A Bitcoin ETF Is Closer Than Ever. What It Means for Crypto and Coinbase.

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The debut of a spot

Bitcoin

exchange-traded fund looks almost like a foregone conclusion after a federal court on Tuesday swatted down the Securities and Exchange Commission’s reasoning for denying one such product.

The decision was one of the most highly anticipated rulings of the year, and will have wide implications for the crypto industry. It also matters for traditional firms such as BlackRock (ticker: BLK), Invesco (IVZ), and others that have been champing at the bit to get into digital assets.

The price of Bitcoin rose more than 7% after the news. The stocks of crypto firms like

Coinbase

Global (COIN) and Marathon Digital (MARA) popped by 15% and 29% respectively.

But while a potential Bitcoin ETF is no doubt a positive for the token industry, there is reason to doubt that the decision will be as game changing as the price action suggests. For one thing, the SEC still has an opportunity to fight or at least delay the debut of a Bitcoin ETF if it chooses.

In the ruling in the U.S. Court of Appeals for the D.C. Circuit, a unanimous panel of judges said the SEC acted arbitrarily and capriciously in denying a bid by Grayscale Investments to convert the

Grayscale Bitcoin Trust

(GBTC) into an ETF. The SEC had argued that the Bitcoin market has insufficient controls to detect fraud and manipulation, but the judges said the agency didn’t adequately explain why it rejected spot Bitcoin ETFs while also approving ETFs that hold Bitcoin futures.

With the decision issued, the agency has 45 days to request that its case be heard by a broader panel of appellate judges. The agency could also appeal the case to the Supreme Court, though it would likely need buy-in from the Justice Department if it went that route.

Even if the agency decides not to fight the D.C. Circuit decision, it has other options on the table to delay an ETF launch. The agency could try to reject Grayscale’s ETF conversion for a reason not addressed by the court, a move that would no doubt lead to another lawsuit. In the most extreme scenario, the SEC could even try to roll back its approval of Bitcoin futures funds.

But the most likely decision is for the SEC to let the funds come to market.

The agency and Gensler “are now in a tough spot and one that may be politically untenable. The easiest answer is to approve these ETFs,” said Nate Geraci, president of the ETF Store, an advisory firm.

The SEC on Tuesday said it was “reviewing the court’s decision to determine next steps.”

Geraci said he expects the spot Bitcoin ETF launches to “shatter” previous ETF launch records, while rendering Bitcoin futures ETFs obsolete. A spot Bitcoin ETF approval would likely bolster token prices and give at least some boost to revenue for BlackRock, Fidelity, Invesco, and the myriad other firms that have applied to launch similar products.

However, the earnings might be slight. As of 4 p.m. on Tuesday in New York, the price of Bitcoin had risen about 7.3% to $27,900 in the past 24 hours, giving it a total market value of about $543 billion. Even if a single Bitcoin fund were to capture 5% of the total market at a 0.5% annual fee, that would only generate about $136 million in annual revenue.

The real bonanza would be if an ETF approval launches token investments into the mainstream by giving financial advisors and other institutional investors the ability to own the token in a familiar wrapper that trades on exchanges. Crypto trading firm NYDIG recently estimated that a Bitcoin ETF could unleash $30 billion in new demand for Bitcoin.

But even that argument has its weaknesses. ProShares Bitcoin Strategy (BITO), the most successful Bitcoin futures ETF, had a torrid debut but has only accumulated about $940 million in assets.

The decision has different implications for Coinbase Global (COIN), which closed on Tuesday up nearly 15% at $84.70. The SEC in June separately sued Coinbase, alleging that it operates an unregistered securities exchange—a charge that the company denies.

That case centers on whether or not some of the products and tokens the platform offers are securities that should be registered with the SEC. Still, the GBTC decision does provide some support, Coinbase Chief Legal Officer Paul Grewal said in an interview.

“It certainly suggests that the SEC needs to rethink how it has approached enforcement as well as its review of applications when it comes to all things digital assets,” Grewal said.

The tenor of the opinion “is that once again the SEC has acted contrary to law in an arbitrary manner and without any real regard for applying or even developing common rules, common standards that all parties are held to,” Grewal said. “We think that theme is very consistent with the theme in our case.”

The Coinbase case could take years to play out, but for now, the momentum has clearly shifted in crypto’s favor.

Write to Joe Light at joe.light@barrons.com