Insight
October 20, 2023
On Monday morning, an erroneous news report that SEC had approved BlackRock’s iShares spot ETF sent the price of bitcoin skyrocketing. In a few short minutes, bitcoin soared 7%, hitting $30,000, causing $85M of short futures liquidations. Unfortunately, however, the euphoria was short lived as the news tweeted by crypto news site Cointelegraph was proven to be completely fabricated, sourced from an anonymous Telegram user and never fact checked. Even though the news proved to be fake, the price action seems to have awakened animal spirits for bitcoin, perhaps reminding investors of the significance and timeliness of spot ETF applications. But the event brings up two important topics: the analysis of news and data in an open era and the role market sentiment.
Bitcoin is famously built around the philosophy of openness. It is a peer-to-peer technology that anyone can download, use, and suggest modifications. Bitcoin’s blockchain, the running ledger of transactions between participants, is available for anyone to inspect and to make observations. Clouding things a bit is Bitcoin’s UTXO model, which makes it hard for outside observers to understand what is intended to be sent and retained as change in a transaction and the pseudonymous nature of Bitcoin, whereby real-world entities are represented by their addresses (or many addresses). All this means is that while Bitcoin’s data is available to all, its interpretation often relies on subjectivity and therefore can be prone to errors.
Oppose this method to a source like the SEC’s EDGAR database, a free repository of financial documents run by a governmental regulator. The SEC requires public companies to file certain financial documents (e.g., 10-Qs, 10-Ks, 8-Ks, etc.) in a prescribed manner (e.g., quarterly, annually), reported in a common manner (e.g., GAAP accounting), and attested by various first and third parties (e.g., auditors, lawyers, management teams). This is a system built on trust in both in the parties involved and the application of financial standards. It is open in the sense that anyone can access financial documents by going to the EDGAR website, but different than Bitcoin in that outside observers have no ability to verify the underlying data, say Apple’s quarterly sales for example.
One of the misconceptions about Bitcoin and blockchain data is that because it is open and available to all; the truth is easy to ascertain. But ask a simple question and it gets complicated quickly. How many bitcoins does Satoshi Nakamoto own? Estimates vary. How much bitcoin moves through the network? Total output should be easy to measure, but transaction volume of economic substance varies by data provider. What is the number bitcoins in circulation that are available for use/purchase (free float)? Coin Metrics just devoted an entire report to that. It is therefore our observation that although this information is open and accessible to all, it’s prone to misinterpretation and subject to analytical analysis that inherently comes with some level of uncertainty.
“Don’t trust. Verify.” It’s an often-repeated Bitcoin mantra, one that speaks of the ability for users to verify aspects of the network, code, and transactions themselves, and it alludes to the core purpose of Bitcoin, a payment technology that removes the requirement of trust in financial intermediaries. Clearly in the case of the fake news from Cointelegraph around the SEC ETF approval, that didn’t happen. Verification of source information should be a key tenet of any journalistic effort, and here it clearly didn’t happen. A cursory search of SEC, SRO, regulatory, and legal filings, which we conducted at the time of the rally, did not corroborate the story. The SEC even went so far as to tweet later, “Careful what you read on the internet. The best source of information about the SEC is the SEC.”
If you had been following the ETF race for the past couple of months, you would have been immediately suspicious of the tweet. “SEC APPROVES ISHARES BITCOIN SPOT ETF” is not what you’d expect in form or function. While the underlying asset of the ETF is bitcoin, rather than a financial product like bitcoin futures, “spot” is odd market slang to interject. Also, the fund’s name is “iShares Bitcoin Trust” and one would expect that to be referenced correctly. In addition, this is Nasdaq’s 19b-4 filing, a proposed rule change with the SEC to list and trade shares of the iShares Bitcoin Trust. So, while the substance might be the approval of the underlying ETF, technically this is the exchange’s, Nasdaq’s, application for a rule change. The final warning regarding the headline is that there’s an expectation that the SEC wants to be seen as not playing favorites and therefore approves (or denies) many or most ETF applications at the same time. Just approving this one product, the iShares one, would be in opposition with that.
If readers want access to source material, we suggest these links:
The interesting thing about the price action this week is not that price of bitcoin jumped on the headline of an ETF approval, even though it was fake. One would expect that to happen. It’s that price corrected, predictably, but then continued to rally after the initial correction. At times today (Friday, October 20, 2023), bitcoin has traded nearly as high as it during the initial fake news rally. Our interpretation is that the news and bitcoin’s ensuing price action awakened the industry’s animal spirits, alerting traders to the imminent nature of ETF approval and how impactful it could be to spot.
How big a spot ETF could be for the industry has been subject to much debate, with some fantastical analysis put out there. Frankly, some it is so nonsensical that it wouldn’t have even passed first round interviews of on-campus recruiting for investment banking analysts. Consider this, however. Compared with gold ETFs, bitcoin ownership through funds is over indexed on a percentage of market cap basis (4.9% for bitcoin and 1.6% for gold) but under indexed on a dollar basis ($28.9B for bitcoin vs $211B for gold).
One must also consider the Venn diagram of US investors who wish to own bitcoin but either can’t or won’t given the current options of spot ownership, private funds, and public futures-based ETFs. Timing of flows also matters. $10B over the next 10 years is different calculus for spot price impact than $10B in the first year. The GLD ETF, the most successful ETF launch in history, accumulated $5.3B in AUM in the first year (present dollars) and less than $2B in the first month. Another factor for consideration should be where we are in the bitcoin price cycle. Launching a spot bitcoin ETF at a cycle high, like what happened with the BITO ETF, would result in different demand than in a rebuilding phase of the cycle, which is where we find ourselves today. The final factor, and one nearly impossible to judge, is the money multiplier effect. Given the low volumes and thin order books for bitcoin, does an influx of capital have a bigger impact on spot price than it would when liquidity is high? We bet it does, but that number is anyone’s guess (we used 10x). However, regardless of your viewpoint on any one particular item, one should have a framework in place as opposed to throw random darts out there, of course unless your objective is to say the largest number. Congratulations.
Social media and public discourse can be of great benefit to investors, incorporating unique views from individuals around the world. Crowdsourced news and analysis have the benefit of covering more ground (thousands of cryptos, global news, numerous technologies, etc.) in a manner that far surpasses the capabilities any one individual or firm. Unfortunately, takeaways can often be skewed, tinged with bias, or just plain wrong (we are not infallible either). These topics are complex, nuanced, and in many cases, cover ground in areas of technology, legal, regulatory, and macroeconomic matters that have never been covered before. Unfortunately, voices on social media are not rewarded with uncertainty or nuance. Strong voices, strong assertions, and outrage are often the attention getters, not reasoned discussion. In the case of the Cointelegraph fake news, its editor in chief cited the pressure to be “break news” and be first to publish in a noisy media world as one of the reasons for the error.
It's ok to say, “I don’t know” or “no opinion.” Those are powerful words. One must not need to have an opinion on every single topic that comes through this industry. If the topic is in your wheelhouse though, you better get it right, especially if you plan to broadcast it to the industry. One of the frustrating things throughout the race for a spot ETF, and one of the reasons we have had to write too much about it, has been public figures getting facts about the process wrong, some of which are basic. We hope the industry can do a better job at providing thoughtful analysis for the benefit of the investment community in the future. The industry is on the cusp of a major milestone, one in the works for over 10 years, and world is watching.
Animal spirits were on display even after the news about the ETF approval was proven to be false, propelling bitcoin up 7.8% on the week. An early morning rally took spot through the $30K ceiling several times today, but the price has yet to eclipse the yearly high of $31,860 set in July in the wake of the initial round of ETF filings. Despite the renewed optimism in crypto markets, traditional markets struggled, particularly stocks and bonds. For equity markets, the S&P 500 fell 1.6% and the Nasdaq Composite fell 2.9%. For bonds markets, investment grade corporate bonds fell 2.5%, high yield bonds fell 1.4%, and long term US Treasuries fell 3.8%. Commodities were another story, however, with gold up 5.3% and oil up 7.8%. Our read is that heightened geopolitical tensions are driving demand for both assets.
BlackRock Boss Says Bitcoin Pump on Fake ETF News Shows ‘Pent Up Interest in Crypto - Decrypt
BlackRock CEO Fink Weighs in on BTC ETF Rumor (Video) - Fox Business News
The Four Seasons of Cryptocurrency - Morgan Stanley
U.S. Spot BTC ETF Approval Likely Within Months - JP Morgan
Correcting Recent Claims on Crypto's Role in Terrorism Financing - Chainalysis
Gov. Gavin Newsom Signs California Crypto Licensing Bill - CoinDesk
FDIC Strategies Related to Crypto-Asset Risks - FDIC
SEC Dismisses Lawsuit Against Ripple Execs in 'Stunning Capitulation' - Decrypt
FTX Debtors Float Payout Plan as Sam Bankman-Fried's Trial Moves Forward - CoinDesk
Oct 23 - Mandate can be issued in Grayscale vs SEC case
Oct 25 - End of comment period for many ETF applications
Oct 27 - CME expiry
Nov 1 - FOMC interest rate decision
Nov 8 - End of rebuttal period for many ETF applications
Nov 14 - October CPI reading
Nov 17 - US federal budget deadline
Jan 10 - Final ETF decision deadline for the first bitcoin ETF, ARK 21Shares
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