Bitcoin ETFs Beckon As SEC Spurns Sweet Spot

From the Editor’s Desk

Dear Reader,

In the digital asset space, the aphorism “all that glitters is not gold” holds as true as it does anywhere else.

And digital gold — in the form of the cryptocurrency that started the digital asset revolution — is back in the news.

With Ethereum lately having put a gleam in investors’ eyes, thanks to the much-anticipated promise of its technology, Bitcoin underwent a technological upgrade of its own at the weekend. There was little of the sparkle that surrounded Ethereum’s London hard fork in August, but the Bitcoin network’s Taproot soft fork — its most significant upgrade in four years — ushered in a number of improvements, focused mainly on privacy, transaction speed and costs.

The last big Bitcoin network revamp, in 2017, was followed by several months of gains that saw the original crypto hit valuations it didn’t attain again until two years later.

It’s too early to say whether the Taproot upgrade may be followed by similar appreciation, given the Bitcoin blockchain’s lack of utility compared to other, younger networks such as Ethereum and Solana. Nevertheless, BTC more or less held its value in the days following the U.S. Securities and Exchange Commission’s decision to shoot down the planned launch of a Bitcoin spot-price exchange-traded fund last week, attesting to its resilience, if not its dynamism.

And despite the bearish mood that appears to have taken hold of the broader crypto market since Monday, bets on its oldest token still comfortably pass the sanity test. Bitcoin’s underlying technology may be more 20-teens than ’20s, but BTC’s potential as a store of value is such that those holding it are more than a little reluctant to spend it — in contrast to the ease with which they spend tokens whose key utility involves facilitating an exchange of value.

Like gold, Bitcoin may not have many uses. But in uncertain times, it’s reassuring to know it’s there.

Until the next time,

Angie Lau,
Founder and Editor-in-Chief
Forkast.News

Forkast.Insights | What does it mean?

Spot ETFs, which offer direct exposure to Bitcoin, have consistently failed to clear U.S. regulatory hurdles, although not for lack of effort on the part of the asset managers seeking to offer them. The SEC has rejected every application for a Bitcoin spot ETF since 2013, approving only funds based on futures contracts — and even then only recently.

The SEC has repeatedly cited its concern over the potential for market manipulation as the reason a spot ETF is unlikely to see the light of day in the United States. Additionally, the regulator has expressed misgivings about possible “wash trading” involving the same financial institution being on both sides of a trade, generating extra fees for minimal risk, and the scope for “manipulative activity involving the purported ‘stablecoin’ Tether.” The operation of futures ETFs by contrast, takes place under the Investment Company Act of 1940, which SEC Chairman Gary Gensler says helps provide “significant” protection for investors.

Since its debut last month, ProShares’ futures-based Bitcoin Strategy ETF has amassed some US$1.4 billion in assets, demonstrating that the market has an appetite for exposure to Bitcoin. But the SEC appears to be in no hurry to open the floodgates for spot trading, no matter how hungry investors may be for it.

Indeed, a broader crypto market downturn over the past couple of days seems to have illustrated the SEC’s point that it can’t protect investors from the volatility associated with Bitcoin and other tokens.

Forkast.Insights | What does it mean?

Bitcoin has become the great lady of blockchain. Revered for its ability to attract investors, it has become a byword for the entire crypto industry.

However, upgrading a blockchain worth more than US$1 trillion only every few years is emblematic of what happens when a network relies on a vote for every single change. Bitcoin’s upgrade approval process is labyrinthine, at best: anyone can suggest an update on Github (there are more than 30,000 commits, or suggestions, from more than 800 contributors), but community approval is required. Once approval is granted, miners have to accept the update and upgrade their mining software.

According to Bitnodes, which tracks the versions of the network miners are running, only one in three are using the latest software, which compounds the difficulty of upgrading the network. Upgrades are linear, meaning that for a user to run the latest version of the software, they typically have to upgrade through its previous iterations first.

Although Bitcoin’s ponderous approach to upgrades (and transaction times) has for now been accepted, decentralized finance is rapidly eating into the original crypto’s market share. At the beginning of the year, Bitcoin accounted for more than 70% of all the value locked into crypto. Today that figure is down to 43% and falling.

If Bitcoin wants to stay on top, it’ll need to innovate more rapidly than it has done in the past.

Forkast.Insights | What does it mean?

The Bitcoin mining saga in China is full of twists and turns. Despite China’s share of declared Bitcoin mining falling to nil in August, in October, Chinese mines were still active, with f2pool, one of the world’s largest, claiming it would take until the end of the year to wind down its operations.

But a different part of China’s crypto industry — mining rig manufacturing — is untouched by government crackdowns and appears to be more profitable than ever. Beijing-based Canaan, one of the largest Bitcoin mining machinery manufacturers in the world, is reporting record earnings in Q3 and projects Q4 earnings to be up to 50% higher than that.

Although the U.S. and other countries saw their share of global hashrate increase, according to the Cambridge analysis, covert mining is more than likely still taking place in China, routed through virtual private networks that make it appear that the computers are operating outside the nation’s borders.

Recent hashrate increases in Ireland and Germany are probably the result of this use of VPNs and proxy servers, according to the Cambridge research. Energy prices in those two markets are among the most expensive in Europe, meaning any sizable Bitcoin farms are unlikely to be making a profit.

China may have imposed a blanket ban on crypto mining, but Beijing’s vast law enforcement apparatus is struggling with the task of locating mining operations tucked away out of sight in places such as in Sichuan, a mountainous southern province that was formerly home to much of the country’s mining activity.

Chinese miners had long taken measures to protect their operations before the arrival of the total ban. Old habits, it seems, die hard.