Anyone can trade bitcoin (BTC): that’s the point of an open protocol like Bitcoin. So why is so much time and energy put towards getting alternative ways of accessing bitcoins? In particular, why is there so much hype around spot market bitcoin ETFs, or exchange-traded funds, especially when similar products (like “futures-based” ETFs and exchange-traded products, or ETPs) already exist?

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And yet, today, at the mere rumor that asset manager BlackRock’s bitcoin ETF was finally approved (it wasn’t), markets bounced up by $2,000 (and then down). Clearly there’s something like pent up demand for these traditional financial instruments, or at least money on the sidelines waiting to trade the news around ETFs.

Cointelegraph, which tweeted out the story then picked up by closely-watched news aggregator accounts, got it wrong. BlackRock’s iShares application is still under review by the U.S. Securities and Exchange Commission (SEC), the company clarified. Market watchers were already primed to look for ETF-related stories, given the confirmed news a competitor ETF application from Grayscale is back in play, after the SEC missed its chance to respond to an appeals court.

In the case of BlackRock’s ETF application, much of the excitement is tied to the fact that it's the largest asset manager in the world that did the filing and is interested to move deeper into crypto markets. BlackRock’s application alone was validation for the whole crypto industry, with comments made later by BlackRock CEO Larry Fink — who argued that a monetary asset untethered to any national government will become increasingly attractive — was sugar on top.

The desire for a spot market bitcoin ETF stems from the idea that many people, firms and funds who are interested in taking on exposure to bitcoin are not yet able to. A traditional financial wrapper for the novel bitcoin asset class would, therefore, act as a bridge to that sidelined capital. Some estimate billions of dollars could flow into a spot market bitcoin ETF. This is the theory, at least.

Although, arguably, the intense interest that has built up around bitcoin ETFs may have as much to do with the fact that the investing public has so far been denied. The SEC has rejected every spot-based BTC ETF application it has seen, starting with the Winklevoss twins' failed bid in 2013. The SEC’s argument has usually centered around the idea of market manipulation, in part because bitcoin’s relative illiquidity (liquidity is split up over the many exchanges that list BTC) and the lack of satisfactory market “surveillance” systems.

At least this has been the case up until last Saturday at midnight, when the SEC failed to respond to a court order to back-up its rejection of Grayscale’s bitcoin ETF application. Grayscale, a CoinDesk sister company, manages one of the first and still the largest closed-end bitcoin trusts, but wants to convert it into an open-ended ETF (the major difference being that people can more easily trade the shares of either bitcoin investment vehicle, and also more easily redeem their assets).

The SEC initially rejected Grayscale’s filing over the same surveillance and market manipulation concerns it has had for all spot BTC ETF applications. However, when Grayscale appealed the decision to a higher judicial authority, a panel of judges found the SEC’s reasoning “arbitrary” and “capricious” — the SEC failed to show how spot BTC ETFs are any more dangerous than futures-based ETFs being traded today in the U.S. without issue.

This all means that Grayscale’s application is back in play, and the SEC doesn’t really have grounds to reject it again. Hurrah! Bitcoin traded up 4.5% early Monday morning, whhttps://www.coindesk.com/markets/2023/10/16/grayscale-gbtc-discount-narrows-to-near-2-year-low-as-sec-misses-etf-appeal-window/ile the discount on the Grayscale Bitcoin Trust (GBTC) narrowed to its lowest level since December 2021. Bloomberg analysts said there is a 90% chance a bitcoin ETF will debut by Jan. 10.

The question now is whether Grayscale will be first through the ETF door. As mentioned, a number of traditional finance firms have edged in on the territory, including BlackRock, Fidelity and VanEck. Given the SEC’s hostility to crypto firms, it’s possible one of these offerings will be first to list — some even suspect SEC Chair Gary Gensler secretly urged BlackRock to file an application, given the numerous market surveillance tools it would apply.

Though in another sense, it doesn’t quite matter who is first to market, but only whether the thesis that spot bitcoin ETFs will lead to a cascade of institutional interest and investment in BTC. Bitcoiners have been widely off the mark in the past when “not giving financial advice,” including on the claim that BTC is a hedge against inflation, destined to hit $100,000 or would be widely adopted as a global reserve currency.

The demand for ETF news is clear enough — as Blockworks reported, the Binance BTC/USDT market, which accounts for 8% of bitcoin daily trading volume, saw a 7% candle roughly 30 minutes after an unsourced, unproven tweet about BlackRock’s approval was posted. Mind you, this is in an industry that was already embarrassed by fake news that in 2022 WalMart was going to accept litecoin (LTC), a project that hasn’t been relevant since the year it was created.

Crypto markets are in need of fresh capital (especially after over $100 million in options were liquidated during the BlackRock spoof), and many are still hanging their hats on the idea that mass adoption can still come. The idea that ETFs will drive institutional adoption is plausible, but likely overhyped — like every other major crypto event known in advance from bitcoin halvings every four years to Ethereum’s “Merge,” people have traded the news even though in an efficient market those happenings would be “priced in.”

I think, to a large degree, interest in bitcoin ETFs stems from this never-ending need to find something to be hopeful about. Further, the fact that markets have been deprived of ETFs only makes them more tempting — similar to the industry’s calls for “regulatory clarity,” which will simultaneously restrain some activity while supposedly creating the foundation for future adoption, if any regulatory advancements are satisfying at all.

This may sound like a Freudian’s psycho-sexual interpretation of behavioral economics, but economies are made of people and people have drives and desires, including coveting what you don’t yet have. Crypto traders trade crypto, they are gluttons for punishment — what more evidence do you need?

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Daniel Kuhn

Daniel Kuhn was a deputy managing editor for Consensus Magazine, where he helped produce monthly editorial packages and the opinion section. He also wrote a daily news rundown and a twice-weekly column for The Node newsletter. He first appeared in print in Financial Planning, a trade publication magazine. Before journalism, he studied philosophy as an undergrad, English literature in graduate school and business and economic reporting at an NYU professional program. You can connect with him on Twitter and Telegram @danielgkuhn or find him on Urbit as ~dorrys-lonreb.