Welcome to our Friday mailbag edition!
Every week, we receive great questions from your fellow readers. And every Friday, I answer as many as I can.
Before we get to your questions this week, I want to remind you of an urgent briefing I released on Wednesday, The AI Ultimatum. There, I told viewers about my favorite artificial intelligence (AI) company today.
It’s trading for only $0.26. And a major announcement could send this micro-cap company soaring at any point.
See, one of the biggest organizations in the world missed the AI frenzy. And now, it’s scrambling to catch up… to the tune of a just-announced $826 billion spending spree.
If you missed my briefing, The AI Ultimatum, you still have a chance to catch the replay. But since this is a fast-breaking situation, I can’t guarantee it will be online for long. Watch it here for all the details.
And now, let’s get to your questions…
This week, the conversation continues about the all-digital dollar we’ve been warning about… and what’s next for spot Bitcoin exchange-traded funds (ETFs) in the U.S…
I am very concerned about a centralized digital dollar and its ramifications giving the government control. My question is that another publication indicated that Jerome Powell said “a digital currency would certainly need Congressional approval.”
Is this correct or would Executive Order 14067 signed by Biden enable the government to circumvent Congress? I would hope not. Appreciate your expertise.
– Bill M.
Hi, Bill, thanks for that excellent question. I’m as concerned as you are.
A digital dollar – by virtue of being programmable – could easily track your financial information and choices. That’s a real swipe at our financial privacy.
Indeed, testifying before the House Financial Services Committee in March 2023, Chair Powell said a CBDC is “something we would certainly need Congressional approval for.”
Here’s how I look at it: Jerome Powell talks about needing Congressional approval for a digital currency, as a way to gain it. It’s a politically savvy way to get Congress on board.
The reality is that whether the Fed can create a digital currency without Congress or not, it’s much easier to have approval rather than friction.
Let’s dig into that some more.
You see – before a bill can become a law, it must be approved by the U.S. House of Representatives, the U.S. Senate, and then the president.
So it’s telling that Powell doesn’t talk about White House approval for a digital currency.
But the Fed is still moving full steam ahead in that direction. And the Federal Reserve and other central banks are exploring the potential benefits and risks of issuing a central bank digital currency (CBDC).
Right now, the Fed is involved in several projects related to a CBDC.
One is an exploratory research project (Project Hamilton), which is being conducted by the Federal Reserve Bank of Boston and MIT’s Digital Currency Initiative. It is exploring the feasibility of a CBDC for use throughout the U.S. economy.
The other project is at the Innovation Center of the Federal Reserve Bank of New York. That one includes exploring the digital dollar in conjunction with the Bank for International Settlements.
And then, there’s the Technology Lab under the Board of Governors. The Fed says this lab is already involved in several CBDC experiments.
And though Chairman Jerome Powell and other Fed officials say the Fed wouldn’t issue a digital dollar without support from Congress, none have explicitly said what this support would look like.
That leaves the door open for partial support, such as Congress allowing the Fed to use a digital currency for certain transactions, say directly with the big banks.
From there, it could be a slippery slope to banks using digital currency with their customers.
Now, the White House released eight reports on digital assets last year. Those reports followed President Joe Biden’s Executive Order 14067 in March.
Two of them examined the policy objectives of a government-backed digital dollar should it “be deemed in the national interest and pursued.”
Then there’s something called the “No CBDC Act.”
It was sponsored by Sen. Mike Lee (R-UT) and introduced on March 23, 2023.
This act takes a pre-emptive strike to prohibit the Fed or Treasury Department from issuing a CBDC directly to an individual or to a bank for an individual’s account.
It also prohibits the Fed from allowing its member banks to use digital currency to fulfill their reserve requirements for the Fed.
Now, this act hasn’t gone through any voting channels yet. But it does show there’s confusion even in Congress as to what the Fed can or can’t do regarding a digital currency.
The broader point is this: If the Fed or the government decides it wants a digital currency, or the two agree, we are a step closer to getting one.
I’m not a lawyer. But what I’ve learned over the years on Wall Street and through hundreds of conversations with legislators is this.
When it comes to money and Washington, where there’s a will there’s a way.
And that’s why it’s smart to get educated on how to protect your wealth and privacy from a digital dollar.
That’s also why I recently put out a free video presentation, where – for anyone interested – I walk you through some of the steps you can take today. You can watch it right here.
I enjoyed your article on prospective spot Bitcoin ETFs. I’ve owned shares in the Grayscale Bitcoin Trust (GBTC) for a few years now.
I believe Grayscale applied with the SEC to change to a spot ETF previously, but was denied.
If BlackRock gets approval for a spot bitcoin ETF, would that improve Grayscale’s chances of gaining approval as well?
– Rick B.
That’s a fantastic and super timely question, Rick. Thanks for asking! (For readers who missed my previous essays on spot Bitcoin ETFs, catch up here and here.)
As you may recall, Bitcoin ETFs already exist in the U.S. And one of the popular products, if not the most popular, is the Grayscale Bitcoin Trust (GBTC).
But, as you’ve subtly indicated, GBTC is not a spot Bitcoin ETF.
Yes, GBTC is a trust that actually holds Bitcoin. But it trades like a closed-end fund and has no redemption mechanism.
This means that the market price of GBTC can deviate a lot from the actual value of the Bitcoin it holds.
Take 2018, for example. At times, investors were paying as much as a 100% premium to the underlying price of Bitcoin. That’s GBTC’s biggest drawback.
Realizing these limitations, Grayscale filed an application with the Securities and Exchange Commission (SEC) to convert GBTC into a spot Bitcoin ETF in July 2021.
But the SEC rejected Grayscale’s application in June 2022, citing concerns about the lack of market surveillance for Bitcoin.
Remember, the SEC has always been wary of the unregulated crypto space.
We can’t be sure what the SEC’s top brass is thinking, but it seems like the Sec’s wary of market manipulation when it comes to spot Bitcoin ETFs.
That’s probably why it’s been more open to Bitcoin futures ETFs. So, while futures ETFs have gotten the green light, spot ETFs are still stuck at the starting line.
In the eyes of the SEC, Bitcoin futures have a bit of an edge because they’re traded on regulated exchanges like the Chicago Mercantile Exchange (CME).
This makes the agency more at ease since these platforms follow U.S. rules meant to keep investors safe.
Plus, these futures markets have built-in checks to spot any sketchy trading, making them less of a Wild West compared to spot markets.
With that said, let’s return to the SEC’s decision to turn down Grayscale. The move drew a lot of flak from various corners of the cryptocurrency community.
Many critics argued that the SEC was being more cautious than necessary. After all, Grayscale already had a functioning Bitcoin product. Others argued that the SEC was discriminating against Bitcoin.
Unsurprisingly, Grayscale didn’t throw in the towel. It challenged the SEC’s decision, and just this week, on August 29, 2023, a U.S. appeals court overturned it.
The court basically echoed what critics have been saying for a while. First, it called out the SEC for not giving a “rational explanation” as to why it shot down Grayscale’s application.
On top of that, the court found that the SEC had discriminated against spot Bitcoin ETFs by approving Bitcoin futures ETFs.
The ruling was a major victory for Grayscale, which has been a vocal advocate for spot Bitcoin ETFs. The company has argued that spot Bitcoin ETFs would provide investors with a more efficient and secure way to invest in Bitcoin.
The Bitcoin market seemed to agree. BTC prices surged by nearly 8% in response.
As for the possibility of the SEC appealing? Yes, it could potentially challenge the court’s ruling. The SEC has 45 days to file an appeal.
At writing, however, it hasn’t said that it will. If the SEC does not appeal, Grayscale could start trading GBTC as a spot Bitcoin ETF in the near future.
Now, the whole Grayscale situation is a pivotal moment in the cryptocurrency space. It’s on par with BlackRock’s application. That’s a topic I’ve discussed here multiple times, and it could potentially be even more impactful.
For those who don’t know, a spot Bitcoin ETF would be a financial product that’s accessible to everyday people, not just the pros. It would be a product for the masses.
And I’m optimistic that whether it’s Grayscale or BlackRock leading the charge, it will pull in a lot of new interest and demand.
To see why, take the example of the SPDR Gold Trust ETF (GLD). I wrote about it in a recent essay.
GLD was the first gold spot ETF. When it debuted in 2004, it made it easier and cheaper for people to hold gold in their portfolios. It legitimized gold.
And in doing so, it set off a chain reaction of surging prices.
When GLD came out in 2004, you could buy one ounce of gold for less than $450. Seven years later, the price of gold had soared to almost $2,000 per ounce.
Now, there is no crystal ball to tell us how this will all play out. But one thing is for certain: we’ve never been this close to getting a spot Bitcoin ETF off the ground.
Keep in mind: this is the first time a court has ever ruled against the SEC when it comes to a spot Bitcoin ETF.
This could be a game-changer. It could open the floodgates for other companies to roll out their own spot Bitcoin ETFs.
In other words, we might just be at the start of a snowball effect here. So for anyone looking for another reason to include Bitcoin in your investment portfolio, this could be it.
The price of Bitcoin is still down about 62% from its November 2021 all-time high of about $68,000.
And that’s a good thing. It means you can still buy it at lower prices before big financial institutions like BlackRock swoop in.
That said, I don’t recommend ever putting all your savings into Bitcoin – or any other asset, digital or not.
Instead, for anyone interested in buying Bitcoin, consider investing a fixed amount of money on a regular basis, such as monthly or bi-weekly.
That way, you can get a better average price per Bitcoin over time. This is called dollar-cost averaging.
But again, cryptos are speculative assets. Remember, even Bitcoin is only 14 years old. It’s still a very new form of currency.
So, as with any speculation, don’t bet the house on it. There’s no need to put a big chunk of one’s portfolio in crypto to see big gains. Even a small investment can go a long way.
And that’s all for this week’s mailbag! Thanks to everyone who wrote in.
If I didn’t get to your question this week, look out for my response in a future Friday mailbag edition.
I do my best to respond to as many of your questions and comments as I can. Just remember, I can’t give personal investment advice.
And if there are any other topics you’d like me to write about, I’d love to hear from you. Write me at [email protected].
Happy investing… and have a fantastic weekend!
Regards,
Nomi Prins
Editor, Inside Wall Street with Nomi Prins