The Single-Most Important Catalyst Taking Bitcoin and the Crypto Market Higher

Yesterday’s highly awaited decision from a federal appeals court appears to have paved the way for a spot Bitcoin exchange-traded fund (ETF) to finally be launched. This news sent Bitcoin (BTC -0.84%) rocketing higher yesterday, with the world’s largest cryptocurrency by market capitalization briefly breaching the $28,000 level. Today, cooler heads and some apparent profit-taking have led Bitcoin to settle around the $27,200 level as of this writing.

A three-judge U.S. Court of Appeals panel in Washington effectively overturned the Securities and Exchange Commission’s (SEC’s) decision to halt the development of a spot Bitcoin exchange-traded fund by crypto asset manager Grayscale. The SEC views futures-based ETFs (which are currently allowed) as safer for investors. The SEC has suggested it will review the decision, but all eyes are now turning to which companies will be in line to launch a spot ETF first. 

Why this ruling matters

Grayscale’s proposal appears to be one that should have been approved, at least according to Judge Naomi Rao, who inserted some interesting comments in the court’s opinion on this matter. The judge suggested that the “denial of Grayscale’s proposal was arbitrary and capricious because the Commission failed to explain its different treatment of similar products.” In essence, the court failed to see how a spot Bitcoin ETF would be substantially different from a futures-based ETF (which are currently allowed), given the close correlation of the underlying assets of both products. 

The panel appears to be calling into question the SEC’s logic with how it has regulated crypto-related products thus far. While crypto proponents have long called for such common sense questioning of the status quo, this latest case of a court siding with the crypto sector certainly has many investors taking a bullish stance on this alternative asset class. This win is the latest feather in the cap of crypto enthusiasts, who previously saw XRP (XRP -1.32%) win a key ruling in its legal fight against the SEC over whether cryptocurrencies constitute securities.

Who will win the race to list the first spot Bitcoin ETF?

It’s not entirely clear if Grayscale will be the first to launch a spot Bitcoin ETF, even though this victory is tied to the company’s legal fight against the SEC. Other high-profile spot Bitcoin ETF applications remain on the SEC’s proverbial desk, meaning this precedent-setting victory for Grayscale could lead to an influx of ETFs in a short amount of time. 

If the floodgates open, as many as 10 other spot Bitcoin ETF applications from the likes of BlackRock, Invesco, VanEck and other major asset managers could be approved in short order. Many of these applications have approaching deadlines, which could lead to a flurry of activity in this sector.

Some experts believe that the market for spot Bitcoin ETFs could amount to as much as $150 billion, about the same amount of capital currently floating around in precious metals ETFs. That’s plenty of potential capital to be spread across 10 or more spot ETFs, and it could lead to increased competition in this niche, which could potentially result in a race to the bottom in terms of fees for fund managers.

What now?

A regulated and competitive spot Bitcoin ETF market only serves to improve liquidity in the Bitcoin and crypto market overall, as well as lower the barriers to entry for investors looking to diversify their portfolios with this alternative asset class. In theory, competitive fee structures and publicly traded ETF options should lead to greater institutional investor adoption, which should prompt more stability in this otherwise volatile asset class.

For long-term investors who have already diversified into crypto, this court ruling provides the kind of validation many expected to see in years past. As the saying goes, it’s better late than never, and with the SEC clearly running into legal roadblocks in its effort to constrain the crypto market, this latest ruling should spur investor interest in this asset class for some time to come.