Monochrome Digest | September 2023 - October 2023

Franklin Templeton Files For a Spot Bitcoin ETF Amidst SEC Delays

With over US$1.5T in assets under management, Franklin Templeton Investments has signalled its intent to step into the digital asset space by filing its spot bitcoin ETF application. 

As one of the world’s largest traditional asset managers, Franklin Templeton is the latest industry giant to apply for a spot bitcoin ETF. Similar to other applications, there is growing interest for a spot bitcoin ETF in public markets to allow everyday investors access to bitcoin through traditional stock exchanges. Franklin Templeton has proposed Coinbase as the crypto custodian for its ETF. It is expected that Franklin Templeton’s application will not be the first application considered by the SEC as it is the first application made by Franklin Templeton. Other applications, including those by Blackrock, WisdomTree and Fidelity are expected to be positioned ahead of Franklin Templeton’s application.

Akin to the entrance of other firms into this space, Franklin Templeton’s application highlights the increasing confidence of financial institutions that the SEC will approve their applications despite delays. But irrespective of the growing pressure on the SEC caused by an ever increasing number of applications for spot bitcoin ETFs, the regulator has delayed its decision on similar applications by BlackRock, Invesco and Bitwise. In addition to delays for the applications by Invesco, Bitwise and Valkyrie outlined in separate September 28 filings, it is expected Fidelity, WisdomTree and VanEck will be subject to further delays also.

These SEC delays have pushed back the deadlines, which were previously set for October 16 – 19. This echoes the SEC delays in August, when the first deadline on a spot bitcoin ETF application was approaching. Consequently, the SEC will now have to make a decision on spot bitcoin ETF applications by Q1 2024 at the latest for seven of the nine firms.

Crypto Lender BlockFi Bankruptcy Plan is Approved While Coinbase Launch Crypto Lending Service

BlockFi has been subjected to pressure for months following the bankruptcy of the crypto lender, where it owed up to US$10bn to over 100,000 creditors. After FTX collapsed late last year, BlockFi was amongst many crypto companies which had frozen its customers’ assets and later filed for bankruptcy. Following this, over 90% creditors have approved BlockFi’s restructuring process after months of deliberation. The proposed bankruptcy plan will allow BlockFi to recover the assets lost in the FTX collapse and to the failed hedge fund, Three Arrows Capital. Additionally, BlockFi owes US$220m to Three Arrows Capital.

This plan will increase the recoveries for BlockFi creditors and is the third amendment of the liquidation plan since the initial documents filed in November last year. Despite resistance from senior management, BlockFi’s restructuring will lower the costs of administrative fees and expenses that would have reduced net recoveries.

While one crypto lender is finalising liquidation plans, Coinbase launched a crypto lending platform for U.S. institutional investors. As part of its existing offering under the label Coinbase Prime, the institutional lending platform aims to capitalise on recent massive failures in crypto lending markets. A Coinbase representative announced the function of the platform stating:

“With this service, institutions can choose to lend digital assets to Coinbase under standardised terms in a product that qualifies for a Regulation D exemption.”

According to a company filing with the SEC, by the end of August, five institutional investors had invested over US$57m in this service. In contrast, Coinbase is winding down its Coinbase Borrow retail offering, which allows users to receive up to $1m by posting bitcoin collateral, “in order to focus our resources on the products and services that our customers care about most.”

Shanghai Recognises Bitcoin As a Digital Currency

The Shanghai No.2 Intermediate People’s court in China has recognised bitcoin as virtual property protected by law. The court determined bitcoin to possess unique and non-replicable properties providing value through scarcity. A report on September 25 outlines the idiosyncrasies of Bitcoin among the vast offerings within the digital asset landscape and highlights the fundamental differences. For more information about the uniqueness of Bitcoin, read Monochrome Research’s ‘Bitcoin Idiosyncrasies’ series.

The report discusses attributes inherent to currencies, which bitcoin shares, including in relation to storage, payment systems, circulation and scalability. These properties alongside a decentralised network and its independence from the services of a financial intermediary are also covered in the report.

China has previously imposed blanket bans on cryptocurrencies “to safeguard people's properties and maintain economic, financial and social order”. However, the recognition of bitcoin as virtual property protected under law has positioned bitcoin in contrast to the blanket ban on cryptocurrencies in China.

Clearly the regulatory landscape for digital assets is still being developed in China and in other jurisdictions but regulation is undoubtedly an important step in protecting investors from sharp practices which occur more often in unregulated markets. 

Wallet Addresses With Balance Under 0.1 BTC Reaches An All Time High

The number of bitcoin wallets with a balance under 0.1 BTC has reached an all time high, exceeding 44 million wallets. At the time of writing this includes addresses with a balance less than AU$4,500, which is representative of mostly retail investors. This sustained growth of retail adoption is indicative of the continual adoption of Bitcoin despite uncertain market conditions. Growing regulation is enticing both retail and institutional adoption, which is likely to be further bolstered by regulated products.

The long-term holder net position change metric illustrates the monthly movement of bitcoin from wallets which have held bitcoin for extended periods. Typically, these investors are more likely to sell as prices increase and accumulate bitcoin as prices weaken. This is shown on the graph below, which illustrates positive net position changes in long-term holders since March this year. Therefore, long term bitcoin holders have continued accumulating bitcoin, while retail investors have also increased in adoption.

Another factor to consider is the net position change of bitcoin on exchanges. Since May this year, the net position change of the supply held in exchange wallets has been negative, which means more bitcoin has left exchange wallets than bitcoin that has entered exchange wallets. Previously, this graph illustrates the heavy withdrawal from bitcoin exchanges in 2022 following the collapse of FTX. Perhaps the negative net position change over the last 5 months is reflective of the growing concerns investors have with exchange related risks.

‘Uptober’ is an amalgamation of the words ‘up’ and ‘October’, used to represent the historical positive price movements of bitcoin during the month of October. From a holistic perspective, the weighing pressure of ETF applications and a pre-halving rally have continued ‘Uptober’ into 2023. Over US$70m in short positions were liquidated from sudden price rises, where bitcoin gained 4% in a 15 minute window.  

Historically, the number of wallets with a balance less than 0.1 BTC has rapidly increased after bitcoin halving events. Bitcoin halving events occur when the reward issued to miners is halved, which reduces the rate of production for new coins. When bitcoin was first issued, miners were given 50 BTC per block mined, however each block mined today generates 6.25 BTC. The next bitcoin halving is expected to occur in 2024.

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