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A Fidelity Bitcoin ETF would be everyone’s win – but grayscale pain

In the letter

  • Fidelity’s ETF stands a great chance of getting SEC approved and would benefit the wider world of Bitcoin.
  • A potential loser is Grayscale Investments, whose longstanding home industry is under threat.

This time it’s different.

For years Bitcoin Companies have knocked on the door of the SEC in hopes of finding a Bitcoin ETF– Just to make the agency answer with a tough no. But now one of the companies at the door is the mighty Fidelity Investments, and that should be a game changer.

In case you missed it, the Boston-based financial giant dropped paperwork this week to set up an ETF (exchange traded fund) called Wise Origin Bitcoin Trust – a name that some say comes from Japanese Kanji is derived for Satoshi Nakamoto. If approved, Fidelity’s Bitcoin fund would trade as shares on public exchanges along with the company’s other ETFs dedicated to bonds, blue-chip stocks, and other assets.

In that case, it would be a huge win not just for Fidelity but for anyone who owns Bitcoin. Approving a Bitcoin ETF would add another shine to cryptocurrency and, more importantly, create a flurry of new investments from both retail and institutional clients. All of this would likely cause the price of Bitcoin to go to the moon, as it is said.

None of this is certain, of course. As noted, the SEC has strongly disapproved of dozens of previous Bitcoin ETF proposals, typically due to possible market manipulation. In the case of Fidelity, however, the company brings an aura of old-school prestige that other applicants lacked, and its proposal is based on pricing the Bitcoin in a variety of spot markets including Bitstamp, Coinbase, Gemini, itBit, and Kraken-One Approach that should allay the agency’s fears of tampering.

After all, Fidelity and his attorneys, who are well versed in SEC politics, have likely chosen to file now because they believe the time is right for a new president and chairman.

The result is everyone is ready to be a winner: loyalty; Bitcoin investors; and even the SEC, which has been criticized for its obstructive crypto policy.

Well almost everyone is going to be a winner.

If the SEC grants Fidelity an ETF, a clear loser will be crypto-staunch grayscale investments. Grayscale has enjoyed a lucrative home industry for years by offering Bitcoin as a stake in the GBTC Trust – a legal loophole that bypasses the SEC’s ban on Bitcoin ETFs and that, for whatever reason, no one else has effectively copied. Through the agreement, Grayscale created new shares in the trust several times a year and sold them to high net worth investors who turned them over six months later for a premium to retail investors. Grayscale charges a fat 2% fee for its problems.

The advent of an ETF means the cozy niche of Grayscale is on the verge of imploding. In fact, the bottom could already be falling as stocks in the Grayscale Trust, which always traded at a premium to the price of the underlying bitcoin, traded below the value of Bitcoin price in recent weeks. Meanwhile, professional investors are upset about buying more stocks. The reason for the slump isn’t entirely clear, but the best bet is for investors to realize that the ETF writing is on the wall – and wait to buy an ETF whose spend is a fraction of the confidence of Grayscale.

This does not mean that grayscale is doomed to fail. As Decrypt’s Tim Copeland reported this week, Grayscale could convert his trust into its own ETF in due course. In that case, the returns wouldn’t be as lucrative for Grayscale, but it could help the company tap into a wider pool of customers and remain a major player in the Bitcoin market. In the meantime, the company will benefit from its capable management team and a balance sheet that is bulging after a record performance in 2020. At the same time, Grayscale can enjoy a quasi-monopoly on stocks of other cryptocurrencies through its trust gap, even after the SEC has approved a Bitcoin ETF.

All of this underscores how the financial pillars of the Bitcoin economy will shift in 2021 as Fidelity and other big dogs from traditional finance move deeper into crypto territory. The phenomenon is likely to benefit everyone involved in Bitcoin, getting higher prices and more participants. There’s no reason to believe that not everyone can be a winner – possibly even grayscale, if they play their cards right.

This is Roberts on Crypto, a weekend column from Decrypt Editor-in-Chief Daniel Roberts and Decrypt Editor-in-Chief Jeff John Roberts. Sign up for the Decrypt email newsletter to receive it in your inbox in the future. And read last weekend’s column: Bitcoin Is Real.

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