Why Wall Street Might Be Falling in Love With Bitcoin

It’s been more than a decade since the idea of bringing bitcoin to the masses was but a twinkle in the Winklevoss twins’ eyes. Bitcoin, of course, is much easier to buy than it was when Barack Obama was president, but the fees, delays, and existential risks of crypto exchanges have led most of the investing public, including nearly all institutional investors, to remain on the sidelines. To date, there arguably hasn’t been an easy, cheap, low-risk way for regular folks with a 401(k) or a brokerage account to buy into the digital currency. But the widely expected approval by regulators of numerous bitcoin-exchange-traded funds in the coming days could change all that.

ETFs, as they’re generally known, are a $7.7 trillion industry, making them one of the world’s most popular ways to invest. A (usually) cheaper and easier evolution of the mutual fund, they’ve been around for 30 years and are deeply ingrained in the way investors around the world now make, and lose, money on Wall Street. At the heart of it, these funds are just ways to buy and sell more complex investments in exactly the same way you might buy and sell a single company’s stock. If you want to buy gold or a given category of bonds or even just stick it to Jim Cramer, you can buy or sell an ETF to do it. To date, the most notable exception to that rule has been bitcoin — with the Securities and Exchange Commission having rejected many applications over the years, starting with the Winklevii’s in 2013. (There are a few bitcoin-related ETFs currently approved, but they are based on derivatives rather than actual bitcoin.)

Now, voices ranging from laser-eyed bitcoin evangelists to Wall Street analysts are predicting that various versions of a bitcoin ETF will be available by January 10. The frenzy over the change has been enormous. The digital currency — abandoned by all but the most fanatical early last year — has been streaking to new recent highs and rose past $45,000 during the holidays, more than tripling its post-FTX low. In 2024, which is, as of this writing, not yet two days old, it has risen as much as 8 percent.

BREAKING: Bitcoin is now trading above $45,000 for the first time since April 2022.

This puts #Bitcoin up 175% over the last year and 210% above its November 2022 low.

A Reuters report this weekend said SEC Bitcoin ETF approvals could be coming as soon as this week.

Since SEC… pic.twitter.com/u9hvRkNMbY

— The Kobeissi Letter (@KobeissiLetter) January 2, 2024

The hype comes down to this: An ETF makes investing in bitcoin easy and relatively more safe. People trust ETFs because they’re simple to buy and sell nearly instantly — decidedly not the case when it comes to most digital currencies — and fully regulated. The ease and peace of mind could (in theory) lead to a flood of money that will push the price of bitcoin even higher over the coming weeks, months, and years.

The companies getting involved here are, in many cases, household names (and not just for people who have their own pet theories about what happened to Satoshi Nakamoto). Industry giants BlackRock and Fidelity are among those positioned to make the first offerings, which could trade on exchanges like NASDAQ. Expectations around the new ETFs have led to a boom not just of bitcoin’s price but also boosted other digital currencies, including ones that were all but left for dead after their close association with convicted fraudster Sam Bankman-Fried. “If you’re worried about little people getting hurt in this stuff, you would want these big, reputable firms to be involved. We’ve always said the ETF is SBF-proof,” said Eric Balchunas, an analyst at Bloomberg Intelligence who has been monitoring the creation of the crypto fund. He predicts there’s a 90 percent chance that the ETF will be approved by government regulators in January. (An online prediction site pegs the odds at roughly the same.)

So what happened? If you take a look at the details of the Winklevoss twins’ very first proposal for a bitcoin ETF and the ones that are being proposed today by BlackRock and other big firms, they are “not really” all that different, Balchunas said. What changed was a big loss in court in August when a judge ruled that the SEC was arbitrarily preventing another massive crypto player, the Grayscale Bitcoin Trust, from offering its ETF in the U.S. (It’s currently available in Europe and other markets.) The SEC, which is led by chairman Gary Gensler, has been a bogeyman for the crypto industry in large part because of the roadblocks it has set up against the creation of these kinds of funds. For a long time, the regulators said they were concerned about market manipulation — and about investors losing money. But after the start of the pandemic, when digital currencies of all stripes caught on in a big way with at least some sectors of the public — and with the agency green-lighting ETFs tied to bitcoin-futures contracts — the argument became less and less tenable.

There also has been a real change in the mood around crypto over the past few months, following a string of legal actions and prosecutions by the U.S. government. In the fall, Bankman-Fried, the former FTX CEO, was found guilty. Then his counterpart at Binance, Changpeng Zhao, pleaded guilty to money-laundering violations and stepped down from the company. Su Zhu, the founder of Three Arrows Capital, crypto’s biggest hedge-fund flameout, got arrested; Do Kwon, the guy whose spectacular collapse presaged all the other reckonings, is on the verge of getting extradited to New York to face federal charges for financial crimes.

In the wake of the cleanup effort, and with growing interest from financial giants like BlackRock, it now appears that bitcoin is on the verge of going corporate — and fast. Balchunas pointed out that you could even see the changing market psychology in play in the way that some of these proposed ETFs are named. While fund manager VanEck uses the crypto slang term HODL as the ticker for its fund, BlackRock is using the much more sober-sounding IBIT. “When it comes to, like, the 75-year-old boomer or a wealth manager, bitcoin is crazy enough. The ticker should almost offset a little bit of the volatility,” he said.

Grayscale, the company whose lawsuit was at the center of the SEC’s legal about-face, is also moving quickly for approval. On the day after Christmas, the company announced that its chairman, Barry Silbert, would be stepping down. (He is a named defendant in a fraud suit from the New York attorney general’s office, and there are multiple investigations into the company from New York and federal regulators over its lending business with the Winklevoss twins’ exchange.) On January 2, the company filed an updated, though incomplete disclosure that included some technical changes that regulators are said to expect from these firms.

That the new bitcoin ETFs are probably almost here was confirmed in late December, as public filings have made it clear that the SEC is getting very involved. James Seyffart, also an analyst at Bloomberg Intelligence, said:

So far we know there were at least 7 separate meetings/calls between SEC and potential #bitcoin ETF issuers yesterday. Total meetings at 32. Notably @BitwiseInvest, @InvescoUS, & @hashdex aren't showing official meetings (Yet?). Maybe SEC is okay with their current S-1 documents? pic.twitter.com/HoUI27RMqU

— James Seyffart (@JSeyff) December 22, 2023

Speaking as someone who’s neither a regulator nor a financier, that sure seems like a lot of meetings in a short period of time for something that wasn’t going to happen. There have also been technical changes to the way people will be able to invest in the ETFs, which appear to be one of the final hurdles. “Based on information that’s come in in the last 24 hours, it looks like they’ve given informal approval,” Balchunas said.

Even Cramer — usual caveats apply — seems convinced that this is happening:

JUST IN: Jim Cramer says you can't kill #Bitcoin and it's here to stay. pic.twitter.com/wYKrDqsfQm

— Watcher.Guru (@WatcherGuru) January 2, 2024

For the bitcoin set, the timing of an approval could be a giant boon. Wall Street has all but placed its bets that the Federal Reserve will avoid a recession with the first cuts to interest rates expected around March, market data shows. The everything rally that has been going on for the past few weeks could certainly creep into crypto ETFs. Balchunas expects there will be about $55 billion to $60 billion invested in these ETFs by the end of the next two or three years. This is far from a guarantee that people wouldn’t lose money — the digital currency is notoriously volatile, and it’s unlikely that new funds would change that about it. But for people who just want to gamble a little bit, why not? “It is a bridge between the crypto underworld and the traditional finance world — and the baby-boomers of America who have a lot of money,” Balchunas said.