The SEC has denied all physically-backed U.S. BTC ETFs, most recently with Fidelity’s filing. All in all, it seems very likely that all upcoming filings will face the same destiny as Fidelity. With the current market structure of bitcoin, it will be near impossible to satisfy SEC’s stringent requirements. The SEC’s reasoning for the denials can be summarized with the following remarks:

The SEC has denied all physically-backed U.S. BTC ETFs, most recently with Fidelity’s filing. All in all, it seems very likely that all upcoming filings will face the same destiny as Fidelity. With the current market structure of bitcoin, it will be near impossible to satisfy SEC’s stringent requirements. The SEC’s reasoning for the denials can be summarized with the following remarks:

No filing proposals are sufficiently “designed to prevent fraudulent and manipulative acts and practices” and “to protect investors and the public interest”.

1. The SEC has noted that none of the filing proposals have satisfyingly documented a price leadership in the price discovery process from CME. If a pronounced leadership role is identified, a surveillance sharing agreement between the ETF provider and CME may be sufficient to get information that could pinpoint any malicious entities seeking to manipulate the market and thus the ETF. Interestingly, Fidelity’s filing was accompanied by a thorough price discovery analysis documenting CME’s importance. The SEC contested the paper, stating that a lack of confidence intervals and ambiguous results from other academic literature related to the manner was not affirmative enough for the SEC to accept whether CME is a market of significant size. Bitwise’s filing contains a price discovery analysis that includes confidence intervals, but it seems likely that the SEC will shed light on the ambiguous conclusions derived from the other academic papers – a spot-based U.S. ETF is unlikely to be approved in the near future.

2. No filings sufficiently identify that wash trading and market manipulation on certain exchanges do not impact the market. Bitwise made a case for BTC’s unique resistance to manipulation while looking at wash trading related to their rejected 2019 filing.

3. No filings have sufficiently illustrated that bitcoin is costly to manipulate.

4. The SEC later points towards more unique “risks” associated with bitcoin. Some noteworthy risk remarks noted from the SEC: “hacking of the bitcoin network and trading platforms”, “malicious control of the bitcoin network” i.e. a 51% attack, “insider trading related concerns”, “manipulative activity involving “purported stablecoin” Tether”.

Nevertheless, despite these comments, the SEC was comfortable approving futures-based bitcoin ETFs. These ETFs are backed by CME futures, futures that settle at prices derived from the spot market. However, they have the added caveat that they include rolling costs for the investors (the same investors that the SEC seeks to protect).

The chart attached in this slide illustrates the performance of $100,000 invested on Dec 23rd, 2020, in either BTC spot, continuously rolling futures at the expiry date (analogous to the futures-based ETFs), and the GBTC trust. With GBTC trading at a massive discount of 25%, the GBTC investors would’ve underperformed the BTC investors by 46%. The futures-based trader would experience an underperformance of 6.1% due to the costs associated with rolling. We’ve not accounted for management fees in these calculations; otherwise, the difference in performance would be even greater.