JP Morgan, one of the largest investment banks in the world, has recently issued a statement that predicts the approval of a Spot Bitcoin exchange-traded fund (ETF) in the US. This is a major development for the cryptocurrency industry, as it could open the door for more institutional investors to enter the market and boost the demand and price of Bitcoin.
A Bitcoin ETF is a financial product that tracks the price of Bitcoin and allows investors to buy and sell shares of it without having to deal with the technical aspects of owning and storing the digital asset. Currently, there are several Bitcoin ETFs available in Canada and Europe, but none in the US, where the Securities and Exchange Commission (SEC) has repeatedly rejected or delayed the applications of various firms.
However, JP Morgan believes that this situation will change soon, as the SEC is under pressure to approve a Bitcoin ETF due to the growing popularity and acceptance of cryptocurrencies. The bank cites several factors that indicate a favorable environment for a Bitcoin ETF, such as:
Tekedia Mini-MBA edition 14 (June 3 – Sept 2, 2024) begins registrations; get massive discounts with early registration here.
Tekedia AI in Business Masterclass opens registrations here.
Join Tekedia Capital Syndicate and invest in Africa’s finest startups here.
The success of the Bitcoin futures ETFs that were launched in October 2021. These products, which track the price of Bitcoin futures contracts rather than the spot price, have attracted billions of dollars in assets under management and trading volume, demonstrating a strong demand and interest from investors.
The increasing competition from other jurisdictions that have already approved Bitcoin ETFs, such as Canada and Europe. These markets have seen significant inflows and growth in their Bitcoin ETFs, which could motivate the SEC to follow suit and not lose its regulatory edge and influence.
The SEC is the federal agency that regulates the securities markets in the US, and it has the authority to approve or reject any ETF application. The SEC’s main concern with Bitcoin ETFs is whether they can protect investors from fraud, manipulation, and other risks associated with the cryptocurrency market. The SEC has repeatedly stated that it needs to see evidence of a “surveillance-sharing agreement” between the ETF sponsor and a regulated Bitcoin market, such as a futures exchange or a spot exchange, to ensure that the ETF price reflects the true value of Bitcoin and that any market abuse can be detected and prevented.
However, such agreements are hard to come by, as most Bitcoin markets are unregulated or operate outside the US jurisdiction. Moreover, the SEC has also raised questions about the liquidity, custody, valuation, and governance of Bitcoin ETFs, as well as the potential impact of Bitcoin’s volatility, scalability, and security issues on the ETF performance and investor protection. The SEC has rejected several Bitcoin ETF applications in the past, citing these reasons.
For example, in 2017, the SEC rejected the Winklevoss Bitcoin Trust ETF, which was proposed by Cameron and Tyler Winklevoss, the founders of Gemini, a US-based cryptocurrency exchange. The SEC said that it did not find that the proposed ETF would be consistent with the requirements of the Exchange Act, which requires that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices. The SEC also said that it did not find that the proposed ETF would be able to enter into a surveillance-sharing agreement with a significant, regulated market for Bitcoin.
In 2018, the SEC rejected nine more Bitcoin ETF proposals from various sponsors, including ProShares, Direxion, and GraniteShares. The SEC reiterated its concerns about the lack of a surveillance-sharing agreement and the risk of fraud and manipulation in the Bitcoin market. The SEC also said that it did not find that the proposed ETFs would be able to demonstrate that they have sufficient mechanisms to prevent fraudulent or manipulative acts and practices in their trading.
In 2019, the SEC rejected another Bitcoin ETF proposal from Bitwise Asset Management, which claimed to have addressed some of the SEC’s concerns by using data from multiple regulated exchanges and third-party custodians. However, the SEC said that it did not find that Bitwise had met its burden to demonstrate that its proposed ETF would be consistent with the Exchange Act. The SEC also said that it did not find that Bitwise had provided sufficient evidence to support its assertion that it could track a reliable Bitcoin price index.
In 2020, the SEC rejected yet another Bitcoin ETF proposal from Wilshire Phoenix, which aimed to reduce Bitcoin’s volatility by holding a mix of Bitcoin and US Treasury bills. The SEC said that it did not find that Wilshire Phoenix had provided enough information to show that its proposed ETF would be resistant to market manipulation and that it would have adequate surveillance-sharing agreements.
As of 2023, there are still several Bitcoin ETF applications pending before the SEC, including those from VanEck, Valkyrie, WisdomTree, Kryptoin, and NYDIG. Some of these proposals claim to have improved their compliance with the SEC’s standards by using regulated futures contracts or spot exchanges as reference prices for their ETFs. However, it is unclear whether these proposals will be able to satisfy the SEC’s requirements and whether they will be approved or rejected.
The SEC has not set a definitive timeline for its decision on these applications, but it has indicated that it is open to considering them on a case-by-case basis. The SEC has also said that it is actively monitoring the developments in the cryptocurrency market and that it is willing to engage with potential ETF sponsors and other stakeholders to facilitate innovation and investor protection.
JP Morgan concludes that a Spot Bitcoin ETF approval in the US is now more likely than ever, and that it could happen as soon as early 2024. The bank expects that a Bitcoin ETF would have a positive impact on the price of Bitcoin, as it would increase its liquidity, accessibility, and legitimacy. The bank also estimates that a Bitcoin ETF could attract up to $50 billion in inflows in its first year of operation, which would translate into an increase of about $10,000 in the price of Bitcoin.
The bank’s statement is a bullish sign for the cryptocurrency industry, as it shows that one of the most influential and respected financial institutions in the world is optimistic about the future of Bitcoin and its potential to become a mainstream asset class. It also reflects the changing attitude and perception of Wall Street towards cryptocurrencies, which have gone from being dismissed as a fad or a scam to being recognized as a viable and innovative investment opportunity.