Chain Reaction: BlackRock and the SEC’s Bitcoin Showdown

Once the pariah of the financial world, Bitcoin’s staying power has won over Wall Street. Asset managers are now racing to bring the world’s first and largest cryptocurrency to millions of Americans. 

BlackRock is leading the charge in a new spate of filings to launch a Bitcoin (BTC) spot price ETF. Invesco, VanEck, and WisdomTree are in hot pursuit with their own proposed funds. 

Yet the Securities and Exchange Commission (SEC) has been on a regulatory tirade against crypto this year, launching investigations into both Coinbase and Binance and threatening to freeze their access to the US banking system. 

Where is Wall Street and the US government’s clash over crypto headed?

Spot ETFs aren’t the only thing that is happening. Newcomer crypto exchange EDX Markets, funded by finance titans like Charles Schwab and Fidelity Digital Assets, opened trading for BTC and ether (ETH) last month. 

The institutional adoption of crypto is not limited to the US either. Across the pond in Europe, Deutsche Bank also revealed it had applied for a digital asset custody license in Germany.

The news has triggered a price pump for Bitcoin which in recent weeks went north of $31,000, reaching new fourteen-month highs. Yet the regulatory chess game is far from over. The industry is sitting tight as it awaits the SEC’s next move. 

This article will review the current regulatory showdown surrounding the scramble for a BTC ETF and consider the long-term investment case for Bitcoin.

Going Mainstream? 

While Wall Street is keen to bring BTC into the financial big league, regulators in Washington aren’t ready to give it an entry pass. On June 30, the SEC claimed BlackRock and Fidelity’s filings were insufficient and lacked clarity. That has not deterred BlackRock, though, and the world’s largest asset manager served up a refreshed filing just days later. 

The direction of travel seems headed toward greater adoption and some financial advisors see the asset’s time has come. 

“Wall Street will prevail, just a matter of when not if,” says Bryan Courchesne, CEO of Digital Asset Investment Management (DAIM). “BlackRock and Fidelity aren’t going to waste their time with repeated filings. They must feel like there is a high likelihood of succeeding in the near future. Maybe they have to amend small details and refile but we think that within 8 months there will be at least one spot BTC ETF available to investors.”

To Hold or Not to Hold?

If it does hit the market, the question for investors interested in crypto then becomes whether to buy up this unique ETF vs. mutual funds that offer exposure to blockchain technologies. And if so, whether to trade on short-term fluctuations in price or go long and hold on for good (or to “hodl” as it is known in the crypto community). 

Despite its relatively short history, investors who have invested in actual Bitcoin typically have a long-term horizon. On-chain analysis from February this year shows the average time that Bitcoin (BTC) stays in an address before being transferred is 3.8 years (or around 45 months), a testament to the confidence in the asset’s long-term prospects. Age is another factor, with crypto investing in is also particularly prevalent among younger investors. 

A 2022 survey from Investopedia shows millennials are the most bullish on crypto, with 38% owning some form of cryptocurrency investment. They were followed by Gen X and Gen Z investors, with 28% and 23% holding crypto assets, respectively. 

Not all crypto assets are made equal, though, and investors should be aware of the fundamentals behind the quirky names and shiny logos of new de-fi projects. Courchesne warns crypto investors to avoid altcoins (a term for non-Bitcoin cryptocurrencies). 

“They are controlled by entities that need naive investors to provide liquidity so that they can dump their coins and make money,” he adds. “If you are going to invest in crypto we highly recommend sticking to BTC and ETH for now,” Courchesne says. “We would weight a portfolio more to Bitcoin since it is still relatively safer than ETH.”

Others extend a cautious word of warning for any form of blockchain-based coin.  

“We advise against clients holding any portion of their portfolio in cryptocurrency,” Caleb Vering, Associate Wealth Advisor at Farnam Financial. “We consider any crypto do be an extremely volatile and highly speculative asset that is not suitable for most investors.”

Bitcoin is broadly used as a hedging asset and, similarly to gold, to act as a digital store of value. Some experts see BTC may have already achieved that state.

“To some extent, Bitcoin is already in the past,” says Chris Chen CFP and Wealth Strategist at Insight Financial Strategists. “It has already achieved a status analogous to gold as a safe haven.”

Yet can it serve as an international reserve currency like the gold standard did before the end of the Bretton Woods system? BlackRock’s Larry Fink may consider it a new “international asset” yet although Bitcoin is unique among cryptocurrencies for its resilience and longevity, its relationship to nationalized fiat currencies is more dubious.

A major disrupter could be the arrival of state-backed stablecoins that function on blockchain technology but remain run by government authorities. Depending on adoption, stablecoins could undermine Bitcoin’s utility and puncture a hole in its market value. 

Chen says the US government is unlikely to cede the power it gains from the greenback to a decentralized currency that is out of its hands.

“It is much more plausible that our government will introduce its own blockchain-based currency that it will control,” he adds. “The Chinese yuan is already partially on blockchain…many other major currencies are exploring blockchain applications. While the future of currency is likely to be associated with blockchain implementations, they are going to be controlled by governments as they are today.”

The arrival of a BTC-based ETF would indeed simplify crypto investing and enable retail investors to easily add exposure to Bitcoin in retirement plans and brokerage accounts as they would gold or oil futures, potentially rocketing adoption levels to new heights. Yet the cryptocurrency’s long-term value will be determined comes down to whether it can fulfill its promise as a form of digital gold in the global financial system. 

Ultimately, the value of crypto will be determined by regulations and the success of the government’s efforts to produce a state-centric clone that would once again kick Bitcoin to the sidelines of the global financial system. In any case, the “digital gold” saga has a long way to go yet. 

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