Summary Bitcoin has had a strong year, up 150% YTD, driven by anticipation of a spot Bitcoin ETF approval. I expect short-term price volatility in Q1 2024, with uncertainty around the approval of a spot Bitcoin ETF. The SEC's market manipulation concerns may delay the approval of a spot Bitcoin ETF. Introduction What a year 2023 has been for Bitcoin USD ( BTC-USD ). The biggest crypto by market cap is up ~150% YTD. Mostly thanks to the widespread anticipation of a spot Bitcoin ETF approval, the sentiment and momentum for Bitcoin have been positive and strong for several months. This momentum has spread to other cryptocurrencies, like Solana USD ( SOL-USD ) and Avalanche ( AVAX-USD ) recording double-digit percentage gains for the first time since the FTX fiasco. Bitcoin kicked off the year with a new NFT "hype" and smart contract capabilities, made possible by the Ordinals protocol, with NFTs on the protocol seeing increasing floor prices. Mid-year, the world's largest asset manager BlackRock tipped its toes into crypto by applying for a spot in the Bitcoin ETF. Though this is not the first spot Bitcoin ETF application with the SEC, BlackRock's reputation in getting successful ETF approvals gave the crypto community and investors "some guarantee" or hope that a spot Bitcoin ETF will be approved sooner or later. The anticipation of this spot ETF approval coupled with the coming halving event have been the main catalysts propelling Bitcoin's price forward. Amidst the ETF approval euphoria and constant fervor generated by crypto influencers and crypto news websites, maintaining a steadfast focus on essential considerations becomes imperative for sound decision-making and risk mitigation. A Volatile Q1 2024 Looms Spot Bitcoin ETF Approval Deadline (Bloomberg) I am bullish on Bitcoin in the long term, but I believe short-term price volatility (amidst price correction) is imminent. Going into Q1 2024, the dates for the next deadlines for the spot Bitcoin ETF approvals are key dates to watch. I think that certain segments of the crypto community and influencers may be overly optimistic, displaying undue confidence in the swift approval of a spot Bitcoin ETF, particularly with high expectations for a potential ETF green light by January 5 - 10, 2024. Some industry watchers put the spot Bitcoin ETF approval odds at 90% by January 10, 2024. The prevailing speculation and confidence in the approval of a Bitcoin ETF by January 5 - 10 lack substantial basis in explicit data. The speculation is largely driven by the ETF applicants' meetings with the SEC, updates to their ETF prospectuses, and listing prospective spot Bitcoin ETFs tickers on the Depository Trust and Clearing Corporation ((DTCC)). While these are noteworthy advancements in the ETF approval process, they are also standard procedures, and they do not guarantee a spot Bitcoin ETF approval by the widely anticipated dates. Analysts and crypto news outlets often sensationalize SEC meetings with the Bitcoin ETF applicants, framing them as attention-grabbing headlines. It is important to recognize that these meetings and updates to ETF prospectuses are standard procedures and should not be sensationalized beyond their procedural nature. There's no data of any kind except for analytics relating to crypto speculation, which is inherently suspect (e.g., the reported 90% likelihood of the SEC's approval of a bitcoin spot ETF, which is absolutely absurd). - John Reed Stark , Former Chief, SEC Office of Internet Enforcement On October 23, BTC saw an over 14% single-day price surge on news that BlackRock's iShares Bitcoin Trust ETF ticker was listed on DTCC. Again, the DTCC listing itself is a standard procedure and a routine step in ETF preparation, related to clearing and settlement services for ETFs, indicating that the infrastructure for potential trading is in place. Though the DTCC listing reflects a certain level of regulatory progress and readiness for trading, this, however, does not mean the ETF shares creation and redemption mechanisms have been set up by the DTCC. The SEC's approval of the ETFs is not contingent on the DTCC listing and the listing is not a direct factor that would influence the SEC's approval decision. Fidelity's Wise Origin Bitcoin Trust ETF also got a DTCC listing some days ago, under the ticker FBTC. Market Manipulation Concerns Could Linger Looking beyond the SEC's meetings with the ETF applicants, the listing of spot Bitcoin ETF tickers on DTCC, and the ongoing adjustments being made by applicants in their S-1 filings, it is imperative to emphasize the challenge of market manipulation, like wash trading , within the underlying asset, Bitcoin. This challenge remains a thorny issue that will take time to overcome. I believe that the level of market oversight sought by the SEC before greenlighting a spot Bitcoin ETF would take a gradual process to achieve. This, in my view, raises skepticism regarding the SEC's likelihood of expeditiously approving a spot Bitcoin ETF by January 5 - 10, 2024. The recent developments at Binance, with former CEO Changpeng Zhao stepping down and pleading guilty to criminal, could potentially reinforce the SEC's inclination to defer the approval of a Bitcoin ETF and raise apprehensions about the integrity of the crypto market. While the newly appointed CEO, Richard Teng, has expressed a commitment to collaborate with global regulators, it is worth noting that Binance Global is not a US-based exchange, and the exchange currently holds the largest share of the crypto and Bitcoin spot trade volume . Coordinating uniform regulatory standards across diverse jurisdictions is complex. New Updates to ETF Prospectuses In-Kind Redemption (BlackRock) In-Cash Redemption (BlackRock) In the ongoing dialogue with the SEC, spot Bitcoin ETF applicants are making strides in allaying the SEC's concerns regarding spot Bitcoin ETFs. Previous updates to the ETF filings have touched on issues like custody, and valuation, and contained certain risk disclosures. In a late November revision to its ETF application, BlackRock presented the Bitcoin ETF redemption workflows to the SEC, detailing the technical process of the spot Bitcoin ETF redemption using either the in-kind or in-cash redemption process. In the in-kind model, when retail investors redeem their ETF shares, they receive the equivalent value in Bitcoin directly from the ETF issuer, like Black Rock or Fidelity. Subsequently, investors can convert this Bitcoin into cash through a broker-dealer or other means. The in-kind model involves the direct transfer of the underlying asset (Bitcoin) during redemptions, allowing investors to receive ownership of the actual cryptocurrency. In the in-cash redemption model, when investors redeem their spot Bitcoin ETF shares, the ETF issuer would need to sell the Bitcoin from its holdings or cold storage, convert it into cash, and then provide the cash to the redeeming investors. BlackRock and other applicants favor the in-kind redemption model as it shields them from immediate BTC to cash conversion risks. Conversely, the SEC reportedly leans towards the in-cash redemption model. It's important to note that the SEC's preference for in-cash redemptions doesn't assure imminent approval. Expressing preferences is part of an ongoing regulatory dialogue between the SEC and applicants. Such preferences reflect discussions aimed at addressing regulatory concerns and aligning ETF structures with established standards. Revised In-Kind Redemption (BlackRock) BlackRock has subsequently proposed a revised version of the in-kind redemption model in its meeting with the SEC on November 28. The detailed workflows of the revised in-kind model can be found in this memo . Takeaway I'm more focused on the Bitcoin halving event, and I consider it the main catalyst for Bitcoin into the imminent bull season. Getting a spot in Bitcoin ETF approved by the next deadline stands at a 50-50 chance. If the ETFs don't get approved, there will likely be some serious price volatility and market shakeout in Q1. I'm maintaining a hold rating for BTC because my outlook is bullish for the long-term (at least post-halving event) irrespective of the likely short-term volatility. I believe that even if the ETFs do not get approved by their Q1 2024 deadlines, the dust (price volatility and price correction) will settle, and the subsequent reduction in block rewards and the post-halving market dynamics are poised to take effect. I'm skeptical about an ETF approval by Q1 and anticipate short-selling opportunities around the ETF dates.
