Summary In May, I speculated that larger investors have been waiting for regulatory clarity to invest in Bitcoin and other digital assets. With the recent approval of spot Ethereum ETFs, that clarity is starting to take form. Former President Trump has already taken a pro-crypto stance publicly and will speak at the Bitcoin 2024 conference in Nashville. When I last covered the ProShares Bitcoin Strategy ETF ( BITO ) in May, I rated the fund a "hold." Among a few other points, I highlighted the fact that transaction volume through platforms like Coinbase ( COIN ) has been primarily driven by institutional investors buying Bitcoin ( BTC-USD ) rather than retail investors in recent quarters. In my closing summary, I mentioned the regulatory environment as something to pay attention to as well: In my opinion, Bitcoin bulls can be patient and pick their spots to add to core positions. Crypto is quickly becoming a political issue in the United States, and I suspect asset managers may want more clarity on what the regulatory environment is going to look like in 2025 before adding too much more exposure to Bitcoin or any of the other "blue chip" digital assets in the market. Just two months later, we are starting to get some of that clarity, but not in the way that I had assumed back in May. Political Pivot Rather than certainty regarding who will be sworn in next year, we are instead seeing a softening from the current administration's regulatory apparatus, as evidenced by recent pivots from the United States Securities & Exchange Commission: In mid-July, the agency opted not to pursue an enforcement action against Paxos Global for issuing a Binance-branded stablecoin ( BUSD-USD ) about a year after serving the company a Wells Notice. More recently, the SEC approved spot Ethereum ( ETH-USD ) ETFs just weeks after approval seemed to be off the table for the foreseeable future. According to reporting from The Block , the recent pivot from the agency to the spot ETH products is attributable to a shift in political strategy. It is no mystery to those paying attention to 'Crypto Twitter' that there has been a noticeable movement toward former President and Republican Presidential Nominee Donald Trump this election cycle from many crypto supporters. Mark Cuban recently theorized that wealthy tech founders and investors are growing increasingly supportive of Trump due to possible deregulation of the industry and more pro-Bitcoin/crypto policy stances should Trump win in November. Beyond that, Trump's campaign has positioned him as the pro-crypto candidate, and he is reportedly planning to speak at the Bitcoin 2024 conference in Nashville. As of article submission, there is now also a possibility that presumptive Democratic Presidential Nominee Kamala Harris may speak at the Bitcoin conference in Nashville as well. While I'm not going to speculate on Harris' crypto leanings one way or the other, I am of the view that the actions from the SEC this month are indicative of an administration that is aware it needs to appeal to younger voters. And pivoting from a combative stance on Bitcoin and cryptocurrencies to a more friendly one could potentially win back voters who have grown disgruntled with the SEC's track record of regulation by enforcement under Chair Gary Gensler. Rates and Deficits In my BITO article from May, I also made note of the difference between the current Bitcoin cycle and previous cycles. The largest of which is arguably the 5% risk-free rate on T-bills. That is still the case today, though the market believes the Federal Reserve will begin cutting rates in September. September Rate Probabilities (CME) The market is currently pricing in a 93.6% chance the Fed provides a 25 bps rate cut in September. While this is by no means a liquidity spigot that would rival ZIRP, there is a case to be made for BTC as a system-hedge asset similar to Gold or Silver. This may be an unpopular viewpoint with some readers, but my opinion on the fiscal side of things is the outcome of the election will probably not matter all that much if the last two decades are any guide: Data by YCharts We've seen both political parties spend and operate at a deficit while the federal debt outstanding quickly approaches $35 trillion, interest payments on that debt are going parabolic due to higher rates, and all with a debt to GDP ratio that has already eclipsed WW2 levels. Debt to GDP (Longtermtrends.net) In a world that lacks certainty, the US government continuing the spending spree at the expense of the currency's purchasing power seems about as safe a wager as any. Given this, it's perhaps interesting that the US Government still holds more than 213k BTC valued at $14.5 billion: US Gov Seized BTC (Arkham Intelligence) These are assets that were acquired through various dark web seizures over the years. Unlike Germany's recent purge of nearly 50k BTC seemingly without consideration for price, the United States has taken a far more nuanced approach to how it has sold seized BTC funds. To this point, the total stack has only been reduced by about 22k BTC in the last two years. None of this means the government will keep holding these assets. From where I sit, a coin dump from the federal government is clearly still a risk. But in an election cycle where both major party candidates may have a presence at Bitcoin 2024, I think aggressive selling of this BTC is much less likely than it may have been before politicians started openly courting the pro-crypto voting block. There Are Still Concerns Bitcoin itself has evolved through the years. Once an asset intended to be a medium of exchange, BTC has become more of a hoarded asset that benefits from a capped supply and diminishing emissions. Monthly DAUs vs Fees (Token Terminal) One could certainly take issue with the collapsing user base due in part to spiking transaction fees, pricing out a large cohort of on-chain wallet holders from regular usage. But if an investor takes the view that BTC is better served as a hedge against currency debasement, then BTC probably has a place in a balanced portfolio, even if it's through a spot ETF or just wagering on price via a futures ETF. Data by YCharts From the standpoint of the ProShares Bitcoin Strategy ETF, there are certainly cheaper ways to get exposure to Bitcoin as an investable idea. The 0.95% expense ratio is higher than every spot ETF with the exception of the Grayscale Bitcoin Trust ( GBTC ) due to the constant rollover of futures contracts. Furthermore, the fact that BITO pays out a monthly dividend looks attractive on the surface. But the total return of the fund in the 6 months since spot ETFs were approved has lagged those products by about 700 basis points. That's not insignificant and implies that BITO will underperform the spot funds over time. However, as a tradeable asset with over $2 billion in AUM and solid daily liquidity, BITO will work well for shorter to medium term speculation. Final Thoughts I'm calling BITO a buy today purely because it's a Bitcoin price proxy and I think Bitcoin's price is poised to go higher. We are at a very interesting crossroads in America, and 2024 is going to be remembered for a variety of reasons. What happened in Butler County, Pennsylvania, could have been much worse than it was. The sitting president is no longer seeking a second term. Debt is high, rates may have peaked, and the surest thing after death and taxes is arguably deficit spending in the US. This is all happening while at least one major party presidential candidate is openly courting the Bitcoin vote, and it's possible we'll see the other candidate do the same. Even the SEC is playing nicer than it was earlier this summer. I like buying Bitcoin directly or through the ETFs more than via futures ETFs, but if I'm right about BTC going up between now and the end of the year, BITO should do just fine as well.
