By David Yaffe-Bellany
In a Manhattan courtroom this month, the cryptocurrency industry faced a reckoning as its onetime star, Sam Bankman-Fried, was convicted of fraud in a trial that put the industry’s excesses on vivid display.
But the ever-volatile crypto markets were already moving on.
Shortly before Bankman-Fried’s verdict landed on Nov. 2, the price of bitcoin surpassed $35,000, its highest level since an industry meltdown in 2022. On Nov. 9, ether, the second-most popular digital currency, surged 10% to around $2,100, its best performance in months. Some investors rushed to declare the end of the so-called crypto winter of falling prices and financial scandals that have plagued the industry for the last 18 months.
Driving the renewed euphoria? A potential new fund.
Crypto investors are growing optimistic that the Securities and Exchange Commission will approve an exchange traded fund, or ETF, that tracks the price of bitcoin, analysts said. The fund would trade on traditional stock exchanges and offer an easy way for people to invest in cryptocurrencies, potentially bringing a wave of money into the industry.
Some proponents have hailed the possibility of this new investment vehicle, known as a spot bitcoin ETF, as crypto’s “salvation.” In August, Grayscale Investments, a crypto asset manager, scored a legal victory over the SEC that seemed to pave the way for it to offer the bitcoin product. And this month, BlackRock, a giant money manager, filed paperwork to establish a similar ETF to track the price of ether, another cryptocurrency.
These new funds “could represent a watershed,” said Michael Sonnenshein, Grayscale’s CEO. “We’re already starting to see quite a few signs of the crypto winter melting.”
The crypto industry has yearned for good news since last year’s market collapse, which erased billions of dollars in savings practically overnight. But approval of a bitcoin ETF is not guaranteed, and some analysts have cast doubt on whether it would draw much new investment to the crypto world.
The fixation on the new fund also underscores how far crypto has drifted from its anti-establishment roots. Bitcoin was created 15 years ago as an alternative to the traditional financial system and a tool to undermine powerful Wall Street interests. Now some bitcoin enthusiasts are celebrating giant financial firms like BlackRock as the industry’s saviors.
“The hypocrisy is just maddening,” said John Reed Stark, a former SEC official and outspoken critic of the crypto industry. “It’s anathema to why bitcoin was created in the first place.”
An exchange traded fund is essentially a bundle of assets split up into shares that investors can buy and sell on the open market. Rather than buy bitcoin directly through a crypto exchange like Coinbase, investors in a bitcoin ETF would own shares in a fund that contains the cryptocurrency, eliminating the need to worry about storing any bitcoin in a digital wallet.
Crypto proponents have pursued a bitcoin ETF for more than a decade. In 2017, the SEC denied an ETF application by crypto entrepreneurs Cameron and Tyler Winklevoss, who had been working on the project for years.
The industry kept battling. In 2021, the SEC approved ETFs that bet on the future prices of bitcoin without holding the currency itself. But the agency rejected an effort by Grayscale to introduce the first ETF linked directly to bitcoin, arguing that the crypto markets were subject to manipulation and other consumer risks.
Grayscale challenged the SEC in federal court in June 2022. The legal battle ended this August, when a panel of judges ruled in favor of the company, deeming the SEC’s actions “arbitrary and capricious.”
Since that ruling, two key offices within the SEC that oversee the ETF application process have worked with companies that want to create bitcoin ETFs, three people familiar with the matter said. The agency’s posture has fueled optimism, two of them said, because the regulators are asking detailed, technical questions that suggest the process has reached an advanced stage. (Some aspects of the talks were previously reported by CoinDesk.)
An official approval could arrive as early as January, analysts at Bloomberg have predicted. Sonnenshein of Grayscale said he had observed a high “level of understanding and engagement” from the SEC.
“For us, it really continues to be a matter of when, not a matter of if,” he said.
A spokesperson for the SEC declined to comment.
Grayscale is one of several firms seeking to offer crypto ETFs. Fidelity, the asset manager, has a pending application for a bitcoin fund. BlackRock has applied to create its own bitcoin ETF, as well as the one linked to ether. Crypto investors are hoping that the approval of bitcoin and ether ETFs will bring billions of dollars of new money into the industry.
Skeptics abound. JPMorgan analysts published a report this month that called crypto’s recent surge “overdone” and argued that an ETF approval would simply redistribute the capital that traders have already put into the industry, rather than attracting new investment. Crypto ETFs that trade in Canada and Europe “have gained little interest from investors since their inception,” the report said.