August 2023: A Step Forward for Spot Bitcoin ETFs
Research Team
Last Updated: 9/1/2023 | 14 min. read
A down month for digital asset valuations ended with a spark of optimism after a court ruling raised the prospects for spot Bitcoin ETF approval.
The drawdown earlier in the month likely began with macro catalysts–virtually all asset classes declined in August–and then accelerated due to exchange liquidations.
The month brought other structural positives, including strong early adoption of a new social media platform, and PayPal’s entrance to the stablecoin race.
In our view, the combination of improving fundamentals and low speculative positioning have created a favorable environment for long-term holders to add to crypto portfolios.
Exhibit 1: All major asset classes faced drawdowns in August
The pressure on global assets appeared to stem from two main sources: pessimism about China’s economic outlook, and a surplus of long-term bond issuance by the US government. China’s real estate sector has struggled for some time, and that weakness is now reflected in other segments of the country’s economy. While the government has announced stimulus efforts, so far they have failed to impress markets or economic forecasters. Meanwhile in the United States, long-term Treasury yields continued to climb, with the yield on the 30-year bond reaching its highest level since 2011. The combined effect of large budget deficits and the Fed’s quantitative tightening (QT) has apparently overwhelmed investor demand at the long end of the yield curve (Exhibit 2)[2].
Exhibit 2: Heavy Treasury borrowing may be weighing on long-end bond prices
Exhibit 3: Wave of exchange liquidations sent Bitcoin’s price sharply lower mid-month
Bitcoin subsequently reversed course after the DC Circuit Court of Appeals ruled in favor of Grayscale in its lawsuit against the SEC. Grayscale argued that the Commission had unfairly denied its proposal to convert GBTC to a spot Bitcoin ETF, while previously approving two Bitcoin futures ETFs — arguing that you must treat like products the same. In its Opinion, the Court expressed agreement with Grayscale’s legal argument, noting that it “presented substantial evidence that Grayscale is similar, across the relevant regulatory factors, to bitcoin futures ETPs. The Commission failed to adequately explain why it approved the listing of two bitcoin futures ETPs but not Grayscale’s proposed bitcoin ETP. In the absence of a coherent explanation, this unlike regulatory treatment of like products is unlawful. We therefore grant Grayscale’s petition for review and vacate the Commission’s order.”
Exhibit 4: ETFs capture the lion’s share of new investment in public equities
Exhibit 5: New social media application friend.tech caused surge in Base transactions
[1] We use the generic term “ETF” to refer to exchange-traded investment vehicles, including those that are required to register under the Investment Company Act of 1940, as amended (the “‘40 Act”), as well as other exchange-traded products which are not subject to the registration requirements of the ‘40 Act.
[2] Since the start of QT, the US government has run a cumulative budget deficit of about $2.5 trillion, but public investors have only needed to purchase around $1 trillion in additional bonds and notes with greater than 1yr remaining maturity. The difference has been made up by higher bill issuance, a drawdown of the government’s cash reserve, and other sources. Financing of government spending from these alternative sources is now limited, and long-term bond issuance will need to increase. These plans were disclosed with the Treasury’s Quarterly Refunding Announcement at the start of August. Source: US Treasury, Bloomberg, Haver Analytics, Grayscale.
[3] Prices based on 5pm NY close. Source: Bloomberg.
[4] As of August 31, 2023.
[5] Including mutual funds, closed end funds, and ETFs, and excluding money market funds. Source: Federal Reserve’s Flow of Funds statistics.
[6] Bitcoin futures expire, and therefore must be periodically “rolled” into new contracts. Because the Bitcoin futures curve is upward sloping (i.e. in “contango”), the process of rolling involves a sell-lower/buy-higher transaction, which can be thought of as a negative yield for the futures portfolio.
[7] Tether (USDT) also returned to its $1 peg after wobbling early in the month.
[19] For example, Bitcoin price returns have been greater than 150% for every three-year holding period since July 2010. Source: Bloomberg, Grayscale.
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