Charting Crypto's Journey, Trust to ETF via Eastward Momentum

• Grayscale secures victory in court; SEC to review bitcoin ETF application
• EOS token greenlit for trading in Japan
• SEBA Bank attains in-principle approval for crypto services in Hong Kong

From Trust to ETF: Voyage through premiums, discounts, and rulings

The past week saw an upswing in the cryptocurrency markets, resulting in a collective 2.1% increase in total market capitalization. This rally brought the combined market cap close to the $1.1 trillion mark, and bitcoin's dominance rose above 49%. Among the major cryptocurrencies, bitcoin displayed a notable 3.4% rally from the previous week, propelled by an upsurge following Grayscale's legal victory against the SEC. However, ether’s performance lagged behind bitcoin, registering a weekly gain of 1.5%. Other cryptocurrencies closely linked to bitcoin followed suit, with bitcoin cash leading the pack by showcasing an impressive 11.5% weekly surge in value.

The Grayscale Bitcoin Trust, a substantial $16 billion reserve of bitcoins structured as a closed-end investment trust and traded under the symbol GBTC, has been endeavoring to transition into an ETF for a considerable period. In its current state, while it can accept new investments, it lacks the capability to efficiently redeem existing investors, rendering it less than optimal for bitcoin ownership. Over time, it has frequently been traded at significant premiums or discounts compared to the actual bitcoin price. This year the discount went from sub 50% to approximately 19% at the time of writing. The transformation into an ETF would simplify the process for Grayscale to convert bitcoins into GBTC shares and vice versa, which should substantially reduce the discount and generate value worth billions of dollars for investors. In June 2022, the SEC declined Grayscale's proposal for conversion, asserting that an ETF grounded in bitcoin lacked sufficient oversight to detect fraudulent activities. Subsequently, Grayscale initiated a legal process to challenge this decision, alleging that the SEC was displaying bias against its product, especially in light of the approval granted to comparable bitcoin futures ETFs.

A three-judge appeals panel in Washington on Tuesday overturned a decision by the SEC to block the ETF, which would be tied to the spot bitcoin price. The court opinion states that "Grayscale has demonstrated its proposed bitcoin ETP is materially similar, across relevant regulatory factors, to the approved bitcoin futures ETPs. First, the underlying assets—bitcoin and bitcoin futures—are closely correlated. And second, the surveillance sharing agreements with the CME are identical and should have the same likelihood of detecting fraudulent or manipulative conduct in the market for bitcoin and bitcoin futures." While the Tuesday verdict is widely perceived as a sharp critique directed at the SEC, it doesn't automatically ensure the imminent launch of a bitcoin ETF. The regulatory body has communicated its intention to scrutinize the ruling, and Grayscale, too, has expressed its intent to carefully assess the specifics mentioned in the judgment. The company intends to provide further insights into the conversion process "as soon as practicable."

Eastward momentum: Tokyo’s drift meets Hong Kong's turbocharge

Among other OG names, EOS demonstrated a significant surge this week, registering an 11.5% increase in weekly gains. The majority of these gains were realized after the EOS network token was granted trading authorization in Japan. Notably, during its inception, EOS was one of the largest ICOs (initial coin offering), amassing nearly $4 billion, yet exhibited relatively modest progress in its initial years. Recently, EOS made a significant announcement regarding its attainment of regulatory approval to operate within Japan. The approval, granted by Japan’s Virtual and Crypto Asset Exchange Association (JVCEA), signifies that the network now has the green light to lawfully expand its adoption within the Japanese market. Additionally, this authorization will facilitate the trading of the EOS cryptocurrency on regulated crypto exchanges within the country.

Continuing its momentum, Hong Kong granted two more in-principle licenses in this month, reaffirming its proactive approach to becoming a crypto business hub with well-defined regulatory guidelines. On Aug. 11, HKVAX announced that it had received an “approval-in-principle” from the SFC that allows the platform to operate a digital asset trading platform that deals with securities, and to provide automated trading services to retail users and institutional investors. On Aug. 30, SEBA Hong Kong said its in-principle approved license would allow it to operate with crypto products such as OTC derivatives, advise on virtual assets and conduct asset management for discretionary accounts in virtual assets. HashKey and OSL are currently the only two fully licensed exchanges in Hong Kong, HashKey officially launched its retail virtual asset exchange this week. In this dynamic landscape, these recent developments further solidify Hong Kong's position as a pioneering hub for crypto businesses, marked by its ongoing commitment to fostering innovation while adhering to robust regulatory standards.

Macro pulse

Risk assets were bid in TradFi markets, with oil futures rallying by 3.5% week on week. The uptick was predominantly influenced by a surprise drop in crude inventories. Furthermore, US equities climbed by 1.8% compared to the previous week, buoyed by US economic indicators indicating a deceleration in growth. This, in turn, strengthened expectations that the Federal Reserve is nearing the conclusion of its tightening cycle. Elsewhere, the US Dollar index declined 20 bps and 10-year US treasury yields slipped 8 bps while the Gold & Silver advanced 2.4% week on week.

*Note: Weekly (7 calendar day) performance figures are as of 8am SGT on August 31, 2023 

DISCLAIMER: The views and opinions expressed herein are those of the author(s) and do not necessarily reflect the views of Talos Trading, Inc. or its affiliates (collectively, "Talos") and summarizes information and articles with respect to cryptocurrencies or related topics. This material is for informational purposes only and is only intended for sophisticated institutional investors, and is not (i) an offer, or solicitation of an offer, to invest in, or to buy or sell, any interests or shares, or to participate in any investment or trading strategy, (ii) intended to provide accounting, legal, or tax advice, or investment recommendations, or (iii) an official statement of Talos. No representation or warranty is made, expressed or implied, with respect to the accuracy or completeness of the information or to the future performance of any digital asset, financial instrument or other market or economic measure. The information is believed to be current as of the date indicated and may not be updated or otherwise revised to reflect information that subsequently became available or a change in circumstances after the date of publication. Talos and its employees do not make any representation or warranty, expressed or implied, as to accuracy or completeness of the information or any other information transmitted or made available. Investing in cryptocurrency comes with risk. Certain statements in this document provide predictions and there is no guarantee that such predictions are currently accurate or will ultimately be realized. Prior results that are presented here are not guaranteed and prior results do not guarantee future performance. Recipients should consult their advisors before making any investment decision. Talos may have financial interests in, or relationships with, some of the assets, entities and/or publications discussed or otherwise referenced in the materials. Certain links that may be provided in the materials are provided for convenience and do not imply Talos's endorsement, or approval of any third-party websites or their content. Any use, review, retransmission, distribution, or reproduction of these materials, in whole or in part, is strictly prohibited in any form without the express written approval of Talos.

‍