Fools rush in: Anatomy of a BTC ETF price pump

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The BTC token’s latest pump on erroneous reports regarding BlackRock’s exchange traded fund (ETF) further exposes the shaky foundation on which the concept of ‘digital gold’ rests.

Much of the momentum behind this week’s abrupt spike in BTC’s fiat price—from below $30,000 to above $35,000 over a two-day span—was based on rumors that asset management giant BlackRock’s iShares Bitcoin Trust (IBTC) ETF application was close to being approved by the U.S. Securities and Exchange Commission (SEC).

The hype began in earnest on Monday morning when Bloomberg senior ETF analyst Eric Blachunas tweeted that IBTC had been listed on the website of the Depository Trust & Clearing Corporation (DTCC). The DTCC provides clearance, settlement, and information services to traditional financial markets, including securities such as ETFs.

The iShares Bitcoin Trust has been listed on the DTCC (Depository Trust & Clearing Corporation, which clears NASDAQ trades). And the ticker will be $IBTC. Again all part of the process of bringing ETF to market.. h/t @martypartymusic pic.twitter.com/8PQP3h2yW0

— Eric Balchunas (@EricBalchunas) October 23, 2023

The SEC has yet to approve any spot-based BTC ETFs, despite the hopes of entities like Grayscale Investments, the Digital Currency Group (DCG) subsidiary that runs the Grayscale Bitcoin Trust (GBTC), a futures-based ETF. The SEC has repeatedly rejected Grayscale’s bids to convert GBTC to a spot-based ETF, but in August, a federal court ordered the SEC to reconsider its rejection, leading Grayscale to file a fresh application last week.

The market, already brimming with highly combustible hopium, needed only a spark to ignite. Blachunas’s tweet indicating that IBTC had made the DTCC’s ‘eligibility’ file—along with news that BlackRock had amended its ETF application last week to include a CUSIP number, suggesting that the seed funding of IBTC was imminent—tossed a match onto this powder keg.

The result was a surge in BTC’s fiat price not seen since the onset of ‘crypto winter’ in the spring of 2022. BTC maxis’ swagger had all but evaporated following 18 months of decline and stagnation, but long-absent ‘to the moon’ triumphalism returned as well as the ‘have fun staying poor’ mocking of doubters.

This euphoria turned to confusion after the DTCC appeared to purge the IBTC listing from its website, and then the DTCC website briefly went offline. When the site came back online, the IBTC listing was restored, along with the maxis’ endorphin levels.

Feeling the need to address this issue, the DTCC clarified that the IBTC listing on its website was “standard practice…in preparation for the launch of a new ETF.” The DTCC cautioned that “appearing on the list is not indicative of an outcome for any outstanding regulatory or other approval processes.”

The DTCC added that BlackRock’s proposed ETF had been listed on the DTCC site since August, so it was anything but a new development. The fact that August brought a $3,000 downward shift in BTC’s fiat price further underscores the lack of situational awareness that permeates the maximalist community.

Remember that BTC’s fiat price surged by 5% last week after the Cointelegraph site breathlessly tweeted that the SEC had approved BlackRock’s ETF. The site was forced into an embarrassing climbdown after people realized the post was based on a single comment in a Telegram channel by an anonymous user who later deleted their account.

And in an unfortunate bit of timing, Tuesday saw BlackRock Advisors LLC fined $2.5 million by the SEC for “failing to accurately describe investments in the entertainment industry that comprised a significant portion of a publicly traded fund it advised.” Way to maximize your time in the spotlight, fellas.

Blame Canada

So why do maximalists share a conviction that a spot ETF is the solution to all BTC’s problems? The theory goes that Joe & Jane Q Public would love to get their hands on BTC, but the technological requirements of acquiring tokens and assuming responsibility for self-storage are too intimidating.

Even opening a Coinbase (NASDAQ: COIN) account and letting Brian Armstrong & Co. handle storage is apparently too high a bar for these Luddite masses to clear. But these crypto snowflakes will use their online brokerage accounts (that they somehow managed to open on their own) to invest in a security where the underlying asset is acquired by BlackRock and custodied by, er, Coinbase.

This theory is also applied to institutional investors, although the recent experiences of two Canadian pension funds who dabbled in ‘crypto’ could give U.S. institutions pause. The Ontario Teachers’ Pension Plan lost $95 million in investing in the FTX exchange, while Quebec’s provincial pension plan lost nearly C$150 million (US$108.9 million) when the Celsius lending platform went belly-up.

Canada looms large in the ‘ETF will save us’ theory because it has had spot-based ETFs for not only BTC but other major tokens for a couple of years now. The first such product, Purpose Bitcoin ETF (BTCC), made its debut on the Toronto Stock Exchange in February 2021.

BTCC had the good fortune to launch just as 2021’s ‘crypto’ bubble was getting underway, and 2022’s wave of insolvencies and frauds wasn’t yet burned into the public consciousness. From a mere 85 BTC at its launch, BTCC saw its pile of BTC tokens grow 100x within two months.

BTCC’s cache of BTC peaked at around 47,900 in mid-2022 but fell by half in just a couple of days as the bubble popped. An overview of the first two years of Canada’s crypto ETFs found that outflows increased dramatically from mid-2022 onwards, and any inflows that occurred after that failed to match the intensity of BTC’s occasional upward surges. In January 2023, BTCC’s trading volume was down two-thirds from the same month last year.

However, a few tentative investors appear to be dipping their toes back into these waters. BTCC currently has just under 25,800 BTC under its control, up from 22,600 at the start of the year and from less than 24,000 just one month ago. Around 1,000 BTC were added in just the past seven days, suggesting the BlackRock misinformation also worked its magic north of the 49th parallel.

Canada’s population is roughly 1/9th of America’s, so can a U.S.-approved BTC ETF attract 9x the sums invested in BTCC? It’s possible. A Bank of Canada survey found that 13% of Canadians owned BTC in 2021, compared to 12% of Americans in a U.S. Federal Reserve report for the same year, so the pool of potential investors appears relatively proportionate.

But again, the irrationally exuberant rush to plow into BTC during the 2021 bubble isn’t likely to repeat itself, given all the public has learned about all the entities and individuals pretending to be responsible stewards during that bubble. Or maybe people really are stupid enough to believe that this time, it’s different.

And don’t forget that ETFs aren’t charities. BTCC charges an annual fee of 1% of assets under management while its Management Expense Ratio is capped at 1.5%. That’s a better deal than Grayscale’s GBTC customers are currently getting, but it’s not nothing.

And for what it’s worth, BTCC uses a combination of Gemini and Coinbase to custody its BTC. Gemini was recently charged with fraud related to the loss of over $1 billion of its customers’ holdings, while both Gemini and Coinbase have been charged with offering unregistered securities to the public. Just sayin’.

This time, nothing is different

Lost in all the BlackRock hubbub is the fact that the SEC is under no legal obligation to approve anyone’s BTC spot-based ETF application. Previous applications by Grayscale and others were rejected in part because the SEC found BTC’s fiat price was extremely vulnerable to manipulation. The obvious impact on BTC’s price from the BlackRock rumors of the past two weeks probably hasn’t done much to ease those concerns.

The manipulation previously flagged by the SEC involved exchanges like Binance and unbacked stablecoins like Tether and TUSD. The latter category also includes Binance founder Changpeng ‘CZ’ Zhao’s new favorite FDUSD, the 24-hour trading volume of which was over 700% of its market cap at one point during this week’s bubble. Nearly all of those FDUSD trades occurred on Binance, and nearly all of it was traded for BTC.

All this wash trading was preceded by the usual stablecoin suspects minting huge amounts of new tokens. This pattern has repeated itself time and again, usually ahead of some really bad news for companies like Binance and Tether. But BTC maximalists ignore these red flags because acknowledging inconvenient truths doesn’t help the number go up.

Let’s face it. Maxis are pinning their financial hopes on a tradfi giant like BlackRock because you can’t use BTC as Bitcoin was originally intended: as peer-to-peer electronic cash.
Controversial changes made to the original Bitcoin design left BTC without the ability to scale to handle a proper volume of transactions, and Layer 2 ‘solutions’ like the Lightning Network have proven so lacking in basic security that its own major developers are walking away.

If you can’t transact with BTC, ‘digital gold’ is all you’ve got left. And this gold won’t increase in value unless entities like BlackRock make it easier for other people to buy BTC. Only then will BTC’s fiat price rise to a point where maxis can finally arrive at their end game: trading their BTC for the filthy fiat cash they used to claim was an obsolete relic.

It’s time for a new slogan. Have fun staying stupid.

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Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.