In the next week, a Bitcoin (BTC) spot ETF will either be denied, postponed, or approved. A black swan if negative, a possible surge in price if positive. My purpose here is to communicate a suite of options for how to prepare for these eventualities.
We’ll go from negative to positive cases to give this piece an uplifting feel.
IF Denied
While the consensus view holds that the spot ETF will be approved, even the Bloomberg specialists covering this topic have retained a 5% - 10% chance of denial (follow them here, and here).
The reason is that the Securities and Exchange Commission (SEC) possesses a multitude of methods to either postpone or reject ETF proposals, which introduces some residual risk.
Should the SEC deny the ETFs, then the portrayal of the SEC in the media is likely to be unfavorable. But that will not alter the point that the SEC alone can decide to approve and that its decisions are definitive. Until we observe official confirmation, which is expected between January 8th and 11th, the possibility of a rejection remains.
In the event of a rejection, I would expect a significant price decline for Bitcoin and the market in general. The market is highly leveraged and liquidations would force quite a bit of selling. Below is an image showing what happened just recently when a rumor of denial occurred in the market.
Although a BTC denial would not be a “black swan” event strictly speaking, since it is foreseeable, it would mark a black day like the LUNA implosion or the FTX collapse.
It’s important to remember, however, that in both cases the market recovered eventually. It would recover again from this as the BTC halving is scheduled for April anyway.
If you want to protect yourself from this sort of eventuality, you could try looking for BTC puts 25%+ out of the money. If you don’t know how to use options, then, you could try to rotate a percent of your portfolio into cash (and maybe off exchanges).
If Postponed
The SEC is unlikely to postpone since it does not want to play the role of “king maker.” If it accepts some ETFs and denies others, while they are all materially the same offering, then it fails to act impartially in the market. Those approved first will gain a “first mover” advantage and it is possible the SEC could be sued for this inequitable treatment.
Still, there might be some legal grounds for this move. The January 10th date is simply the final deadline for the ARK / 21 Shares ETF proposal. They would be required to refile, but the other applicants could make whatever minor adjustments would be needed.
I doubt, in the short term, that the market would act much differently from an outright denial. Again I would expect a material price decline for BTC into the 30% range. Again, the purchase of 25%+ OTM puts or a cash position would be some of the more obvious ways to protect against this eventuality.
I do not like the idea of perpetuals--which leverage your position. The reason is that in the event of an approval, the collateral required for a perpetual short position might prove insufficient and you’d be liquidated. Which brings us to …
If Approved
The base case remains approval. All the effort by the SEC to follow up with a multitude of legal teams on many resubmissions would have been wasted resources if approval were not the outcome. We are to hear news (likely) on the approval by January 11.
It seems likely to me that BTC will reach a new (relative) high in the $47k - $50k range. Smaller coins in the BTC ecosystem would likely surge, with some, like ORDI and STX poised to make 30%+ gains in the very near term. I do not think that market liquidations of short positions would drive these results so much as FOMO.
An interesting opportunity to arbitrage large institutional investors emerges. Because there will be some 2 - 3 weeks between S-1 approval and operationalization, investors with access to blockchain coins will be able to buy the coins in anticipation of the operationalization of the ETF funds.
Rumors have it that BlackRock has planned to introduce $2b in investment capital its first week. Using the GLD ETF as a proxy, and making adjustments for other market factors, The Block tweeted that their baseline scenario was $2.5b in the first quarter with a $40b market cap in two years.
In short, ETFs are likely to serve as a tailwind to the industry long term. Perhaps the BlackRock rumors will prove accurate, but if you have a good investment without that, then they form the proverbial “icing” on the cake.
Note: we’ll be keeping up on these matters 👉in our Discord community. 👈
Investment Ideas
To bring these threads together, here are some investment ideas for you to DYOR.
First up, hedging seems smart as there is residual risk. Either holding back some cash or buying puts would work for that. Plan to lose your purchase price on the puts (if things go well) or miss out on some upside if you’re just holding cash. Smart investors don’t aim to make maximum returns.
I don’t like the idea of using perpetuals to hedge in this scenario, since the collateral you need to post for that could get liquidated.
Second, while BTC will earn, you could buy smaller coins “down chain” that are likely to rise more than BTC on positive news. If your position is small with them, then you won’t lose much in a bad outcome. Yet, because they’ll earn more than BTC, they’ll make up for your lost potential by holding cash (or buying puts) should things turn out well.
That way, you get the best of both worlds.
Coins to consider are: STX and MUBI (which build on chain ramps to BTC), ORDI as the top BRC-20 coin ... and then there's esoteric stuff, like ATOM as the top Atomical, and I'm sure there will be various meme coins related to this event.
Just be sure to have clear exit prices / stop-losses in case things go nuts (in either direction). This could shape up to be quite a lucrative week.
As a final note, while I expect a positive decision to improve the price of the entire market, ETH, SOL, AVAX and others included, the more immediate impact will be on the BTC ecosystem.
Happy Trading!!
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