Ben Strack and Casey Wagner are pleased to welcome you to the On the Margin Newsletter. You’ll discover the following in this edition:
- Ben explains the importance of SEC’s recent bitcoin ETF approval.
- Expectations when the five SEC commissioners visit Capitol Hill on Tuesday.
- It may not be an exciting FOMC this week. Economic data will continue to flow regardless.
BTC as a regulated leverage tool in the Financial World
It was an important event when US ETFs were launched in January that held Bitcoin directly. The upcoming offerings on these funds are expected to be equally game-changing.
The SEC provided a recap of the Friday event. “accelerated” approval of options on BlackRock’s IBIT — with segment observers expecting the regulator to give similar blessings soon.
The SEC’s approval took eight months and more after the ETF was launched. The CFTC, OCC, and other agencies still need to approve the listing, which is why the timeline for these options remains uncertain.
Reminder: An option contract represents the right of a buyer or seller to buy or sale a financial item at a set price over a period.
Grayscale Investments has been vocal in its call for the approval of commodity-based ETPs options. The firm that operates GBTC essentially argued if bitcoin futures options exist then spot products should too.
Grayscale said that options would help price discovery for ETPs. In its filing on Friday, the SEC noted that many proposal proponents had stated such options could facilitate price discovery in ETP shares. “help investors to hedge their positions and manage crypto-related risk.”
According to Eric Balchunas of Bloomberg Intelligence, approval is a “no-brainer”. “will attract more liquidity, which will in turn attract more big fish.”
Compass Point Research and Trading Analyst Chase White said to Blockworks in an earlier report that institutional investors who lack the mandate to trade derivatives that are directly linked to BTC could be interested by bitcoin ETFs.
Such institutions could look to hedge their downside risk in the funds — whether they’re long or short the ETFs, he noted.
Jeffrey Park, Bitwise’s Jeffrey Park in a Friday note on X said that these options will mark “the first time the financial world will see regulated leverage on a perpetual commodity that is truly supply-constrained.”
These options may also lead to new products. When they’re introduced officially, investors should expect to see a “flurry” The ETF Store’s president Nate Geraci wrote in an X message that he was aware of ETF filings.
He noted that these include Bitcoin defined-outcome funds; Premium Income or Covered Call funds; Bitcoin tail risk funds; and Convexity Funds.
Roundhill Investments offers a bitcoin covered call ETF through exposure to ProShares bitcoin futures ETF BITO. A covered call strategy typically involves holding a financial product and selling call options on it — potentially generating income through options premiums while giving up possible upside.
Defined-outcome (aka “buffer”) ETFs — gaining popularity in recent years — are true to their name, using options in giving a predefined range of outcomes over a set period. Theoretically, this would give investors who are looking for exposure in a volatile asset the comfort they need to assess its specific risk/return features.
It’s not necessary to get into the details of all other new options investors could use (and their packaging by fund managers).
It’s important to note that even though this news might not be as big as January’s fund approvals for bitcoin ETFs, the crypto market is poised to move forward.
— Ben Strack
Three Hundred Seventy-Seven Million dollars
Inflows net by US bitcoin funds from September 16 to 20, for which there are expected to soon be options. Since the launch of bitcoin funds in January, total category flows have reached $17.7billion.
Farside Investors’ data show that this amount is almost the same as the $404 million in funds received the previous week following an eight day run of net withdrawals.
CoinShares reported on Monday that the Federal Reserve has increased its funding. “more dovish stance than anticipated” — leading to a 50-basis point rate cut — as a likely driver.
SEC Commissioners Head Back to Capitol Hill
The five SEC Commissioners will be appearing before the House Financial Services Committee tomorrow for the first since 2019.
The oversight hearing, scheduled to kick off at 10 am ET, is expected to focus on the SEC’s regulatory agenda and rulemaking — particularly when it comes to how the agency has approached digital assets.
Gensler or other commissioners should be specifically asked by legislators to explain the meaning of this term “digital asset security,” What Ritchie Torres (D-N.Y.) said to the committee last week seems to be a fabrication “out of thin air.”
This hearing is taking place as we approach the US’s fiscal year end. To avoid a government shut down, lawmakers have until September 30 to come up with a plan of funding. Due to the approaching deadline and some lawmakers’ frustration over the SEC using time and resources, the budget is likely to dominate Tuesday’s meeting.
Gensler asked for approximately $2.6 billion in funding SEC operations to be funded by the SEC fiscal year of 2025. In 2024 the agency was only able to receive $2.1 billion, a fraction of Gensler’s $2.44 billion request.
The added funds are needed to expand the SEC’s team, Gensler said — an action not meaningfully undertaken since 2023, when the agency hired 400 people and brought its size to just above where it was in 2016. Gensler noted that the SEC still has about 300 positions less than the authorized level by Congress.
All the best to tomorrow’s commissioners. You are not envious of us.
Our Radar
Enjoy your Monday. Happy Monday! The Fed rate decision is behind us but the next two weeks will be busy with data about inflation and labor conditions. Good data are generally positive in a cycle of rate cuts, while poor data tend to be negative.
Keep an eye on these things over the next couple of days:
- Initial jobless claims on Thursday will provide an insight into the state of the labour market. First-time unemployment filings came in at 219,000 for the week ended Sept. 14 — compared to the expected figure of 230,000. Analysts predict that Thursday’s numbers will be 223,000.
- We will also receive the final second-quarter GDP report on Thursday. Analysts predict a decrease of 2.9%, down from the previous 3%. The markets will want to see growth signs, but there could be disappointment.
- The PCE Index will be the last and most significant data point of the week. Fed’s preferred measure of inflation is forecast to increase by 2.2% over the past year and 0.1% from July. The Core PCE (which excludes volatile energy and food prices) is forecast to increase by 2.7% and 0.2% from the previous month.
Bulletin Board
- At a New York fundraiser, Vice President Kamala Harris gave her first public statement on the digital assets industry. “We will encourage innovative technologies like AI and digital assets while protecting consumers and investors,” Jennifer Epstein, a reporter for Bloomberg says that’s what she told them. A member of Harris’ team said similar things last month.
- The September flash S&P Global Services PMI slipped less than expected, coming in at 55.4 vs. the anticipated 55.2, Monday’s report showed. The price of goods and services is still rising at a rapid pace, the highest since March. Expectations for the remainder of 2024 have also been rapidly decreasing.
- Casey returns to court on Monday for the sentencing of Caroline Ellison. Ellison was Sam Bankman Fried’s former right-hand-woman (and sometimes romantic partner) and faces a sentence of 110 years. Given her “extensive” The prosecutors are requesting a leniency. Blockworks.co has the latest information.
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