In the fourth quarter, two main subjects took centre stage: the ongoing process surrounding the spot Bitcoin ETF and the long-awaited resolution of the slow-moving conflict between Binance and the US Department of Justice. We closed off our Q3 market update with the words: “It's fair to say that we've entered the apathy phase of the bear market, characterised by low volatility, negative sentiment, limited inflow of new capital, and a virtually non-existent appetite for risk-taking”.Just two weeks into October, the situation dramatically changed in a manner that was very characteristic of the cryptocurrency world. A major media player in the sector, Cointelegraph, erroneously tweeted on the 16th of October that the Blackrock Bitcoin ETF had been approved, having mistakingly sourced information from a fake news outlet. As a leading authority known for delivering exclusive cryptocurrency news, Cointelegraph's announcement caused an immediate surge in Bitcoin's value, further intensified by algorithmic traders responding to the news. The price of Bitcoin soared from $27,200 to $30,000 in just a few minutes. Meanwhile, other top-tier news organisations closely following the Bitcoin ETF story, such as Bloomberg, refrained from verifying this announcement. Approximately 15 minutes following Cointelegraph's tweet, it was revealed that the information was, in fact, false.
Image 1. The fake-news tweet from Cointelegraph that sent Bitcoin price soaring.
Contrary to widespread expectations that Bitcoin's price would revert to its pre-tweet level of $27k, following the surge to $30k, the reality unfolded differently. The erroneous tweet from Cointelegraph triggered a ripple effect, awakening sidelined investors to the potential impact of a real approval in the near future on Bitcoin's value. This incident marked a departure from several months of gradual decline and low volatility in the crypto market. It sparked a renewed appetite for risk among investors, with Bitcoin leading this shift. By the end of October, Bitcoin had achieved a significant 29% increase in its value.
The growing belief in the imminent SEC approval of the spot Bitcoin ETF in the upcoming months gained momentum due to the continuous updates and amendments made to the filings by all nine ETF applicants, including prominent names like Blackrock, Fidelity, and Bitwise. This contrasted sharply with past Bitcoin ETF proposals, which the SEC had rejected outright, without engaging in further discussions. The situation took a notable turn in late October when the SEC decided not to contest a court decision that allowed Grayscale to convert its Grayscale Bitcoin Trust (GBTC) into a spot ETF. This decision served as a significant green light, further fueling optimism about the future of spot Bitcoin ETFs
Despite favourable developments in the regulatory landscape and the ETF sector, there remained a significant obstacle. In our previous quarterly report, we highlighted the ongoing risk posed by Binance, the largest cryptocurrency exchange by volume, potentially facing action from the US Department of Justice. Following the collapse of FTX in November 2022, there was widespread anxiety in parts of the crypto market about a possible similar catastrophe, with concerns that Binance might not have sufficient funds to cover customer deposits. Additionally, the persistent uncertainty surrounding Binance was a major barrier to the approval of an ETF. The SEC has consistently maintained that as long as the bulk of Bitcoin's spot trading is conducted on offshore exchanges beyond its regulatory reach, it would be hesitant to approve a spot Bitcoin product.
The situation reached a climax in November when the US Department of Justice scheduled a press conference to discuss a 'historic crypto enforcement' action. During this conference, it was revealed that Binance had reached a settlement with several US regulatory bodies, including the Department of Justice, FinCEN, CFTC, and OFAC (significantly, not with the SEC), agreeing to a $4.3 billion penalty – the largest ever for a cryptocurrency company. Binance acknowledged certain lapses in its Know Your Customer (KYC) and Anti-Money Laundering (AML) practices. However, the extensive multi-year investigation did not uncover any mismanagement of customer funds or inadequacy in securing customer deposits. As a condition of the settlement, Binance's CEO Changpeng Zao (CZ) agreed to resign and potentially serve up to 18 months in prison. Additionally, the US government would oversee Binance’s compliance operations for the next five years.
Image 2. Despite market-wide fears, withdrawals from Binance remained limited to ~$2 billion.
Upon the announcement of this news, the market reacted negatively, with many investors fearing a scenario similar to FTX, where a surge in withdrawal requests from Binance could occur. However, as time passed, it became evident that Binance was efficiently handling withdrawals, leading to a recognition that this settlement might be one of the best possible resolutions to the DOJ's investigation into Binance. The settlement not only alleviated concerns about a potential FTX-style collapse at Binance but also brought a new realisation to the market: with Binance now under the monitoring of the US government, it could represent the final obstacle being removed before the approval of the Bitcoin ETF. This is because the largest Bitcoin spot market was now under US government oversight.
The settlement with Binance, coupled with the continuous modifications to ETF filings, ignited a surge in cryptocurrency buying. This enthusiasm extended beyond Bitcoin, trickling down to altcoins as well, with the latter half of Q4 witnessing a resurgence in the appetite for riskier crypto assets. In December, alongside the ongoing updates to the S-1 forms of ETF applicants, the SEC engaged in discussions with various major exchanges, including NYSE, Nasdaq, and CBOE, regarding the potential listing of a future Bitcoin ETF. These developments further fueled the belief that an ETF approval could be imminent.
Although the approval did not come in Q4 2023, the final word from the SEC came on the 10th of January. After more than 10 years of attempts to get a Bitcoin spot ETF approved, history was written on the 10th of January 2024 when the SEC gave the green light for all the 9 ETF applications simultaneously. Our next quarterly update will delve into the potential market implications of these ETF dynamics. However, the significance of these approvals cannot be overstated. The world's leading asset managers are now fully incentivized to promote the Bitcoin ETF to a broad audience that previously had limited venues to invest in this asset class. The initial weeks following the approval have been characterised predominantly by market repositioning. We're observing widespread profit-taking from funds and traders who speculated on the ETF's approval, along with a shift from direct Bitcoin holdings to one of the newly approved ETFs. There's also a notable outflow from Grayscale’s GBTC, which lacked a redemption option for years. It's anticipated that it will take several weeks for this overhang to be cleared.
Looking ahead to 2024, our outlook for the industry remains highly optimistic. The introduction of Bitcoin ETFs is a game changer, poised to unlock a substantial influx of previously untapped capital. Additionally, April 2024 brings another significant event: The Bitcoin halving. This event, which occurs every four years, reduces Bitcoin's inflation rate by 50%. Historically, it has acted as a positive catalyst for the industry. Furthermore, with inflation in the US and Europe showing signs of easing and the prospect of lower interest rates on the horizon, the macroeconomic environment appears increasingly favourable for risk assets. Overall, we are enthusiastic about the industry's advancements and believe that the recent developments will not only attract more talent but also open up new opportunities.