📌 MUST READS

While the crypto community holds its breath waiting for a spot bitcoin ETF to be approved by the SEC, asset managers are now rushing to get a spot-based ethereum ETF approved as well.

Last week we saw two 19b-4 applications, kickstarting the race…

The first came from Cathie Wood’s Ark Invest pairing up with 21Shares with the latter acting as the sponsor. The fund would trade under the ticker "ARKE."

Then, on the same day, VanEck filed for their own spot-based ethereum ETF. Notably, VanEck was the first fund to file for a spot-based ether ETF back in May 2021. The difference, though, was that in 2021, VanEck filed an S-1 (as opposed to a 19b-4 application) which is only an indication of a firm’s intention to list a particular investment product on a national exchange.

With both groups filing 19b-4 applications last week, a 240-day clock has now been kickstarted for the SEC to hand down a decision.

We also wouldn’t be surprised if we were to see many more filings emerge (like this). This would be especially true for Grayscale and their Ethereum Trust (ETHE) which is currently trading at a 25% discount to NAV.

Speaking of ETHE, is it worth buying the fund to arbitrage an upcoming ETF, like investors did with GBTC?

For the answer to that question, we reached out to Boaz Weinstein who we covered two-weeks ago in regards to the GBTC arbitrage play. Here’s what he had to say:

Why a Spot-based Ethereum ETF Matters
A spot bitcoin ETF could revolutionize the crypto landscape by providing a more accessible and secure entry point for new investors. However, a spot-based ethereum ETF could be even more intriguing.

That’s because, while both ETF structures will charge investors a management fee to safely custody the cryptoassets, an ethereum-based ETF could actually provide yield in excess of what the management fees are.

Think about it, running an ethereum validator currently pays ~4.5%. If an ETF is able to accrue ether and stake it, they would be able to pass on a large percentage of that reward in the form of dividends to investors.

Now, the real question is whether or not the SEC would allow an ETF to stake ETH, but that’s an issue for another day. In the meantime, investors may soon be able to add BTC and now ETH to their retirement accounts.

🔍️ DEEP DIVES

Last week, the Financial Accounting Standards Board (FASB), the US body that sets the rules for how companies should keep their financial books, unanimously voted to allow companies to report their crypto holdings at fair market value.

To translate: It just became much easier for corporations to add bitcoin (and other crypto assets) to their balance sheets without scaring off investors or accountants.

And, overall, it’s a huge boon for institutional/corporate adoption.

Let’s break it down.

The Backdrop:
Right now, corporations like MicroStrategy (MSTR) – who’ve been forward-thinking enough to add bitcoin to their balance sheets – are required under US Generally Accepted Accounting Principles (GAAP) to classify their crypto holdings as "intangible assets."

This classification only allows for companies to record the purchase price of the crypto asset and then perform periodic "impairment tests." For example, if the market price of bitcoin falls below the purchase price, the company must write down the value of the asset and take an impairment charge against earnings.

But here’s the kicker – companies are not allowed to write up the asset value if bitcoin's price recovers. In fact, impairment losses cannot be recovered for any subsequent increase in fair value until the sale of the asset.

So… you can mark down, but you can’t mark up.

This obviously creates a huge accounting headache and is ill-suited given crypto’s volatility. The FASB's recent decision, however, is poised to change that.

What’s Changing:
Under the new rules, companies can report their crypto holdings at fair market value. The big difference here is that the most recent valuations, including rebounds after a price drop, can be captured. It's a move that will certainly reflect a more accurate financial picture for firms holding bitcoin and other crypto assets.

Companies like MicroStrategy are likely to benefit the most immediately, which partially accounts for the jump in MSTR share prices following the news.

Under the old rules, balance sheets were taking hits left and right thanks to bitcoin's price fluctuations, even if the overall trajectory was positive. No more of that nonsense.

Little Caveats:
But, and there's always a but, the new rules won't go into effect until 2025, although companies have the option to apply them early.

To add, the new accounting measures won't cover all types of digital assets. Wrapped tokens, stablecoins, as well as NFTs, didn’t make the cut.

Despite these limitations, Jeff Rundlet, head of accounting strategy at Cryptio, calls this a "great step toward mainstream adoption." And we're inclined to agree.

The Bigger Picture:
In an era where inflation is increasingly viewed as public enemy no. 1, safeguarding cash reserves has never been more crucial, particularly for large public corporations.

The forthcoming accounting adjustment – though not immediate – has the potential to reinvigorate institutional interest in bitcoin. If this narrative strengthens in the coming years, it could drastically reduce the available supply, or "free float," of bitcoin in the market, thereby exerting upward pressure on its price.

TWEET OF THE WEEK

Other Content You Might Enjoy

ABOUT COINSNACKS

Launched in December 2017, CoinSnacks is home to the longest continuously running crypto newsletter. Each week, we publish our cryptoasset musings to an audience of ~30,000 crypto enthusiasts and investors.

In a space flooded with new projects, research, and narratives, the average investor may feel overwhelmed or confused. CoinSnacks offers a solution by doing the digging for you, so you don't have to spend hundreds of hours sifting through the noise.

REACH OUR AUDIENCE

If you’re a brand interested in partnering with CoinSnacks to find your next customers, partner, or ally, we’d love to hear from you. Learn more here.

JOIN OUR OTHER PUBLICATIONS