A potentially historic week awaits Bitcoin (BTC), and the crypto market is holding its breath over the approval of a spot Bitcoin exchange-traded fund (ETF) in the United States. Many believe that approval will catalyze the next crypto bull market and a wave of crypto adoption.
The list of hopeful spot Bitcoin ETF issuers has grown, and the companies involved have filed their most recent Form S-1 amendments on Jan. 8.
Here's a view of the Cointucky Derby starting gate as of this morning. We're focused on these 11 spot #Bitcoin ETF filers. Expecting most of these N/A's to be filled over the next ~week.
— James Seyffart (@JSeyff) January 2, 2024
Still looking for potential approval orders in that Jan 8 to Jan 10 window. pic.twitter.com/HYdnPuiaRx
Analysts and observers predict that the U.S. Securities and Exchange Commission (SEC) will finally approve the first spot Bitcoin ETF by Jan. 9 or 10. Senior ETF analyst at Bloomberg Eric Balchunas is confident “there’s a 90% chance” that a spot Bitcoin ETF will get approved.
No matter the decision, be it approval or rejection, crypto markets will undoubtedly be shaken.
The crypto industry may be preparing for popping champagne bottles, but what about its ripple effect? For the Bitcoin ETF market, the arrival of titans like BlackRock and Fidelity — with trillions of dollars in assets under management — may shift the fundamentals of companies such as Coinbase or MicroStrategy. Both trade on the open market, but how will they respond to a spot Bitcoin ETF approval?
MicroStrategy’s premium could be negatively affected
A spot Bitcoin ETF could open the gates for traditional investors to enter the crypto market, putting negative pressure on Bitcoin proxies like MicroStrategy.
MicroStrategy has been buying Bitcoin since its co-founder, executive chair and former CEO, Micheal Saylor, decided to acquire BTC as an inflation hedge and alternative to holding cash on its balance sheet.
At its most recent purchase on Dec. 27, 2023, MicroStrategy now owns 189,150 BTC, bought at an average price of $31,168. The tech company is the public company with the most BTC in its holdings, followed by crypto mining company Marathon with 15,174 BTC and Tesla with 10,725 BTC. MicroStrategy’s BTC buying spree has positioned the company to hold almost 1% of the total supply of Bitcoin in existence.
The vast exposure of MicroStrategy to Bitcoin has uniquely positioned the company by converting its stock into a Bitcoin proxy.
As MicroStrategy is listed on the Nasdaq, traditional investors have an investment vehicle to gain exposure to Bitcoin indirectly.
However, if a spot Bitcoin ETF is approved, MicroStrategy could face serious competition and lose its status as the Bitcoin proxy of the traditional markets.
As Spencer Bogart, fundamental analyst and general partner at crypto venture capital Blockchain Capital, said on the Unchained podcast, a hypothetical approval of a spot in Bitcoin ETF is clearly “a headwind” for Saylor’s company.
According to Bogart, an approval could benefit MicroStrategy by raising its stock price due to its heavy exposure to Bitcoin. However, MicroStrategy investors should question how a spot Bitcoin ETF could affect its stock premium related to the BTC it holds.
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A premium occurs when a stock or share is issued above its par value. The premium of any stock is an abstract analysis; therefore, rates differ per analyst. A representative from the private bank, Julius Baer, told Cointelegraph that its MicroStrategy premium is 9%.
Bogart rates the actual premium of MicroStrategy at a 30% rate, meaning if an investor used it to track the price of Bitcoin, they would be paying a 30% premium.
Bogart said, “There’s got to be some significant percentage of MicroStrategy holders that are using it as their best proxy for Bitcoin exposure.”
If some investor’s sole purpose in buying MicroStrategy stock is to get the closest exposure possible to BTC without purchasing the asset itself, then a spot Bitcoin ETF approval could mean those investors decide to sell the stock in favor of an ETF. Bogart explained:
“Once a Bitcoin ETF is approved, presumably some percentage of those investors [in MicrStrategy] will switch over to the ETF product.”
Due to this shift in the traditional market, Bogart thinks that the extra value of MicroStrategy stock compared to the actual value of Bitcoin they own — known as a premium — might decrease.
As of April 11, 2023, MicroStrategy’s BTC holdings turned green as the price of Bitcoin increased. Even if there is selling pressure on MicroStrategy, Bogart said the tech company can still benefit from the growth of the adoption of Bitcoin.
A spot Bitcoin ETF can boost crypto adoption as the perfect crossover investment vehicle between the crypto and traditional markets. The existence of a spot Bitcoin ETF would provide an on-ramp for Wall Street capital to enter the Bitcoin ecosystem, pushing adoption in the long run and potentially translating into buying pressure for MicroStrategy stock.
Another positive factor for holding MicroStrategy instead of a spot Bitcoin ETF is that investors won’t need to pay a management fee, which, according to the latest documentation, varies between 0.24% for Bitwise and 1.5% for Grayscale. Saylor highlighted this during an interview with Bloomberg in December 2023:
“The ETFs are unlevered, and they charge a fee [...] We provide you leverage, but we don’t charge a fee. We offer a high-performance vehicle for people that are Bitcoin long investors.”
Another positive factor is that MicroStrategy is a thriving business that provides business intelligence, mobile software and cloud-based services. Additionally, the company stands in a decent financial position regarding its Bitcoin investment, with an average purchase price of $31,168.
MicroStrategy’s shares have surged over 350% in 2023, outperforming Bitcoin as it rallied roughly 150% during the same period.
Coinbase: All-in as the custodian of spot Bitcoin ETF’s
American cryptocurrency exchange Coinbase has closed deals with the world’s largest asset managers, including BlackRock, VanEck and Grayscale, to serve as custodians for their proposed Bitcoin ETFs.
The competition between Grayscale, Fidelity, ARK Invest, Franklin Templeton and others will be fierce as they each compete to become the ETF with the most liquidity.
Being the first to launch on the open market is a significant breakthrough, although the different companies may attract customers by playing with their fee structure or other technicalities.
Many see BlackRock as one of the most prominent candidates, but others such as ARK Invest, Bitwise, WisdomTree or Valkyrie have prior experience with Bitcoin futures and a crypto-savvy approach.
Coinbase has gone all-in on the spot Bitcoin ETF race, positioning itself as the custodial service to trust. The exchange will gain more revenue and possibly generate more demand from other big players in the traditional investment sector as it becomes the custodian of choice for the Bitcoin held by the ETF funds.
Coinbase could successfully expand its existing model, which, in addition to gaining revenue through internal volumes, also pockets cash flows through a variety of subscriptions and services. These factors provide a solid foundation for Coinbase stock to attract investors, and in 2023, its value surged 370%, according to data from TradingView.
There are other factors that could potentially put pressure on the Coinbase stock price. The SEC currently has a pending case against Coinbase for failing to register its staking-as-a-service program. When the SEC initially announced its case against Coinbase on June 6, 2023, the stock price sank 15%.
A week of Bitcoin volatility
The BTC price is highly sensitive to the SEC’s decision to approve or reject the spot Bitcoin ETF.
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On Jan. 2, Markus Thielen, head of research for crypto platform Matrixport, said that he thinks the SEC would reject the current BTC ETF applications as the agency believes they “fall short of a critical requirement.”
This suggestion of an SEC rejection and the reaction of the crypto community on X (formerly Twitter) was enough to tank Bitcoin’s price by 7% on Jan. 3.
The rapid price decline highlights the price volatility of Bitcoin and the many sellers waiting on the sidelines for news of the decision from the SEC.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.