Why Grayscale's SEC Victory Is Unlikely to Benefit Bitcoin and Crypto Markets in the Long Run

Key Points

* Grayscale's SEC victory led to a surge in Bitcoin prices but may not offer long-term benefits.

* Market reactions to Grayscale's moves have been inconsistent.

* Grayscale's trusts inherently limit crypto circulation.

* Most Grayscale trusts unlikely to convert into ETFs.

* Declining trading volumes signal caution.

* Broader market implications for companies like BlackRock and Fidelity.

The U.S. Court of Appeals for the District of Columbia Circuit ruled in favor of Grayscale Investments on August 29, 2023, ordering the SEC to review Grayscale's Bitcoin ETF application. While this led to an immediate surge in Bitcoin prices, several factors suggest caution for long-term market implications.

Broader Market Implications

The court's decision is poised to send ripples through the financial industry. Firms such as BlackRock, WisdomTree, and Fidelity, which have expressed interest in launching Bitcoin ETFs, could find the legal terrain shifting either for or against them, contingent on the SEC's future actions and any ensuing appeals. In the wake of legal victories for Ripple XRP and Grayscale, this trend could serve as a catalyst for other companies, like Coinbase, that are currently embroiled in legal battles with the SEC. 

Market Reaction: A Historical Perspective

Grayscale initially submitted an application to transform its Grayscale Bitcoin Trust (GBTC) into an ETF in October 2021. The market's initial response was negative, yet Bitcoin soared to a record high of $69,000 on November 10, 2021, before experiencing a 70% decline thereafter. This inconsistent market reaction suggests that the recent surge in Bitcoin and cryptocurrency prices may not be reliable indicators of sustained long-term market trends. The surge in Bitcoin prices may be a trading strategy aimed at liquidating short positions.

Grayscale's Trusts and Crypto Circulation

Grayscale's GBTC, launched in 2013, is the world's largest Bitcoin fund traded over-the-counter with over $14 billion in assets under management. Grayscale's trusts inherently limit the circulation of cryptocurrencies. These trusts are not redeemable, effectively locking up assets. Grayscale offers multiple trusts related to a variety of cryptocurrencies, including: Aave (AAVE), Algorand (ALGO), Avalanche (AVAX), Basic Attention Token (BAT), Bitcoin (BTC), Bitcoin Cash (BCH), Cardano (ADA), Chainlink (LINK), Compound (COMP), Cosmos (ATOM), Curve (CRV), Decentraland (MANA), Ethereum (ETH), Ethereum Classic (ETC), Filecoin (FIL), Horizen (ZEN), Litecoin (LTC), Livepeer (LPT), MakerDao (MKR), Polkadot (DOT), Polygon (MATIC), Solana (SOL), Stellar Lumens (XLM), Uniswap (UNI), Zcash (ZEC).

Limited Scope for ETF Conversion

While the court ruling mandates a review of Grayscale's Bitcoin ETF application by the SEC, it does not guarantee its eventual listing. Most other cryptocurrencies under Grayscale's management are unlikely to convert into ETFs. If the SEC allows these trusts to be redeemable, it could be detrimental due to increased circulation, especially when these assets are priced lower than market rates.

Regulatory Uncertainties

Judge Neomi Rao emphasized that the SEC's initial denial was "arbitrary and capricious," particularly when Bitcoin and Bitcoin futures are "closely correlated." Both parties have 45 days to appeal, and the SEC has not yet indicated whether it will appeal the ruling. If Grayscale prevails and the SEC does not appeal, the court would specify how its decision should be executed, potentially instructing the SEC to approve the application or revisit it on other grounds.

Declining Market Volumes

The overall cryptocurrency market is exhibiting signs of fatigue, marked by a significant decline in trading volumes. Notably, the Bitcoin market is currently seeing its lowest monthly trading volumes since the historical price peak in November 2021. For instance, Binance's Bitcoin spot trading volume plummeted from $195 billion in September 2022 to a mere $28 billion last month. This sharp decline serves as a cautionary signal for investors who may be anticipating a long-term market uplift from Grayscale's legal victory, especially considering its potential to increase the Bitcoin supply.

Conclusion

While the immediate market reaction to Grayscale's SEC win has been positive for Bitcoin, several factors suggest caution. From the inconsistent historical market reactions to the inherent limitations of Grayscale's trusts and declining market volumes, the long-term benefits of this legal victory for the crypto market remain uncertain.