With the SEC approving IBIT options, we look at the next steps required for options to begin trading.
Allegations that ETFs aren’t backed by actual bitcoins hold no merit.
Bitcoin’s protections under the First Amendment.
SEC Greenlights IBIT Options, But Some Hurdles Need to be Cleared Before Trading Begins
Late Friday, the SEC approved the Nasdaq ISE’s rule change request to list and trade options on BlackRock’s iShares Bitcoin Trust (IBIT). The approval, which was ultimately expected, came as a bit of a surprise in its timing. By our count, five similar requests were withdrawn in rapid succession in August, leading many to look at dates further out on the calendar for an approval. However, the Nasdaq ISE application was never withdrawn, and the approval order came on the SEC's final day to respond.
Why was Nasdaq ISE’s application approved, while the others were withdrawn? Comparing the 19b-4s for NYSE American and Cboe that were withdrawn to their newly filed and open applications highlights some differences, including specificity around the options contracts, details around the underlying ETFs, and expanded details about surveillance and compliance details. While all of these are true, probably more importantly, application withdrawals usually come at the request of the SEC, and it could have been the case that Nasdaq ISE simply didn’t heed the agency’s urgings.
One of the withdrawn applications, NYSE Arca’s, was to list and trade options on commodity-based trust shares, a blanket definition that would have included precious metals ETFs as well as bitcoin. Exchanges tried to get options on platinum and palladium ETFs listed and traded back in 2010 but were unsuccessful. Back in 2010, the SEC approved the exchanges’ requests to trade and list options and Options Clearing Corp's (OCC) request to clear the options, but after that, the CFTC put the topic out for public comment and simply never responded. OCC’s rule change request sits on its website still today, 14 years later, as an “approved rule filing not yet implemented.”
There’s no reason to think options on bitcoin ETFs will suffer the same purgatory fate that palladium and platinum options suffered. Our understanding of the issues at the time was around the size of markets and fraudulent and manipulative trading practices. Bitcoin held in publicly traded funds around the world, ETFs and closed-end funds, amounts to 5.5% of the total market value of the asset, a much larger share than any precious metal. Also, the dollar size of the bitcoin ETFs and the underlying asset are much larger than platinum or palladium. As such, we would expect to see options trading on IBIT, and potentially the other bitcoin ETFs as well, by the end of the year. There are still several steps that need to happen before that though, including OCC’s submission and SEC approval of a 19b-4 change of rule request and a sign-off by the CFTC.
No Credible Evidence to Show ETFs Aren’t Back by Bitcoins
Lately, there has been a vocal minority within the bitcoin community questioning whether Coinbase promulgates fractional reserve crypto practices, especially as it relates to the bitcoins backing BlackRock’s iShares Bitcoin Trust (IBIT) ETF. The situation came to a head a week ago when Coinbase CEO Brian took to X (formerly Twitter) to dispel the notion that Coinbase engages in such practices with its ETFs, options, and newly launched cbBTC.
While the accusations don’t surprise us, practices engaged by the fractional reserve banking system are no friend to Bitcoiners, these allegations fail to contain an ounce of credibility, and instead expose the ignorance of the accusers (as well as their inability to read critically). Operating procedures for how these funds, including IBIT, operate are spelled out in various regulatory filings with the SEC. Failure to understand the difference between trading and custodial balances, how trades settle, and how cash and bitcoin move proves a lack of knowledge by the complainant, not malice of those alleged.
This is a classic crypto industry move – desperately wanting something, ETFs backed by actual bitcoin, and then turning around and criticizing it, incorrectly. With Brandolini’s law on full display here – the amount of energy needed to refute “falsehoods” is an order of magnitude bigger than that needed to produce it – we’ll leave readers with a link to a third party, Arkham Intelligence, which has identified most of IBIT’s addresses (cluster analysis is not perfect science), totaling 362.19K bitcoins, which is essentially all of the 362.2K bitcoins the fund holds.
Bitcoin's Protection under the First Amendment
Earlier this week, Ross Stevens, NYDIG’s Founder and Executive Chairman, published a paper on Bitcoin and the First Amendment. The paper explores the legal argument that Bitcoin qualifies as a form of speech protected by the First Amendment of the U.S. Constitution and any regulations or restrictions on Bitcoin, including mining, have constitutional implications that must be carefully considered. If you haven’t had the chance to read it yet, please click on the link below.
Bitcoin rallied 2.3% this week on the heels of last Wednesday’s interest rate cut by the FOMC. The US, however, wasn’t the only country adding fuel to the monetary fire. This week, the PBOC unveiled a massive slate of monetary measures aimed at reviving China's slowing economic growth, including interest rate cuts, bank reserve requirement reductions, mortgage rate deductions, capital injections in major banks, and lending facilities for financial firms to buy securities and corporations to conduct stock buybacks, with more stimulus expected to come on the fiscal side. While China famously “banned” crypto in 2021, a recent analysis from blockchain analytics firm Chainalysis reveals Chinese OTC traders have seen $75B of inflows in 2024. Given this figure, clearly crypto is still alive in China, which is why these recent measures are so important. The global money supply (M2) continues to hit new highs, fueled by measures like those in the US and China, providing a tailwind for bitcoin’s price.
Stocks rallied, but of the traditional assets, gold shone brightest, up 3.1% this week. Real interest rates rose on the week and inflation expectations remained unchanged but given that China has been a big demand driver of the asset the past few years (see our piece from last week), it’s not surprising the asset was up with the news of the China stimulus.
September is shaping up to be a good month for bitcoin, up 10.0% so far, and bucking the typical seasonal trend. It was only a few weeks ago that traders came back from the summer holiday and hit the sell on major assets, including bitcoin, leaving many to worry about the longevity of the crypto cycle. Now with monetary stimulus in effect in the US and China, the industry’s attitude has done a complete u-turn. Bitcoin ETFs have taken in $862M in 6 trading days (since the day after the FOMC lowered rates) and bitcoin has broken through its 200-day moving average. Bitcoin remains in the trading range it has been in for the past 6 months, but perhaps these new catalysts plus favorable seasonality will allow it to breakout.
You are receiving this email because you signed up to receive our weekly research at www.nydig.com
This communication has been prepared solely for informational purposes and does not represent investment advice or provide an opinion regarding the fairness of any transaction to any and all parties nor does it constitute an offer, solicitation or a recommendation to buy or sell any particular security or instrument or to adopt any investment strategy. Charts and graphs provided herein are for illustrative purposes only. This communication does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of New York Digital Investment Group or its affiliates (collectively NYDIG).
It should not be assumed that NYDIG will make investment recommendations in the future that are consistent with the views expressed herein, or use any or all of the techniques or methods of analysis described herein. NYDIG may have positions (long or short) or engage in securities transactions that are not consistent with the information and views expressed in this communication.
The information provided herein is valid only for the purpose stated herein and as of the date hereof (or such other date as may be indicated herein) and no undertaking has been made to update the information, which may be superseded by subsequent market events or for other reasons. The information in this communication may contain forward-looking statements regarding future events, targets or expectations. NYDIG neither assumes any duty to nor undertakes to update any forward-looking statements. There is no assurance that any forward-looking events or targets will be achieved, and actual outcomes may be significantly different from those shown herein. The information in this communication, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.
Information furnished by others, upon which all or portions of this communication are based, are from sources believed to be reliable. However, NYDIG makes no representation as to the accuracy, adequacy or completeness of such information and has accepted the information without further verification. No warranty is given as to the accuracy, adequacy or completeness of such information. No responsibility is taken for changes in market conditions or laws or regulations and no obligation is assumed to revise this communication to reflect changes, events or conditions that occur subsequent to the date hereof.
Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. Legal advice can only be provided by legal counsel. NYDIG shall have no liability to any third party in respect of this communication or any actions taken or decisions made as a consequence of the information set forth herein. By accepting this communication, the recipient acknowledges its understanding and acceptance of the foregoing terms.
