Insight
September 27, 2024
Late Friday, the SEC approved the Nasdaq ISE’s rule change request to list and trade options on BlackRock’s iShares Bitcoin Trust (IBIT). The approval, which was ultimately expected, came as a bit of a surprise in its timing. By our count, five similar requests were withdrawn in rapid succession in August, leading many to look at dates further out on the calendar for an approval. However, the Nasdaq ISE application was never withdrawn, and the approval order came on the SEC's final day to respond.
Why was Nasdaq ISE’s application approved, while the others were withdrawn? Comparing the 19b-4s for NYSE American and Cboe that were withdrawn to their newly filed and open applications highlights some differences, including specificity around the options contracts, details around the underlying ETFs, and expanded details about surveillance and compliance details. While all of these are true, probably more importantly, application withdrawals usually come at the request of the SEC, and it could have been the case that Nasdaq ISE simply didn’t heed the agency’s urgings.
One of the withdrawn applications, NYSE Arca’s, was to list and trade options on commodity-based trust shares, a blanket definition that would have included precious metals ETFs as well as bitcoin. Exchanges tried to get options on platinum and palladium ETFs listed and traded back in 2010 but were unsuccessful. Back in 2010, the SEC approved the exchanges’ requests to trade and list options and Options Clearing Corp's (OCC) request to clear the options, but after that, the CFTC put the topic out for public comment and simply never responded. OCC’s rule change request sits on its website still today, 14 years later, as an “approved rule filing not yet implemented.”
There’s no reason to think options on bitcoin ETFs will suffer the same purgatory fate that palladium and platinum options suffered. Our understanding of the issues at the time was around the size of markets and fraudulent and manipulative trading practices. Bitcoin held in publicly traded funds around the world, ETFs and closed-end funds, amounts to 5.5% of the total market value of the asset, a much larger share than any precious metal. Also, the dollar size of the bitcoin ETFs and the underlying asset are much larger than platinum or palladium. As such, we would expect to see options trading on IBIT, and potentially the other bitcoin ETFs as well, by the end of the year. There are still several steps that need to happen before that though, including OCC’s submission and SEC approval of a 19b-4 change of rule request and a sign-off by the CFTC.
Lately, there has been a vocal minority within the bitcoin community questioning whether Coinbase promulgates fractional reserve crypto practices, especially as it relates to the bitcoins backing BlackRock’s iShares Bitcoin Trust (IBIT) ETF. The situation came to a head a week ago when Coinbase CEO Brian took to X (formerly Twitter) to dispel the notion that Coinbase engages in such practices with its ETFs, options, and newly launched cbBTC.
While the accusations don’t surprise us, practices engaged by the fractional reserve banking system are no friend to Bitcoiners, these allegations fail to contain an ounce of credibility, and instead expose the ignorance of the accusers (as well as their inability to read critically). Operating procedures for how these funds, including IBIT, operate are spelled out in various regulatory filings with the SEC. Failure to understand the difference between trading and custodial balances, how trades settle, and how cash and bitcoin move proves a lack of knowledge by the complainant, not malice of those alleged.
This is a classic crypto industry move – desperately wanting something, ETFs backed by actual bitcoin, and then turning around and criticizing it, incorrectly. With Brandolini’s law on full display here – the amount of energy needed to refute “falsehoods” is an order of magnitude bigger than that needed to produce it – we’ll leave readers with a link to a third party, Arkham Intelligence, which has identified most of IBIT’s addresses (cluster analysis is not perfect science), totaling 362.19K bitcoins, which is essentially all of the 362.2K bitcoins the fund holds.
Earlier this week, Ross Stevens, NYDIG’s Founder and Executive Chairman, published a paper on Bitcoin and the First Amendment. The paper explores the legal argument that Bitcoin qualifies as a form of speech protected by the First Amendment of the U.S. Constitution and any regulations or restrictions on Bitcoin, including mining, have constitutional implications that must be carefully considered. If you haven’t had the chance to read it yet, please click on the link here.
Bitcoin rallied 2.3% this week on the heels of last Wednesday’s interest rate cut by the FOMC. The US, however, wasn’t the only country adding fuel to the monetary fire. This week, the PBOC unveiled a massive slate of monetary measures aimed at reviving China's slowing economic growth, including interest rate cuts, bank reserve requirement reductions, mortgage rate deductions, capital injections in major banks, and lending facilities for financial firms to buy securities and corporations to conduct stock buybacks, with more stimulus expected to come on the fiscal side. While China famously “banned” crypto in 2021, a recent analysis from blockchain analytics firm Chainalysis reveals Chinese OTC traders have seen $75B of inflows in 2024. Given this figure, clearly crypto is still alive in China, which is why these recent measures are so important. The global money supply (M2) continues to hit new highs, fueled by measures like those in the US and China, providing a tailwind for bitcoin’s price.
Stocks rallied, but of the traditional assets, gold shone brightest, up 3.1% this week. Real interest rates rose on the week and inflation expectations remained unchanged but given that China has been a big demand driver of the asset the past few years (see our piece from last week), it’s not surprising the asset was up with the news of the China stimulus.
September is shaping up to be a good month for bitcoin, up 10.0% so far, and bucking the typical seasonal trend. It was only a few weeks ago that traders came back from the summer holiday and hit the sell on major assets, including bitcoin, leaving many to worry about the longevity of the crypto cycle. Now with monetary stimulus in effect in the US and China, the industry’s attitude has done a complete u-turn. Bitcoin ETFs have taken in $862M in 6 trading days (since the day after the FOMC lowered rates) and bitcoin has broken through its 200-day moving average. Bitcoin remains in the trading range it has been in for the past 6 months, but perhaps these new catalysts plus favorable seasonality will allow it to breakout.
Investing:
BlackRock's Mitchnick on ETF Custody, Nasdaq Listing IBIT Options, Crypto-Stock Correlation - Bloomberg
BNY Approved by SEC for Crypto Custody Beyond ETFs, Gensler Says - Bloomberg
Regulation and Taxation:
SEC Chair Gary Gensler on Crypto - CNBC
Two Russian Nationals Charged in Connection with Operating Billion Dollar Money Laundering Services - DOJ
Companies:
PayPal Enables Business Accounts to Buy, Hold and Sell Cryptocurrency - PayPal
Bitfarms and Riot Announce Settlement - Bitfarms
Fractal Bitcoin: A Misleading Affinity - Bitcoin Magazine
Ancient Whales Send BTC to Kraken - Arkham Intelligence on X
DTCC Tokenization Pilot Finds 'Significant' Improvements to Liquidity and Collateral Optimization - The Block
Swan Bitcoin Lawsuit Targets Former executives, Implicates Tether - Protos
Oct 4 - Sept jobs report
Oct 10 - Sept CPI reading
Oct 25 - CME expiry
Nov 5 - US election day
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