot Bitcoin ETF simply provides standardised access to the digital asset as an investment, without altering Bitcoin's core proposition. “Only time will tell if greater adoption leads to more transformational outcomes for the crypto ecosystem and financial system.”
Deutsche Bank Research report referenced
And the spot bitcoin ETC is approved by the SEC by Marion Laboure and Cassidy Ainsworth-Grace was published on 16 January 2024 by Deutsche Bank Research