February 19, 2022
I'm in favor of the Grayscale Bitcoin Trust's proposed conversion to a spot ETF. I write a column for the financial markets website Seeking Alpha, and my readers and I are eagerly watching the developments of this case.
The clearest argument for allowing Grayscale's Bitcoin Trust (GBTC) to convert to an ETF is that it improves market access for the investing public and makes the market more efficient.
But first, some stories from real-life crypto investors who I know that illustrate the problems with the status quo.
A friend of mine in Florida lost his password that was used to access his Bitcoin. That Bitcoin today is now worth over $100,000, and it's gone forever unless we can find some computer whiz who can unlock it for us (the early indications are that this is doubtful). A friend in Texas lost several thousand dollars in Dogecoin to an offshore exchange that won't return his emails. I myself believe I nearly lost several thousand dollars in Bitcoin when I traded in my iPhone at the ATT store that was used for the 2-factor authentication and had to use my backup key to access my BlockFi account. I withdrew my money from them immediately afterward, because I found the risk that I could simply lose all of my investment because of a technology hiccup unacceptable. Some of the media reports are even wilder, with people losing millions of dollars in Bitcoin and trying to go through the city landfill to find their passwords. If a low-fee Bitcoin ETF existed, would we need to go through any of this? We would not.
There are concerns that need to be addressed for this to be a safe product for the public, and the biggest concern in my mind is not market manipulation but rather cybersecurity. If a Bitcoin ETF were to be hacked and the money stolen, it would be an unmitigated disaster from an investor protection standpoint. Therefore, the utmost care needs to be taken with anyone who wants to get into the Bitcoin ETF business to ensure cybersecurity.
The SEC request for comments referenced the possibility of market manipulation and asked for comments on it, so I'll address this briefly as well. The main thing I thing is worth noting is that Bitcoin futures ETF (BITO) is for all intents and purposes un-investible due to the futures contango. This has been a persistent problem with other ETFs that use futures, for example, the United States Oil Fund (USO). There are sophisticated firms moving in to arbitrage this, which should bring the contango down over time, but crypto has shown itself to be a very inefficient market so far. A spot ETF would put us towards sidestepping these problems. I'd look towards the broader foreign exchange market for ideas on how to prevent market manipulation since currencies generally don't trade on centralized exchanges either. I don't have all of the answers here, but I believe that in the end, the public would be best served by a framework that lets them invest in crypto via a spot ETF. Grayscale would initially be getting somewhat of a monopoly on a spot bitcoin ETF if they're the first approved, so I'd like to see them lower their management fees to a more competitive price if they are to be approved for it or to give consideration to competitors who also have viable ETF conversion plans.
Best,
Logan C. Kane
Disclosure: I have a small investment in GBTC shares.
Note: I previously submitted comments via email but may have sent them to the wrong place or entered the case number incorrectly.