For a Few Minutes, I Thought We Were Done

Like many of you, yesterday afternoon’s announcement that the SEC had approved Bitcoin ETPs caught me by surprise.  We were geared to expect something shortly before today’s deadline, so the announcement on the SEC’s Twitter/X account was greeted with a collective gasp.  The bigger gasp of course occurred a few minutes later, when Secretary Gensler’s personal account debunked the news as a hack.  I admit that I was disappointed by the head fake.  I thought we could finally be done obsessing about this topic.  But alas, not yet.

Despite the fleeting nature of the “approval”, there are a few key takeaways from the debacle:

1. Crypto remains a magnet for hackers.  All financial markets have seen their share of hacking attempts, false press releases, and the like.  Equities are heavily regulated by the SEC, yet there have been numerous attempts by unscrupulous traders to move stocks by issuing misleading statements.  By no means does that negate the thesis for investing in equities, nor should it do so for cryptocurrencies.  But just as unscrupulous manipulation attempts were a feature during the stock market’s early days – in fact prompting the creation of the SEC – they remain a bigger feature in cryptos. 

I was privileged to have a recent conversation with a key executive at one of the ETP aspirants, and he said that cybersecurity is an overriding concern for their business.  I’m sure this is the case for executives at any financial company, but the recent history of cryptocurrencies is uniquely littered with stories of hacks, fraud, theft, and bankruptcies.  The idea that the potential launch of this highly anticipated product was greeted with a hack is a remarkable irony.

• So far, the “buy-the-rumor, sell-the-news” theory that I proposed on Monday was correct.  We had a fleeting rally within seconds of the false tweet, but the price fell within minutes, and failed to recoup its “pre-announcement” levels.   The concept will not be fully proven or disproven until after the actual ruling from the SEC, but the early results are not promising:

Bitcoin 2 Days, 2-Minute Candles

Source: Interactive Brokers

• Although the consensus is broadly expecting approval, there is one nagging feature that could remain a problem.  The vast majority of ETP applicants expect to use Coinbase (COIN) as the custodian for their assets.  This is not necessarily a dealbreaker, but there is a finite probability that the SEC could have issues with the concentration of ETP holdings at an unconventional location.  The ETP industry tends to utilize highly regulated counterparties – either clearinghouses or major banks.  It is not inconceivable, though unlikely, that the SEC could further delay their final approval because they require extra assurances or compliance from either the applicants or COIN regarding asset custody.

Hopefully we’ll know something concrete later today.  And hopefully we can then move onto other topics…