Here’s What You Need To Know About The Bitcoin ETF Court Case

This week, the long-running legal battle to establish an exchange-traded fund that follows bitcoin will finally be heard.

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Grayscale Investments is attempting to move a spot bitcoin ETF one step further for the future of its Grayscale Bitcoin Trust after other companies failed to do so (GBTC). Grayscale filed a lawsuit against the United States after its request to convert the trust into an ETF was denied in June. In Washington, D.C., the Securities and Exchange Commission. Appeals court for the circuit. On Tuesday, the oral arguments are expected to start.

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A possible bitcoin ETF was once thought to be a method to get more investors interested in cryptocurrencies, but the trial comes as low prices and increased regulatory scrutiny have lowered retail interest in the industry.

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These are the most important case-related facts.

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The Disputes

One of the main arguments made in the lawsuit by Grayscale is that while the SEC has already approved the entry of bitcoin futures ETFs, spot bitcoin is still off-limits. The ProShares Bitcoin Strategy ETF (BITO), the largest of the funds, is now managing close to $800 million in assets.

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The SEC has stated that while spot bitcoin is not regulated, bitcoin futures, which trade on the CME, are, raising worries about fraud in a market where there is "no sufficient oversight."

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The SEC ruling is absurd, in response to Grayscale, because the two are so inextricably intertwined.

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"Any fraud or manipulations in the spot market would obviously impact the cost of bitcoin futures, thereby hurting the net asset value of an ETP owning either spot bitcoin or bitcoins futures as well as the price profitable in terms for such an ETP's shares," Grayscale wrote in a legal brief. ETFs are included in ETPs, or exchanged traded products.

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The SEC has a "very weak hand" in the lawsuit, according to Jim Angel, an associate professor at Georgetown University's McDonough School of Management who specializes in financial market structure.

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"You need a macro lens to tell the difference between two - they're both ETFs to track bitcoin, the only distinction is that BITO does it in a very inefficient manner using bitcoin futures, which generates a great deal of transaction costs since one has to rollover the future role every month," said Angel.

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The U.S. Chamber of Commerce, NYSE Arca, and Coinbase are a few of the organizations that have submitted amicus papers in support of Grayscale.

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Grayscale's Price Cut

The fact that Grayscale Bitcoin Trust, an over-the-counter contract, trades at a significant discount to the value of its underlying asset is one reason why Grayscale in particular has been at the forefront of this battle.

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According to Grayscale's website, the market value of a GBTC share has decreased by over 60% in the last year. Nonetheless, the holdings' value per share has decreased by nearly 48%.

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Since the trust doesn't really currently have a redeeming mechanism, experienced investors are unable to engage in arbitrage transactions that would bring the fund's price closer to that of bitcoin. This also implies that the shareholders will receive a significant discount as a result of the shares' poor performance. According to cryptocurrency news site The Block, the fund was trading last week at a price that was about 50% lower than the value of the assets it owns.

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However, one way to create a redemption procedure is to convert to an ETF, and those products typically trade considerably more closely to the value of the real assets than the GBTC does. 

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There are other ways for Grayscale to implement a redemption process, according to Bryan Armour, director of inactive strategies analysis for North America at Morningstar, but doing so could harm assets under management and consequently the firm's fees.

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"I don't think this is a scenario with a high probability. Grayscale may be using this as a stall tactic to prevent current investors from redeeming, according to Armour.

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Bitcoin winter

The interest in a bitcoin ETF as well as the pricing for crypto markets as a whole have significantly decreased. The price of bitcoin is still dropped more than 60% from its all-time peak even with a strong start to 2023.

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According to Armour, investors may swiftly abandon futures ETFs if a spot bitcoin ETF is approved, but demand won't be as high as it may have been prior to the decline in cryptocurrency values.

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"There is, and has been for a long time, an appetite. Putting it in ETF format may make it more available for advisors, albeit it's highly unlikely to be as strong as it was before 2022," Armour said.

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The trial takes place as the crypto industry as a whole is going through some turmoil. The collapse of several big companies has been witnessed in the sector, including the fraud allegations at FTX last year, and the SEC has become more active on matters like crypto staking.

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In order to increase the potential reach of cryptocurrency, Grayscale and some other significant industry players have stated that they would like to see more regulatory clarity.

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"Regulated access to the asset is more crucial than ever in situations like these, when the crypto ecosystem has lost a substantial amount of trust and confidence. For those who want to hold bitcoin as a security in their brokerage or retirement account through a regulatory investment product, with SEC reports, audited financials, tax records, and the like, products like spot ETFs might further open up access to bitcoin, according to a blog post by Grayscale's chief legal officer Craig Salm. 

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For its part, the regulator has stated that prohibiting the ETF is not intended to be a criticism of the digital asset market as a whole.

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The legislation governing the listing and trading of novel instruments on national securities is the subject of this lawsuit, not whether investors should or can buy bitcoin assets, according to one SEC brief.