(Kitco News) - Optimism about the approval of the first spot Bitcoin (BTC) ETF surged recently after it was reported that multiple asset managers with applications before the Securities and Exchange Commission (SEC) submitted amendments to their filings to include the process of cash creation and redemptions instead of in-kind creation and redemptions.
The SEC had been pushing the asset managers to make the change as they were worried about money laundering via in-kind creations in a spot bitcoin ETF.
According to Martin Leinweber, digital product specialist at MarketVector Indexes, these changes suggest that we are on the verge of seeing the first spot BTC ETF approved, which will pave the way for a variety of other crypto-focused ETF products to launch.
During an interview with Kitco Crypto, Leinweber noted that while the optimal ETF would offer access to Bitcoin in-kind, “we’ll take what we can get, and this is an acceptable version for the time being.”
“I think that further down the road we will get the in-kind version, but if you look at the market pricing and what you hear, I think there is a 95% or so likelihood that we get the approval on Jan. 10,” he said. “That doesn't mean that it will trade on Jan. 10. It will likely take a little bit [of time], so then we will see if it is a ‘buy the rumor, sell the fact’ or a ‘buy the fact’ event.”
He noted that a lot of people are saying that it is a buy-the-fact event, which makes him cautious, “because everybody is so keen on that narrative. So I can imagine that we will see a dip, and I would welcome that as a healthy development because we’ve seen a little bit of frothiness in the market,” he said.
“At the moment we are in no-man’s land. You have strong technical marks between $48 and $50,000 and in the $38,000 area,” he said. “I can imagine that we run to the $50,000 level and then have a correction. That would be my preferred scenario.”
Leinweber pointed to the surge in meme coins and the practice of traders jumping from coin to coin and sector to sector as further evidence that market conditions have gotten frothy.
“That's always a sign for me that the market is all about speculation at the moment,” he said.
One narrative that has been gaining steam in recent months is Solana’s (SOL) revival as an “Ethereum (ETH) Killer,” he noted. “It's fair to say that Solana has established itself as the number three token next year behind Bitcoin and Ethereum, but the talk of Ethereum’s demise is premature.”
“There's so much negativity on Ethereum now, and so much positivity on Solana, which suggests to me that maybe that's the trade for next year, then the reversal,” he said. “You have the ETH ETF fantasy, so just from a liquidity and trading volume standpoint, institutions are more likely to trade ETH. We could also see more airdrops on Ethereum again with new layer-twos, which will attract the community.”
While the issue of high gas fees on Ethereum remains a problem, especially during periods of high network activity, Leinweber noted that on the other hand, there is a burning mechanism in place that has made the token deflationary. “So I can imagine that you suddenly have ETH pumping, which brings back the positive narrative,” he said. “Then maybe the focus shifts to decentralization, or what happens if Solana shuts down again, which will shift the conversation back in Ethereum’s favor.”
He said that while there is no guarantee this will happen, it would have a significant impact on both Solana and Ethereum if it did, and it's not outside the realm of possibility as Solana has gone down multiple times in the past.
As for the speculation that the market is currently in an “altseason,” Leinweber said he doesn’t think we are in “the real brutal altseason because Bitcoin dominance is still rising.”
Altseason is “normally when Bitcoin’s dominance is falling,” he said. “That’s the final leg for this super pump, which we’ll likely see next year. Maybe it comes with the spot Bitcoin ETF.”
He also said the macroeconomic picture will play a role in how Bitcoin and the crypto market perform moving forward, and things are looking increasingly precarious for governments, central banks, and the fiat currency regime.
“Overall, we have over $8 trillion in money market funds, which is fine when you get 5%,” he said. “But now, if you think of rates falling, people will then rotate out of money market funds and back into risk assets. So they will go to stocks, of course, but also to crypto.”
“I just know from past experience that in crypto bull markets, you have these 20-30% corrections in Bitcoin, which means 50-70% corrections in altcoins,” he warned. “People forget that. If Bitcoin crashes 30%, then your altcoins are going down at least 50%. Maybe the increase in decentralization will mean we only get a 20% correction instead of a 30% correction, but we will have corrections along the way. Nothing goes up in a straight line.”
“I think we are in a bull market, but I think it would be healthy to get these corrections,” he said. “I think it would be nice to have a little bit more fear again, a little bit more respect, and not profit chasing. The market is currently displaying a lot of frothy behavior.”
Global effect of a spot BTC ETF in the U.S.
When asked what it's like for a Europe-based asset manager with listed crypto products to see all the focus on a spot BTC ETF in the U.S., Leinweber said, “To be honest, it’s super frustrating.”
“With the approval of the Markets in Crypto Assets (MiCA) legislation, there was no price impact,” he said. “In Europe, we have ETNs for retail and institutions to buy already, including products from 21Shares, VanEck, and ETC Group. You also have products in Switzerland, but everyone is talking about the spot BTC ETF in the U.S. It’s still so dominant.”
“But it's not all bad,” he said. “It not only has a positive impact on the U.S., but if you have the largest capital market in the world, a regulated ETF from the largest asset managers in the world makes the career risk lower in other countries because everybody can say, ‘Oh, BlackRock and Fidelity are doing it now.’”
“At that point, not owning some Bitcoin and crypto will become a risk, because if you look at the risk-adjusted returns over one year, especially during bull markets, it's the best risk-adjusted return across asset classes,” he said. “Then clients will say, ‘Hey, why don’t I own that?’”
“Very often, in the TradFi world, the impulse comes from the U.S., and then you get it in Europe,” Leinweber said. “In Europe, we have an advantage when it comes to tokenization. We have the first tokenized bonds in Germany, and we are working now on tokenizing stocks and fund shares. So the real-world asset sector is where the most proactive regulation is for Europe, while the U.S. is focused on Bitcoin.”
He warned things will get more complicated in the U.S. once people start to focus on an Ether ETF because that will lead to other altcoins, like Solana. “The SEC said Solana and a few other coins, like AVAX and Cardano, are securities. So there will be more legal questions and challenges in trying to get a Solana ETF.”
For that reason, Leinweber said regulators will likely focus on only Bitcoin and Ether in 2024.
But in the grand scheme of things, the U.S. risks having a less influential voice in the global crypto landscape due to the slow response to crafting meaningful regulation, he warned.
“People forget that crypto is a global phenomenon,” he said. “You don’t need to buy Bitcoin on a U.S. exchange. You can buy it everywhere. But if really big money is coming in via the spot BTC ETF, that will improve liquidity overall, and that will ignite FOMO globally. It’s an important part because you’ll get the institutions in, and you’ll get all the advisor money in.”
“So the U.S. plays an important role, but I think it's ridiculous that we focus so much on spot Bitcoin ETF talk, the SEC, and in-kind versus cash redemptions,” he said. “To be honest, nobody is interested in that stuff when it comes to the stock market, but in crypto, everyone is an ETF expert.”
Leinweber said the one main benefit of these discussions in crypto is that it is having an “educational effect” on market participants.
“I studied economics. We never talked about money,” he said. “Suddenly you have crypto, and people are talking about fiat. They talk about what is money, how it works, and how central banks work. You never had an instance where more than 12 ETF applications for the same asset are very likely to be approved on the same day, so it will be interesting to see how it all works out.”
“If you think about it from a certain perspective, financial education is really coming from the crypto sector currently,” he said. “Because people have to convince other people about what crypto is, how it works, and what makes it different from the old way of doing things.”
“I think the over-indebtedness around the world and what the U.S. is doing when it comes to the issuance of debt is brutal,” Leinweber said. “Eventually, we are all going to have to come to terms with the massive amount of money printing that has occurred, and cryptos are likely to benefit.”
Outlook for Ethereum
Digging deeper into the topic of Ethereum and competing layer-one networks, Leinweber said Ethereum is likely to be the top L1 for a long time as it “has the business-to-business use case for settlement on layer-one.”
“Solana doesn’t earn enough fees and is still not proven in the eyes of large corporations,” he said. “Ethereum will have the B2B use case for settlement on layer one, and everything else will be on layer two, similar to what you have with Bitcoin and the Lightning network.”
“The real-world asset movement will bring the focus back to Ethereum,” he said. “The short Ethereum, long Solana trade is the most crowded trade in the market at the moment, but I think that will reverse in the year ahead. Ethereum is straddled between the Bitcoin ETF fantasy, and Solana and the other outlier networks. It’s a tough spot. But from my experience in the markets, if everybody has the same trade and the same opinion, such as everyone being bullish on Solana and bearish on Ethereum, then it would be wise to do a different trade.”
“Last year, the focus of the conversation was about how Solana was the ‘Sam coin’ [due to Sam Bankman-Fried’s high level of support and investment in Solana], and all these odd layer ones not being decentralized enough,” he said. “It was all about decentralization because when you are fearful, you value decentralization. Now, it’s the other way around, and people don’t care about decentralization because the network is fast and the price is rising. It’s always the same story – traders chasing narratives.”
He said the important thing for crypto traders to remember is that – just as one of the best methods of increasing a position is by dollar-cost averaging (DCA) – during bull markets, it is “important to DCA out of positions as well, to bank profits.”
The problem you will face then is “where to put your wealth with a lower risk profile,” he said. “The U.S. is already talking about lowering interest rates which will lead to more money printing. It is going to be a challenge to find reliable investments capable of maintaining their value amid the struggle by global central banks to reconcile the years of unabated fiat creation.”
“Bitcoin will be a part of it,” he concluded. “That’s the reason why BlackRock is buying it.”
