Did SEC Admit Defeat? Bitcoin ETF Could Be Near

Summary Grayscale Bitcoin Trust surges after SEC does not appeal court ruling on ETF application denial. ETF approval could lead to institutional money flooding into GBTC and narrowing the discount to NAV. Bitcoin's volatility and lack of liquidity highlight the need for an ETF approval to establish a more liquid market. Thesis Summary Grayscale Bitcoin Trust ( GBTC ) was up big on October 16, following news on October 13 that the SEC would not appeal a court ruling that said the SEC had arbitrarily denied Grayscale’s ETF application. This potentially paves the way for the ETF to be approved, which in turn paves the way for a flood of institutional money. Over the past few months, the GBTC discount has narrowed. However, there’s still around a 16% discount, and for this reason, GBTC could continue to outperform Bitcoin ( BTC-USD ). But what happens if and when the ETF does get approved? This could turn into a sell-the-news event, as Bitcoin will no longer have the looming catalyst of the ETF approval. SEC does Not Fight the Ruling Friday was the deadline for the SEC to appeal the court ruling that found it had arbitrarily rejected Grayscale’s ETF application. The latest ETF application was rejected on the grounds that Grayscale could not protect investors from market manipulations. This led GBTC to sue the SEC, making the point that the SEC had already approved Bitcoin futures after certain surveillance measures were put in place. Both futures and a Spot ETF rely on Bitcoin’s price, so how come the market is “safe enough” for futures trading but not for an ETF? Well, the court listened and in fact, sided with Grayscale, saying that the SEC had arbitrarily denied their application. The SEC has not appealed this decision. So what happens next? The court is expected to issue a ruling specifying what happens next, but most likely, it will mean that the SEC will have to revisit Grayscale’s application. This doesn’t mean that an ETF will definitely be approved, but, at the very least, the SEC will have to find a more legitimate reason to turn down the application. Institutions waiting on the sidelines Of course, there are two important factors to consider here when it comes to GBTC and Bitcoin. Firstly, an approval of the ETF would serve to close GBTC’s current discount to NAV. GBTC discount (YCharts) GBTC still trades at a discount to its intrinsic value. In other words, the value of its Bitcoin is higher than the current share price reflects. A spot ETF would introduce a mechanism for the fund to arbitrage this discount, which would serve to eliminate it. As we can see, the discount has already been narrowing, perhaps in anticipation of the ETF approval. The discount, which once reached almost 40% has now narrowed to 15%. On top of that, an ETF approval would serve to capture a much larger chunk of institutional and retail traders. This increasing interest can actually be seen in the recent flow data: According to data released on Monday, digital asset investment products have seen consistent inflows of $15 million for three weeks straight, even though trading volumes are currently 27% below the 2023 average. Source: Investing.com This data also points out an interesting dichotomy, which is that while flows are up, volumes are down, and this is actually having some strong repercussions in the market. Bitcoin Volatility Bitcoin has been incredibly volatile over the last few months. If we look at the chart, we see long periods of “inactivity”, where price remains almost flat, and then big moves up, like the one we are seeing today. This shows that the current market lacks liquidity. It seems like a bit of volume is greatly affecting the price. This recent surge is evidence of that. In fact, after a post on X, falsely claimed that the BTC ETF had been approved, we saw a big and short-lived spike to $30,000 Bitcoin (BTC) surged from $27,900 to $30,000 after a false report of a spot ETF approval was posted on social app X, formerly Twitter, leading to nearly $100 million in liquidations in the past hour. Source: CoinDesk These wild moves and liquidations are not great, in my opinion. Bitcoin needs to establish itself as a liquid market, and my plans are that an ETF approval will also contribute to this, GBTC vs. BTC Since Bitcoin bottomed in late 2022, GBTC has actually outperformed Bitcoin by quite a margin. GBTC v BTC (TradingView) GBTC is up over 150%, while Bitcoin is “only” up 59%. This can be attributed to the narrowing of the discount. As I mentioned before, the discount is now at 16%, but there might be even more juice left to squeeze. The discount could easily become a premium, something that is not unprecedented. GBTC discount/premium to NAV (Ycharts) Back in the height of the bull market, the GBTC premium reached close to 40% Technical Outlook With this new high in GBTC, the odds are increasing that we are beginning a much larger rally. GBTC TA (Author's work) The way I see it, the move we saw up to $22 was an initial wave 1. The sell-off back to $17 was our wave 2, and now we could be beginning another impulse in our large-degree wave 3. Taking the length of our wave 1 and measuring from the bottom of our wave 2 would protect us towards at least $31 for wave 3, which would be the 1 ext. More likely, though, we could rally into the 1.619 ext, which would take us all the way up to $40. A Word Of Caution While I am indeed bullish on GBTC, there are some potential risks here. Firstly, all investors should know that owning GBTC is very different from owning and storing your own BTC. As the old saying goes, not your keys not your crypto. On another note, I believe that the ETF approval could act as a double-edged sword. While I do believe it will be overall bullish, I believe once the ETF gets approved, we could see Bitcoin and GBTC struggle. Once the ETF has been approved, Bitcoin may need to find another catalyst to spark interest. And on that note, while I mentioned above that GBTC could end up trading at a premium, the odds of this are much lower if, indeed a spot BTC ETF does get approved. Just like the discount will likely be removed, so will the premium.