What happened last week?

BlackRock, the world’s largest investment company, filed an application for a Bitcoin spot ETF on June 15th, which, if approved, would be the first of its kind in the United States.

Bitwise, Invesco and WisdomTree reacted and filed their own spot BTC ETF applications in the following days. One of the key challenges faced by these companies in their ETF filings is the requirement by the SEC that listing exchanges must demonstrate their ability to detect fraud and manipulation through agreements, which is a difficult task.

The SEC has never approved physical Bitcoin ETFs, citing concerns over the cryptocurrency’s volatility and the risk of market manipulation. However, the new wave of applications indicates that asset management giants are acknowledging the growing demand for regulated investment vehicles in the crypto space and are willing to challenge the regulator on its stance.

Unsurprisingly the Crypto markets reacted positively to this sudden interest from some of the largest financial firms in the world. However, all of these ETFs are still subject to SEC approval and aside from the likelihood of the SEC accepting or rejecting the filings, the deadline for a decision to be made on the BlackRock ETF could be pushed as far back as February 2024.

Generally, large traditional institutions paved the way this week not only with ETF filings but also Deutsche Bank applying for a digital asset license as well as a story about Prometheus a largely unknown exchange with founders having strong ties to regulatory bodies in the US as they seem to have received licenses from FINRA and SEC seemingly effortlessly. Be it good or bad, it probably aided the bullish narrative of institutional demand.

The week started off quietly with equities around the globe reverting some gains following a bullish last week for TradFi. Tech stocks led the decline, as is often also the case in the U.S. markets when the FOMC announces future rate hikes. In China where Hang Seng saw the sharpest decline as Alibaba was reshuffling management to the surprise of investors, dragging the rest of Hang Seng along. Chinese stocks saw a sharp decline throughout the week after its best weekly performance in 5 months. The selloff followed the PBOC’s announcement that they were cutting 2 key lending rates, the cuts were smaller than expected.

On June 21st, 2023, Federal Reserve Chairman Jerome Powell delivered his Semi-Annual Monetary Policy Report to the US Committee on Financial Services of the US Congress. The testimony lasted over three and a half hours and was primarily centered around the Federal Reserve's monetary policy, particularly the raising of interest rates to combat inflation.

Chairman Powell stated that the Federal Reserve would likely have to raise interest rates again as part of its mandate to bring inflation back to the 2% target. At the time of his testimony, inflation was still at 4%. Powell acknowledged that the high interest rates could pose challenges for individuals with fixed debts and salaries, as well as small businesses. However, he emphasized that the central bank's primary objective is to control inflation, and that they would adjust their policy as inflation tapers down.

An interesting aspect of Powell's testimony was his comments on cryptocurrencies and stablecoins. He acknowledged that cryptocurrencies appear to have staying power as an asset class. Regarding stablecoins, Powell admitted that the Federal Reserve sees stablecoins as a form of currency, particularly those fully collateralized in dollars. He also indicated that the central bank would like to be involved in the regulatory process of stablecoins as they are equivalent to the dollar in the markets.

The cryptocurrency market reacted positively to Powell's statements. Bitcoin's price surged by 6.5% in a few hours during Powell's testimony, and Ethereum also saw gains. This was seen as a reaction to Powell's acknowledgment of cryptocurrencies as a viable asset class. However, the US stock markets closed at a loss on the day of Powell's testimony as he remained hawkish, CME Fed Watch Tool is largely in favor of a 25bps hike at next meeting.

Bitcoin has been on a run for the past week, gaining 18.24% in the past 7 days and sitting at $30’100 at the time of writing. In a week where sentiment was already positive Jerome Powell’s comments on Crypto added fuel to the fire.  The sharp upward moves triggered short liquidations of $290M over 2 days which saw Bitcoin reaching $30’800, the highest level since  April 14th on which Bitcoin reached its YTD high of $31’050. The broader Crypto market could not keep up with Bitcoins rally, ETH is up 12.75% in the same timeframe and the Crypto market Cap excluding BTC and ETH is up 6.09%. Bitcoins outperformance is also evident when looking at the Bitcoin dominance, Bitcoins share of the Total Crypto Market cap which climbed to its highest level in over two years and is currently at 51.56%.

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Our Take

Bitcoin Spot ETF applications have been a hot topic in crypto for a long while, throughout the bear market of 2018 and 2019 numerous deadline extensions and rejections of BTC Spot ETF applications by the SEC led to selloffs once the news broke. The SEC has since faced harsh criticism about its regulation on Crypto, or the lack thereof. The Filings for new BTC spot ETF’s put the SEC in a precarious position, to reject these applications will undoubtedly see it face another wave of backlash, this time by some of the largest financial institutions worldwide. Accepting the applications would legitimize Crypto in a way that might make ongoing legal struggles with Coinbase and others look unjustified. A rejection of the Applications would further solidify the SECs stance and would undoubtedly drag the Crypto markets down. The discount on Grayscales GBTC is shrinking as with the increased likelihood of BTC spot ETF the hopes of GBTC itself turning into a spot ETF at some point in the future were refueled again. Any statement from the SEC in the near future can impact Crypto significantly, so it will prove beneficial to keep up with their news releases.

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The Week Ahead

• 28.06 - Wednesday: Fed Chair Speech
• 30.06 - Friday: EU Unemployment and Inflation rate

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