What to make of the ETF approval?

TRADERS’ RISK CALL 11 Jan 2024

This week, we discuss the following:

The Bitcoin Exchange Traded Funds are finally approved for trading by the US Securities and Exchange Commission. Vee shares his thoughts on it and what it means for the cryptocurrency sector going forward.

Transcript:

The US Securities and Exchange Commission approved 11 Bitcoin exchange-traded funds a few hours ago, and as we’ve been saying, this is an inevitable step in the long journey of cryptocurrencies becoming viable alternative assets for mainstream investors. Interestingly, in the statement where he announced the approval, the chairperson of the commission, Gary Gensler, who is vocally against cryptos, reiterated that this approval does not signify an endorsement of Bitcoin, and investors should remain cautious about the myriad of risks associated with Bitcoin and products that derive their value from cryptocurrencies. Even in his statement, he was clearly trying to be very negative about the cryptocurrency sector, and from his language, you could tell that he was forced to approve because there is really no reason for him to disapprove any further, especially since the court ruled that the SEC was wrong in not adequately explaining its reasoning for disapproving the listing and trading of Greyscale’s proposed ETF.
Greyscale’s proposal was to convert its fund to an ETF, but it was denied, and clearly, there are no strong reasons for it, and the SEC couldn’t give a logical or legal reason to disapprove. So, it’s good that we can see that even if there are critics of cryptocurrencies among the authorities, they cannot really find legal reasons to stop this asset class from becoming more mainstream because it meets all the requirements of a legally traded asset class. This is very good for cryptocurrencies as a whole in the long run, and the primary beneficiary in terms of pricing today would be Ether, because, as a cryptocurrency, it’s not the biggest, but it’s more than Bitcoin. Bitcoin is up slightly more than one percent on the day, but Ethereum is up more than 10% because it’s a natural candidate for more ETF applications going forward. So, we will see that start to trickle down the chain to other cryptocurrencies as well. What this means is that they will not have reasons to disapprove because once one of them has been proven to be viable, then what is to stop the rest from being viable as well? I guess the critical question to be answered is whether the cryptocurrency is open to manipulation or not. Some of the smaller ones will be clearly more vulnerable to manipulation, especially if they are less decentralised than Bitcoin.
But where do we go from here? We have been saying for some time now that this step is an inevitable step and any noise around when it gets approved is just noise in the shorter term because you cannot stop something that is eventual and inevitable given the soundness of it being an alternative asset class. And this is the case with Bitcoin. The approval is finally here, so what’s next, right? Bitcoin’s market capitalization currently is slightly above 900 billion dollars, so it’s almost a trillion, but more traditional stores of value, like gold, have a market cap of more than 13 trillion dollars. This is just the physical, above-ground gold market value, and it doesn’t include the paper gold, meaning derivatives that trade around gold, and if including that, it would be much more. As we know, gold is a very acceptable store of value for most traditional investors, but these are traditional investors growing up in a world where gold has been an acceptable form of store of value for centuries, and we are going to see, going forward, younger people growing up in a world where Bitcoin is an acceptable store of value. So, it is a very natural step indeed to expect Bitcoin to gain share as a store of value. So, between less than a trillion now, to comparison of gold being more than 13 trillion, we are likely to see assets being allocated to Bitcoin grow, and it’s likely to become a buy and hold for many of these small investors. Unless the price goes up by multiple times, it is unlikely you are selling because you are just allocating a share of your savings into an alternative asset. This will be the case with many wealthy people as well, and we are likely to see this grow. And of course, we are seeing a surge in so-called experts being shipped out to mainstream media to talk about the price targets. I think whatever price targets they have, they are likely to be underestimating it because they are really not seeing the world as we have been talking about for years now. It is just an inevitable step with the population dynamics such that if you grew up in a world where this is an acceptable form of asset and store of value, and you start to allocate to it, it will be slow, but it builds persistent flows, and it will be very, very sticky flows. So, the next question to ask, of course, is let’s just say Bitcoin, in the next few years, grows to just half the market capitalization of gold. That implies prices of Bitcoin going up 7 times from here. We would see prices like more than 200,000, possibly close to 300,000, and we are now trading just below 50,000. So, many numbers that are shipped out could seem mind-boggling, but if history continues the way that it has been for years, where when an asset class becomes acceptable, you can start to allocate to it, and I expect to do it in such a fashion where it’s a store of value rather than a trading instrument. With that, it’s likely that we’re going to see Bitcoin prices continue to rise going forward as well. The next candidate for an ETF is Ethereum, which is the second-biggest cryptocurrency in the world, with a market cap of now 0.3 trillion. Imagine if it grows as Bitcoin starts to scale higher, the Bitcoin ownership starts to go higher, and if Ethereum remains a viable cryptocurrency, as I believe it is, and it will remain so. It has more usage than just being a store of value but also has usage in that fees are being paid for using its smart contract. If there’s no other viable candidate coming to take its place, it’s likely to go multiple times higher as well. But without even that,, I think if just people speculating on Ethereum being the next approved ETF, we will see multiple types of growth in assets allocated to it as well, because as Bitcoin becomes more established, the chances and the likelihood of these ETF developments capturing the imagination of the mainstream investors will become more and more likely, and people will start to allocate to it as well. So, should we be surprised by the approvals? Not really, it is an inevitable step in the asset class for the mainstream investors, but what does it mean? It just means that progress will continue to be made on this front as we see Bitcoin being approved. You’re likely to see more derivatives being developed for the cryptocurrency sector and more ideas will come forward to encourage more investment or make investments into cryptocurrencies more accessible. This step is not surprising because it was inevitable, but it’s still a piece of very good news for the sector.
Could we see a ‘buy on rumour, sell on fact’ reaction? Yes, it could be. Many people are invested in Bitcoin, looking forward to these announcements, so we could see some take profits, but I think the false SEC announcement earlier this week, where they claimed that their Twitter was hacked, and then they posted an approval, and then they say it’s not approved, we saw a price action where Bitcoin spiked to nearly 48,000 and then dropped to below 45,000, and then came back to around 46,000. I think that volatility, that short-term volatility, also took out a lot of speculative positions. So, I think positions are much cleaner now, and the thing to look forward to now is to see the first day of trading of these Bitcoin ETFs. Every one of the firms with the approvals has announced their fee schedules. They have announced discounted fees, some of them even limited-time zero fees until a certain asset under management target is met, so they are fighting for market share, and it would be interesting to see how much volume on the first day and for subsequent days. Then, if it’s a very high amount of money flowing into these Bitcoin ETFs, it’s likely to boost sentiment in the sector even further. So that’s the next thing to watch out for. And as always, stay true to the process, and eventually, we will be profitable. Thank you.