“Arbitrary and capricious”…
Those are not two words you’d use to describe a regulator that’s doing its job right.
But that’s how a federal appeals court described the decision by the Securities and Exchange Commission (“SEC”) in a recent ruling.
The SEC is the main stock market regulator in the U.S. And the court was specifically referring to the agency’s rejection to a proposal by Grayscale Investments to turn its popular bitcoin trust into an exchange traded fund (“ETF”).
And the court didn’t just pour scorn on the SEC…
It also ordered it to vacate its rejection of the Grayscale switch and reconsider the merits of the company’s proposal.
As you’ll see today, this didn’t just leave the SEC with egg on its face.
It also has huge implications for us as investors.
As colleague and crypto investing expert Teeka Tiwari has been telling his readers, we’ve never been closer to a U.S. bitcoin ETF.
That would allow folks to buy and hold bitcoin, through a third party, via their regular brokerage account.
That means a flood of investor money headed into the cryptocurrency… and a major milestone on the road to mainstream adoption.
We’ll get into that in a moment. First, if you haven’t been following the case, let me catch you up really quick.
Grayscale’s trust buys and holds bitcoin on behalf of shareholders…
And it’s no minnow…
The Grayscale Bitcoin Trust (GBTC) is the world’s biggest bitcoin fund. It holds 627,000 bitcoin on behalf of investors. That’s $16 billion at current prices.
But because of its trust structure, it often trades at steep discounts or premiums to the price of bitcoin.
Without getting lost in the weeds, that’s because you can’t directly redeem your shares for the bitcoin the trust holds.
This imbalance between supply and demand leads to times where there are too many or too few shares available to the market. When this happens, GBTC’s share price moves away from the price of bitcoin.
And sometimes those moves away from the bitcoin price can be significant.
For instance, late last year the discount was about 50%. And the premium over the price of bitcoin has been as high as 41% back in July 2019.
And that’s not where the problems end.
GBTC doesn’t trade on a major stock exchange…
Instead, it trades on something called the over the counter, or OTC, market.
It’s a decentralized marketplace where trading happens directly between two parties.
And it’s typically seen as a riskier place to trade because it’s subject to fewer regulations than an exchange such as the Nasdaq or the New York Stock Exchange.
That can also lead to wide price spreads when trading. That’s another small reason for some of the trust’s premiums or discounts compared to its bitcoin holdings.
Worse still, GBTC carries an annual management fee of 2%.
That may not sound like a lot. But for a passive holding fund, it’s massive.
Vanguard charges 0.04% annually for its S&P 500 ETF (VFIAX). So it’s about 5,000 times higher than what the industry standard market-tracking ETF charges in fees.
And the higher the fee you pay as an investor to own an asset, the lower your returns will be. Investors who own bitcoin directly pay no fees.
That’s why the SEC’s refusal to allow GBTC to convert to an ETF is such as mystery. An ETF is superior to an investment trust in every way.
Even more perplexing is the SEC’s greenlighting of a bitcoin futures ETF…
In October 2021, the regulator allowed ProShares to launch the ProShares Bitcoin Strategy ETF (BITO).
But it doesn’t hold bitcoin on behalf of investors like the proposed Grayscale would do.
Instead, it tracks the price of bitcoin through bitcoin futures contracts.
Don’t be put off by the jargon. A futures contract is an agreement between two parties to buy or sell an asset at a predetermined price at a specified time in the future… in this case, bitcoin.
The problem is that futures markets are complex beasts. Most importantly, similar to trading options, they lose value over time.
As a result, futures ETFs often do a poor job of accurately tracking the price of the underlying asset shareholders want exposure to.
That’s why the court accused the SEC of being “capricious and arbitrary” in its decision to reject the Grayscale bitcoin ETF.
It rejected a simple, investor-friendly way of owning bitcoin via the stock market. But it allowed a complex, investor-unfriendly futures ETF to go ahead.
That’s why the court’s decision is a watershed moment…
It shows the SEC for what it really is – a bumbling regulator that doesn’t have regular investors’ interest at heart.
And it puts SEC chair Gary Gensler and his organization under pressure to give a regular bitcoin ETF – also known as a “spot” ETF – the go ahead.
It’s something Teeka has following closely over at his Palm Beach Research Group advisory business. He’s had a close eye on all things bitcoin since he first recommended it to his subscribers back in April 2016, when it traded at just $428.
And he’s been following this situation for his readers just as closely. Here’s Teeka…
The writing is on the wall. We’re going to get a bitcoin ETF. The court unanimously came out and just executed every single point the SEC tried to bring up for why it should not allow a spot settled bitcoin ETF.
To me, it’s not whether we’re going to have an ETF, it’s just a question of time. Now that this ruling is in place, it’s removed a massive hurdle for bitcoin ETFs to get approved.
Bitcoin is a volatile asset. And it’s one that’s tough for investors to own through traditional means.
Grayscale has spent years trying to improve its structure. Plus, other financial institutions want in on a bitcoin ETF. And regulators are now being pushed by the courts to make it happen.
With approval on the way, investors who acquire bitcoin now should benefit from the increased demand that will come from an easy, simple, and low-cost way to own bitcoin in their traditional financial accounts.
As with any investment, don’t overdo it. This is a big trend where even a small allocation now can lead to life-changing returns in the coming years.
Regards,
Chris Lowe
Editor, The Daily Cut