Behind Bitcoin's Price Boost: BTC EFTs On The Horizon

The price of Bitcoin (BTC) experienced a significant surge in value on Tuesday following a highly-anticipated ruling from the US Court of Appeals for the DC Circuit. The court decided that the Securities and Exchange Commission (SEC) was mistaken in denying Grayscale, a major crypto investment firm, the authorisation to convert its prominent Bitcoin trust into an exchange-traded fund (ETF).

The original cryptocurrency jumped in price by more than 7%, hitting $27,851.82 on Tuesday before settling down to just over $27,000 at the time of writing. This positive price movement for Bitcoin also uplifted the broader cryptocurrency market, leading to higher valuations for both cryptocurrencies in general and crypto-related equities.

What's so special about this ruling?

Grayscale brought its lawsuit against the SEC in June 2022 after the agency rejected the company's bid to convert its Bitcoin trust (known as GBTC) into an ETF. Grayscale opted for the ETF route, backed by actual Bitcoin rather than derivatives after the SEC approved ProShares' Bitcoin futures-based ETF in October 2021. Although the ruling faced several delays, the SEC ultimately rejected Grayscale's application in the previous summer, citing concerns about market manipulation and investor protection.

While several Bitcoin futures ETFs have already received approval in the US, the legal dispute between Grayscale and the SEC garnered special attention from investors and industry participants who closely monitored the proceedings and calculated their trades accordingly.

Grayscale is an early entrant in the digital asset fund management market and manages over $40 billion in funds. Such a big play has the potential to bring about substantial changes in the wider crypto market, which has been languishing in an extended period of limited volatility and liquidity.

Bitcoin's trading volatility recently plummeted to its lowest level in over four years, and the lack of clarity surrounding cryptocurrency activities has been a major factor, largely because investors were awaiting clearer regulatory guidance on cryptocurrency activities. This guidance could come from new legislative measures from Congress or the introduction of a spot Bitcoin ETF, which was a feature of Grayscale's proposal at the heart of its court case with the SEC.

Grayscale's proposal had been denied by the SEC, leading finance industry experts to lambast the regulator's apparent inconsistency. The US Court of Appeals agreed and criticised the SEC's decision, labelling it "arbitrary and capricious". Judge Neomi Rao noted that Grayscale's proposed ETF was "materially similar" to Bitcoin futures exchange-traded products that the SEC had already approved for trading. The court pointed out that the SEC had approved the listing of two Bitcoin futures exchange-traded products (ETPs) but not Grayscale's proposed Bitcoin ETP without providing a coherent explanation for the discrepancy. Consequently, the court granted Grayscale's petition for review and nullified the SEC's order.

The court's ruling could potentially pave the way for the SEC to approve other Bitcoin ETF applications, including those from notable financial institutions such as BlackRock, Fidelity, WisdomTree, VanEck, and Invesco. A US-based Bitcoin ETF would enable investors to gain exposure to Bitcoin's value without having to actually hold the cryptocurrency. This development could attract both retail and institutional investors, as well as wealth managers, to participate in the market, bringing in funds from traditional finance entities and speeding up cryptocurrency integration with the mainstream.

What's the SEC's next move?

In response to the ruling, the SEC stated that it is currently reviewing the court's decision to determine its next steps. Industry experts view the ruling as a significant step toward the eventual establishment of a spot Bitcoin ETF in the US, although there is no guarantee of this happening as things currently stand. 

The recent court decision does not oblige the SEC to approve Grayscale's filing or those of other entities on the waiting list. However, the loss of face and credibility suffered by yet another court ruling against the SEC's inconsistent stance on crypto could lead the agency to change its tune and support the market's demand for more accessible crypto-based financial instruments.

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