There’s a lot going on onchain; from Cosmos ecosystem airdrops to new L1s launching, there’s certainly a lot to consider.
That being said, the most important catalyst to come is still the $BTC ETF. After some volatility in the markets and a report predicting ETF denial, there is still uncertainty leading into the decision.
In today’s edition, we're giving you some insights on the BTC and ETH ETFs, cash-create vs in-kind creation, and more, from Bloomberg ETF Analyst James Seyffart.
In this edition,
Stay alert in the markets ⬇
News:
- Matrixport Analyst Predicts SEC Rejection of Bitcoin ETFs: Contrary to popular belief, the SEC is expected to reject all bitcoin spot ETF proposals this month.
- Crypto Hacks Decrease in 2023 but Remain High: Despite a drop in losses, the frequency of major hacks in the crypto world remains consistent.
- Bitcoin Slumps Amid ETF Uncertainty: The cryptocurrency sees an 8% drop as the market reacts to the uncertain future of a spot bitcoin ETF.
- USDC Briefly Deppegs Amid Market Sell-Off: Circle's stablecoin experiences temporary instability following a marketwide sell-off.
- Stocks and Crypto Begin 2024 on a Downward Trend: Analysts ponder the future of equities and crypto as major indexes dip on the first trading day of 2024, amidst mixed predictions and ETF optimism.
- CleanSpark Announces In-House Trading Desk: Bitcoin mining company CleanSpark plans to manage its large bitcoin balance with a new trading desk, following a trend among miners to diversify revenue streams.
- CBOE Digital President Optimistic About Spot Bitcoin ETF: John Palmer discusses the potential broadening of the ecosystem for institutions and retail with the approval of a spot bitcoin ETF.
- Michael Saylor Begins Selling MicroStrategy Stock Options: The executive chairman of MicroStrategy commences the sale of $216 million worth of stock options, planning to acquire additional bitcoin.
- Etherscan Acquires Solscan to Expand Services: The leading Ethereum block explorer acquires Solscan, aiming to improve the accessibility of blockchain data across multiple networks.
- Crypto Phishing Scams Net Nearly $300 Million in 2023: Scammers increasingly use wallet drainer malware to siphon funds from victims, with significant losses reported over the year.
- Conflict Arises in Bitcoin Developer Community Over BRC-20: UniSat and the creator of BRC-20 take opposing positions on a proposed network upgrade, potentially leading to conflicting standards.
Project Updates:
- Maker/DAI Ecosystem Set for a Breakout Year in 2024: An educational post addresses misconceptions and predicts a significant year for the Maker/DAI ecosystem with new branding and token strategies.
- Klaytn Foundation Launches Gold-Pegged Coin on DeFi: South Korea's Klaytn Foundation introduces the first tokenized gold on DeFi outside of Ethereum, aiming to provide cost-effective gold trading.
- Radiant Capital Hacked for $4.5 Million: The cross-chain lending protocol suspends operations on Arbitrum after a security breach leads to a significant loss, assuring that current funds are not at risk.
- ENS Token Surges After Vitalik Buterin's Endorsement: Ethereum's co-founder highlights the importance of the Ethereum Name Service, causing a significant price jump.
- Zilliqa Announces Major Network Upgrade: The v9.3.0 mainnet upgrade aims to enhance the network's capabilities and efficiency.
Crypto Market Update:
- Top Gainer (24H) in the top 50 mcap: Arbitrum $ARB increased in price by 18.2%.
- Top Loser (24H) in the top 50 mcap: Filecoin $FIL is down -13.9%.
- Total crypto market cap has seen a decrease by 4.9% to stand at $1.6T.
- BTC dominance in the market is currently at 52.6%.
- Median gas price on Ethereum over the past 24 hours has been 22 gwei.
Background on James
James Seyffart is an Analyst at Bloomberg specializing in covering ETFs.
He aids Bloomberg’s commodity strategist in researching crypto, showing rising institutional demand for, and interest in the asset class.
Bloomberg has its own dedicated crypto webpage and crypto twitter account.
While it may not be completely up-to-par for crypto natives, it is clear that the investment research platform is expanding its offerings to align with what market participants want.
James has extensively covered the latest $BTC ETF saga, garnering a lot of engagement on twitter (@JSeyff).
Changes being made to the applications
James says that the launch of spot BTC ETFs is expected to happen soon.
He adds that multiple meetings are taking place between issuers and the SEC in preparation for the launch.
There are various speculations about approval timelines, but it's believed that one $BTC ETF will be approved by early January.
Meetings with the SEC involve discussions on finer details and arguments regarding different aspects ofthe operation.
The frequency of meetings indicates significant effort is being put into preparing for the launch.
Some misconceptions have been circulating on Twitter regarding frequent meetings with the SEC indicating imminent approval.
Approval does not necessarily mean immediate listing; there may be additional considerations before listing occurs.
The main focus currently revolves around the in-kind versus cash-create-redeem model.
Issuers need to ensure they are operationally ready before launching Bitcoin ETFs.
There is no fixed timeline for listing after approval; it can range from a few days to a couple of weeks.
Mid-January is speculated as a potential timeframe for listing, but exact dates are unknown.
James says that approval orders for $BTC ETFs are expected between January 8th and January 10th under the 19 B4 process.
The S1 process involves discussions about risk disclosures and operational aspects with no specific deadlines.
A delay of a few days or weeks between approval orders and listings is possible but not abnormal.
Issuers' readiness determines how quickly they can launch their funds after receiving approval.
James says that approval orders are expected to be issued simultaneously for all $BTC ETFs.
Listings depend on the readiness of issuers and their partners.
He adds that some issuers may decide not to proceed due to various factors, such as competition or the SEC's stance on in-kind transactions.
The decision to launch ultimately rests with the issuers.
In kind vs. cash creations and redemptions
James says that the primary concern revolves around whether in-kind transactions will be allowed by the SEC.
Various reasons contribute to this uncertainty, leading some issuers to reconsider launching $BTC ETFs.
The SEC will determine if issuers are ready for launch, but it is up to them to ensure operational readiness.
James says that ETFs are considered more tax-efficient than mutual funds.
ETFs trade intraday and allow investors to put money into them at any time.
Unlike certain investment vehicles like GBTC and closed-end funds, ETFs do not experience significant premiums or discounts.
Te in-kind model is commonly used by ETFs, where authorized participants gather $BTC to create shares of the ETF.
This helps maintain zero premium/discount and keeps the net asset value (NAV) in line with the price.
In an in-kind transaction, trading $BTC for shares of an ETF is not considered a taxable event by the IRS.
He adds that mutual funds typically pay capital gains at the end of the year, while ETFs almost never do due to their in-kind model.
Cash create and redeem is another model where market makers exchange cash for shares of an ETF or vice versa.
However, this can result in taxable events at the fund level.
James says that implementing a cash-create and redeem model may increase costs for issuers.
Market makers would need to buy/sell $BTC directly instead of relying on in-kind transactions.
Some issuers may be hesitant to adopt this model due to increased operational complexity and expenses.
The additional steps involved in cash create and redeem introduce more friction compared to the streamlined process of in-kind transactions.
James says that the difference between in-kind and cash creation/redemption results in minimal impacts for average investors seeking exposure to $BTC.
The spreads and basis points differences are negligible for most individuals.
However, taxable aspects such as capital gains distributions may matter to some investors.
While the difference between in-kind and cash creation/redemption is not a major concern, it is essential for people to be aware of these nuances.
Individuals should conduct their own research and consult tax experts or lawyers for specific advice.
Backend participants face risks due to constant conversion between US Dollars and $BTC.
The volatility of Bitcoin prices and bid spreads can result in potential losses if trading strategies are not implemented correctly.
The expenses incurred by backend participants may trickle down to users through wider spreads.
Market makers, such as Citadel and Jane Street, hedge on both sides of the trade to maintain neutral exposure.
More complicated or volatile situations may lead to slightly wider spreads.
James says that the SEC does not feel comfortable with brokers typically touching Bitcoin.
Allowing in-kind creation/redemption would imply accepting a loophole that goes against their jurisdiction.
Brokers might establish subsidiaries or offshore entities dealing with $BTC, creating an implicit loophole that bypasses SEC regulations.
He adds that by enforcing cash creation/redemption, the SEC ensures that brokers do not touch Bitcoin directly.
Brokers fall under the SEC's jurisdiction while asset management firms running ETFs also remain within their purview.
James says that the SEC has taken incremental steps in allowing different types of ETFs.
They initially approved $GBTC, followed by $BTC Futures ETFs.
However, the SEC is still not comfortable with brokers directly touching on-the-line Bitcoin for spot ETFs.
It is likely that cash creation/redemption will be the initial approach before considering in-kind options.
James says that the SEC does not want to allow in-kind creations for ETF issuers.
Issuers like BlackRock and Grayscale are still trying to push for a revised model that includes in-kind creations.
Other issuers have mentioned in their documents that they would like to use in-kind creations, but it is subject to regulatory approval or changes.
He adds that issuers wanted both cash creation and redemption options as well as in-kind creations.
Cash transactions involve banks, which cannot hold crypto assets.
In-kind transactions are more efficient from multiple perspectives.
Most trades and transactions happen in kind due to their efficiency.
How the model that's chosen will affect Grayscale
James says that other ETF issuers would be starting new funds, so the impact is not significant for them.
However, Grayscale already has a large amount of (620,000 $BTC) stored in their trust.
The cost basis of these Bitcoins varies, with some acquired at lower prices over time.He adds that if investors start selling shares of GBTC, it would require selling $BTC and potentially triggering capital gains taxes.
James says that Grayscale's $GBTC has taken in over $7.4 billion in its lifetime, resulting in a significant amount of Bitcoin stored in the trust.
Selling shares of $GBTC would require selling $BTC with higher cost bases first to minimize taxable events.
He adds that capital gains taxes would be distributed as capital gains distributions to shareholders, who would then pay individual capital gains tax rates.
James says that if you have held $GBTC for a long time and are considering switching to another ETF, you will need to sell your $GBTC shares for a profit, resulting in capital gains.
You have two options: either sell your shares and pay capital gains taxes or hold onto them and potentially receive a capital gains distribution at the end of the year, depending on fund flows.
He adds that if there are no significant outflows from $GBTC, this may not be an issue.
However, if $GBTC converts to an ETF and uplists on the New York Stock Exchange, certain decisions need to be made.
Grayscale has not given up on in-kind conversions yet.
Their documents and filings still mention in-kind conversions rather than cash-only transactions.
If the SEC insists on cash-only conversions, Grayscale would likely convert to an ETF but currently advocates for in-kind conversions.
He adds that holding any asset requires consideration of recognizing gains when selling or trading.
This applies regardless of whether you stay in the fund or switch investments.
In-kind conversions allow control over when to recognize gains, while cash transactions may force earlier recognition due to outflows.
James says that as a pass-through entity, Grayscale itself would not incur taxes upon listing as an ETF.
The trust would distribute assets as cash dividends or distributions labeled as capital gains distributions. These distributions should consist of long-term gains, which are taxed at a lower rate if the assets were held for over a year.
He adds that Grayscale's conversion to an ETF would not trigger taxes for the company itself but rather distribute gains to shareholders.
BlackRock's private trust
James says that in August 2022, BlackRock announced a partnership with Coinbase and launched a private trust for institutions and high-net-worth individuals seeking $BTC exposure.
The contents of the trust are unknown, but it likely holds significant assets, potentially amounting to hundreds of millions of dollars.
He adds that one theory suggests that BlackRock may transfer the $BTC from the private trust into the ETF upon its launch, providing an initial asset base for the ETF.
Being in the ETF would likely be more cost-efficient than remaining in the private trust.
James says that BlackRock may be aiming to perk up its ETF and make it appear more competitive.
Having a significant amount of money in the ETF and a recognizable name like "BlackRock" could add value and meaning to the product.
This strategy could potentially level the playing field for Black Rock in the market.
He adds that several issuers have filed applications for an $ETH ETF, but no specific timeline for approval has been provided.
It is speculated that approvals may come around May 23rd or 24th, but confidence in this timeline is lower compared to $BTC ETF approvals.
Some objections have been raised regarding the staking model associated with $ETH, which could potentially impact its classification as a security by the SEC.
James says that BlackRock's active involvement in advocating for an $ETH ETF suggests that they may have their own strategic reasons.
He believes that one possible reason could be the desire to make their ETF more competitive, similar to their strategy with $BTC ETFs.
James says that multiple issuers are also applying for an $ETH ETF, but approval is not expected until sometime in the spring or later.
There have been objections raised in the press regarding the staking model associated with $ETH and concerns about its implications for an ETF.
Ethereum ETFs
James says that the spot $ETH ETF decision by VanEck is expected around May 23rd or 24th.
hile there is a possibility of approvals by then, confidence is higher for $BTC ETF approvals compared to $ETH.
He adds that some objections raised in the press regarding staking may not be relevant since current applications do not involve staking ETH.
The SEC's objection based on staking could potentially classify it as a security, which might hinder the approval of an Ethereum ETF.
However, if the trust documents only mention holding $ETH without staking, it would be similar to Bitcoin and less likely to face such objections.
James says that when CME listed $ETH Futures, it implied that the SEC accepted $ETH as a commodity.
Registration documents for $ETH Futures did not classify them as security futures, indicating the SEC's comfort with $ETH being treated as a commodity.
He adds that if the SEC were to backtrack and classify $ETH as a security, it would require delisting all $ETH Futures contracts and ETFs.
This would not only pit the SEC against the industry but also against its sister agency, CFTC.
He believes that based on these factors, approval for an $ETH ETF is more likely than not in 2024.
James says that Gary Gensler has categorized $BTC differently from other cryptocurrencies, treating it as a commodity rather than a security.
However, he has not explicitly stated his position on whether or not $ETH should be considered a security.
He says that while there may be potential delays or obstacles, he does not consider it worth the SEC's time and effort to oppose an approval.
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