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Welcome to the On the Margin Newsletter, brought to you by Ben Strack and Casey Wagner. Here’s what you’ll find in today’s edition:
- Ben breaks down the significance of the SEC’s latest bitcoin ETF options approval.
- What to expect when all five SEC commissioners head to Capitol Hill tomorrow.
- There may not be a splashy FOMC meeting this week. But economic data will be flowing in regardless.
A regulated BTC leverage tool for the financial world
The January launch of US ETFs that directly held bitcoin was a big deal. Now, many expect the upcoming options on those funds to also be a game-changer.
If you missed it on Friday, the SEC gave “accelerated” approval of options on BlackRock’s IBIT — with segment observers expecting the regulator to give similar blessings soon.
SEC approval was not exactly quick, coming eight-plus months after the ETF launched. Other agencies (the CFTC and OCC) still have to give the go-ahead, too, so the exact timeline on when these options will list remains unknown.
A quick reminder: An option is a contract representing the right to buy or sell a financial product at a certain price for a specific period of time.
Grayscale Investments was vocal about the need for swift approval of options on commodity-based ETPs. The firm, which operates GBTC, had essentially argued that if options on bitcoin futures exist, so too should those on spot products.
Options would facilitate price discovery in the ETP shares, Grayscale noted. The SEC acknowledged in its Friday filing that several proposal proponents noted such options would “help investors to hedge their positions and manage crypto-related risk.”
In the words of Bloomberg Intelligence’s Eric Balchunas, the approval “will attract more liquidity, which will in turn attract more big fish.”
To that point, Compass Point Research and Trading analyst Chase White told Blockworks earlier this year that bitcoin ETFs could appeal to institutional investors that lack the mandate to transact in derivatives directly tied to BTC.
Such institutions could look to hedge their downside risk in the funds — whether they’re long or short the ETFs, he noted.
As Bitwise’s Jeffrey Park said Friday in a note posted to X, these options mark “the first time the financial world will see regulated leverage on a perpetual commodity that is truly supply-constrained.”
Then there’s the new types of products these options could lead to. Once they’re officially introduced, investors can expect a “flurry” of ETF filings, The ETF Store president Nate Geraci said in an X post.
These include bitcoin defined-outcome ETFs; premium income or covered call funds; bitcoin tail risk ETFs; and convexity funds, he noted.
Roundhill Investments already offers a covered call bitcoin ETF via exposure to options on 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. This would theoretically give comfort to investors looking for exposure to a volatile asset given they can assess the product’s specific risk/return characteristics.
We won’t get too technical here about all the other kinds of new ways investors might use options (and how fund managers can package them in products).
But the point is: Though the news of incoming bitcoin ETF options might not be as splashy as the January fund approvals, crypto investing appears poised to take a major step forward because of it.
— Ben Strack
$397 million
The net inflows tallied last week (Sept. 16-20) by the US bitcoin funds for which options are soon expected to be offered. The category inflow total since the January launches now stands at $17.7 billion.
This sum nearly matched the $404 million the funds brought in the week prior following an eight-day run of net outflows, Farside Investors data shows.
A Monday CoinShares report noted the Federal Reserve’s “more dovish stance than anticipated” — leading to a 50-basis point rate cut — as a likely driver.
SEC Commissioners head back to Capitol Hill
Tomorrow all five SEC commissioners will appear before the House Financial Services Committee for the first time 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.
I expect lawmakers will specifically ask Gensler and other commissioners to define the term “digital asset security,” which committee member Ritchie Torres, D-N.Y., said last week appears to have been invented “out of thin air.”
The hearing comes as the end of the US fiscal year approaches. Lawmakers have until Sept. 30 to agree on a funding plan and avert a government shutdown. Given the looming deadline, and at least some lawmakers’ apparent frustration with the SEC’s use of time and money, I’d expect the budget to be a major topic of discussion during Tuesday’s hearing.
Gensler in March requested roughly $2.6 billion to fund SEC operations for fiscal year 2025. The agency received $2.1 billion in 2024, less than Gensler’s requested $2.44 billion.
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. Even so, Gensler added, the agency is still about 300 positions below the level authorized by Congress.
Good luck to all the commissioners tomorrow. We certainly do not envy you.
— Casey Wagner
On Our Radar
Happy Monday! The Fed rate decision may be behind us, but we have a busy couple of weeks ahead with incoming data on labor conditions and inflation. In a rate-cutting cycle, good data is generally good, while bad data is typically bad.
Here’s what to keep an eye out for over the next few days:
- Thursday’s initial jobless claims will once again provide a look into how the labor market is faring. First-time unemployment filings came in at 219,000 for the week ended Sept. 14 — compared to the expected figure of 230,000. Analysts are calling for Thursday’s number to come in at 223,000.
- Also on Thursday, we will get the second and final GDP report for the second quarter of 2024. Analysts are expecting a downward revision of 2.9% from 3%. Markets are going to want to see signs of growth, though, so there may be some disappointment.
- Finally, Friday will bring us the most important datapoint of the week: the PCE index. The Fed’s preferred inflation gauge is expected to show a 2.2% year-over-year increase and a 0.1% bump from July. Core PCE, which excludes volatile food and energy prices, is expected to come in 0.2% higher from than the prior month and increase 2.7% annually.
— Casey Wagner
Bulletin Board
- Vice President Kamala Harris made her first-ever public comment on the digital asset industry Sunday night at a fundraiser in New York. “We will encourage innovative technologies like AI and digital assets while protecting consumers and investors,” she told the crowd, according to Bloomberg’s Jennifer Epstein. An adviser on Harris’ team reportedly said something similar 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. Goods and services prices are still increasing at the fastest pace since March, and expectations for output during the rest of 2024 are quickly decreasing.
- Casey heads back to court tomorrow for Caroline Ellison’s sentencing. Ellison, who was FTX founder Sam Bankman-Fried’s right-hand woman (and occasional romantic partner), faces 110 years. Given her “extensive” cooperation though, prosecutors have requested leniency. Keep an eye on Blockworks.co for the latest coverage.