In his Bloomberg Opinion column dated January 11, 2024, Matt Levine provided an insightful analysis of Bitcoin’s evolution and the recent approval of spot Bitcoin exchange-traded funds (ETFs) by the U.S. Securities and Exchange Commission (SEC).

Bitcoin’s Shift from Original Vision: Levine began by contrasting Bitcoin’s original purpose as “electronic cash” with its current status. He noted that while Bitcoin has made some progress as a payment method, it hasn’t overtaken traditional banking and fiat currency, even in places like El Salvador where it’s legal tender. Instead, Bitcoin’s rise in value, from zero in 2009 to around $46,000, is attributed more to its perception as a “store of value” rather than widespread adoption as a payment mechanism.

Store of Value and Investment Perspective: Levine emphasized that people buy Bitcoin not necessarily to use as digital cash but because they believe others will buy it at a higher price. This speculative nature aligns with why people invest in assets like stocks or bonds. However, he pointed out that unlike these traditional assets, which have cash flows or industrial uses, Bitcoin’s value is almost entirely self-referential and based on market consensus.

Bitcoin as a Social Technology: Levine highlighted Bitcoin’s success as a “social technology,” creating a valuable asset purely based on collective agreement, without underlying commodities or cash flows. He compared this to traditional currencies like the US dollar, which are backed by governments and economies.

SEC’s Approval of Bitcoin ETFs: Levine discussed the SEC’s recent approval of eleven spot Bitcoin ETFs, a decision that followed over a decade of resistance. Levine described this as a “landmark event” for the digital asset sector, broadening Bitcoin’s access to Wall Street and beyond. He noted that this approval came after BlackRock Inc.’s application and a court ruling against the SEC’s previous denial.

Bitcoin ETFs’ Functionality: Levine pointed out that spot Bitcoin ETFs, while less useful as a payment mechanism, are more effective as a store of value. These ETFs allow investors to hold Bitcoin in traditional brokerage accounts, isolating its store-of-value component without engaging in the alternative financial system. The anticipation of these ETFs led to a surge in Bitcoin’s price, as they were expected to attract more investors to hold Bitcoin as a store of value.

Market Reaction to ETF Approvals: Levine observed the market’s reaction to both the fake and real approval of spot Bitcoin ETFs by the SEC. He noted the price of Bitcoin experienced a modest jump and then a fall following the fake approval tweet. Interestingly, a similar pattern occurred when the ETFs were genuinely approved, with Bitcoin’s price surging past $49,000 before falling back.

SEC’s Stance on Bitcoin and ETFs: The column highlighted the SEC’s cautious approach towards Bitcoin and the new ETFs. SEC Chair Gary Gensler’s statement clarified that the approval of Bitcoin ETFs does not equate to an endorsement of Bitcoin, labeling it as a speculative and volatile asset. Commissioner Caroline Crenshaw expressed concerns about market manipulation in Bitcoin trading, citing instances of wash trading and inflated trading volumes.

Future of Bitcoin ETFs and Crypto Lending: Levine speculated on the future of spot Bitcoin ETFs, questioning whether they will remain as “physical” ETFs holding inert Bitcoins or evolve into something akin to money-market ETFs, lending out Bitcoins to earn interest. He also touched on the SEC’s view of Bitcoin lending as a security subject to regulation.

Comparison with Traditional Financial Products: The columnist drew parallels between spot Bitcoin ETFs and traditional financial products, noting the peculiarities of Bitcoin as an asset class. He discussed the potential for Bitcoin ETFs to lend out their assets in the future, a common practice in modern finance to maximize efficiency and returns.

SEC’s Reluctance on In-Kind Creation/Redemption: Levine noted that unlike traditional ETFs, the newly approved spot Bitcoin ETFs use only cash creation and redemptions, possibly due to the SEC’s discomfort with in-kind transactions involving Bitcoin.

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