The long-awaited Bitcoin futures exchange-traded fund (ETF) began trading on the New York Stock Exchange on Tuesday, and is a key moment in the cryptocurrency's continued launch. The new ETF is called the ProShares Bitcoin Strategy ETF (BITO) and it joins a narrow field of funds that offer exposure to digital currency.
The new Bitcoin-linked fund offers traders a way to speculate on Bitcoin without having to buy cryptocurrency outright or set up an account with a cryptocurrency exchange. Investors can simply buy and sell the fund as they would any other stock trading on the exchange, making it easy to get started.
By opening the doors to mainstream investors through Bitcoin ETFs, numerous investors can participate in indirectly investing in Bitcoin, but without actually having the digital asset itself, which can help alleviate the fears that many just have. arrived, "says Peter Jensen, CEO of blockchain. RocketFuel Blockchain payment company.
But the path to more cryptocurrency exchange-traded funds looks bumpy, experts say, even though many fund companies would love to get a slice of the healthy fees that can be charged for running an ETF based on the hottest asset. And this desire comes during a period when rates on traditional assets, such as stocks, have dropped dramatically as competition for new assets increases.
Here are the few crypto ETFs available now and the funds that traders can look forward to in the future.
Bitcoin ETF: the funds available now
Bitcoin ETFs can exist in two main types, depending on how a fund owns the cryptocurrency and provides exposure to investors:
- Physical ETFs, which contain real bitcoins that back the fund
--Futures ETFs, which hold cryptocurrency futures contracts traded on an exchange
"Right now, most of the applications the SEC is considering are for physical ETFs, but there have been a growing number of applicants for futures ETFs in the last year," says Sui Chung, CEO of CF Benchmarks, a subsidiary of Kraken, a crypto exchange.
It may seem like a small detail, but being able to buy and sell cryptocurrencies through the ETF structure opens the asset to new investors.
"Bitcoin ETFs allow major institutional investors to access Bitcoin without having to worry about storing Bitcoin in active wallets, which are more susceptible to attack, as well as the regulatory and tax implications their funds would face if they simply did so. They will buy on a decentralized cryptocurrency exchange. "says Kay Khemani, managing director of Specter.ai, a trading platform without intermediaries.
For now, the Securities and Exchange Commission (SEC) favors futures ETFs, including the new ProShares Bitcoin Strategy ETF, but there are some existing funds that are already publicly traded.
Existing crypto funds
Two existing funds that own cryptocurrency are publicly traded and both own it directly.
Grayscale Bitcoin Trust (GBTC)
Grayscale Bitcoin Trust started in 2013 as a private investment with a six-month lockdown that prevented investors from reselling it on the public market during that period. But since then some investors have sold their shares on the market, so now anyone can buy shares in the fund. The fund charges a fee of 2 percent of the assets under management annually.
The company behind the fund announced in October that it is looking to become a Bitcoin spot ETF. The fund would give investors a way to track the price of Bitcoin in a familiar ETF structure.
Bitwise 10 Crypto Index Fund (BITW)
The Bitwise 10 Crypto Index Fund tracks a weighted index of the 10 largest cryptocurrencies by market capitalization (not including stablecoins and a few others) and rebalances on a monthly basis. It started in 2017 as a private investment for accredited investors, but is now publicly listed. The fund charges a hefty 2.5 percent of assets annually as a management fee.
Its largest holdings include Bitcoin (which comprises the majority of the fund), Ethereum, Cardano, and Solana.
Other funds related to cryptocurrencies
At least one fund, Volt Crypto Industry Revolution and Tech ETF (BTCR), has worked around the SEC's preferences and was recently approved for trading.
"The SEC approved the Volt Equity ETF, which aims to circumvent current SEC restrictions by not investing directly in Bitcoin, but by tracking companies that have the majority of their assets in Bitcoin or that derive their income from activities related to Bitcoin. Bitcoin, "says Jensen. .
Blockchain ETF
For now, the ways to invest directly in cryptocurrencies through publicly traded funds are limited. But those looking to play with the rise of blockchain technology, the technology behind these digital currencies, have a few ways to invest in funds owned by companies on that wave.
The largest blockchain ETF is Amplify Transformational Data Sharing ETF (BLOK), whose main holdings include Hut 8 Mining (HUT), Marathon Digital Holdings (MARA) and MicroStrategy (MSTR), as of October 2021.
Another player here is the Siren Nasdaq NexGen Economy ETF (BLCN), whose main holdings include Silvergate Capital (SI), Marathon Digital Holdings, and MicroStrategy.
The SEC and crypto ETFs
"So far, the SEC has refused to approve any ETF that invests directly in Bitcoin, even though there are numerous asset managers who have requested to do so with a similar setup that is already running visibly strong in countries like Germany, Canada, and Switzerland, "he says. Jensen.
So what is preventing the SEC from approving other funds or those that own cryptocurrencies directly? Experts point to several reasons.
"Regulatory concerns surrounding ETFs include their management fee structures, questions about the true intrinsic value of Bitcoin, and of course the fact that the underlying asset in question still has an uncertain regulatory future," Khemani says.
Chris Kline, COO and co-founder of Bitcoin IRA, points to other reasons.
"Based on past rulings, regulators are concerned, that is, about the manipulative ability of digital assets, volatility issues and lack of oversight," says Kline.
"In the past, regulators weren't very sure how cryptocurrencies worked," he says. "As they have become more familiar with the space ... the SEC is beginning to understand how these assets are stored, insured and reconciled to make sense in traditional finance."
But another key reason the SEC has shown some preference for futures ETFs over physical ETFs concerns already existing regulation, Chung says.
"The places where the majority of cryptocurrency trading takes place, exchanges, are currently under no legal obligation to adhere to existing capital market regulations, such as the Securities Exchange Law," he says. "Of course, many platforms, including Kraken, have voluntarily chosen to follow these requirements, but the SEC continues to have reservations about approving a product from a market that falls largely outside its purview."
"But since Gary Gensler became the new SEC chairman earlier this year, he has expressed his preference for a futures ETF, as it will hold contracts from the Chicago Mercantile Exchange, a market that is already regulated by its sister regulator, the CFTC, "says Chung. .
What crypto ETFs are on the horizon?
While the SEC may be slowly approving crypto ETFs now, experts see it as largely temporary and are targeting existing crypto ETFs in Canada and Europe. When the regulatory framework is established, it could eventually lead to a range of new ETFs, even if some of the more esoteric products remain off-limits to publicly traded funds.
"Once the regulatory issues have been fixed, the ETFs will follow," says Khemani.
"In the case of crypto ETFs, we are unlikely to see anything other than Bitcoin and Ethereum in the short term, but we are likely to see variations in the future as the SEC begins to more actively regulate the industry," says Ben Weiss , Executive Director. and co-founder of CoinFlip, the operator of a cryptocurrency ATM network.
And as for when traders might see a range of new crypto ETFs?
"Crypto ETFs are unavoidable," says Kline. "A product like this will eventually come to fruition as there is a demand, but the timeline remains uncertain."
Increased regulation, which can create safeguards around cryptocurrencies, could also open up cryptocurrencies to a broader range of fund companies.
"While crypto companies have proposed a number of ETFs, such as Valkyrie and Kryptoin, a number of new player applications have also emerged in the traditional space, such as WisdomTree, Invesco and ProShares," says Chung.
Although a clear regulatory framework and standards will help usher in a wave of crypto ETFs, don't expect the industry to insure all crypto products.
"ETFs on more exotic crypto concoctions, such as unregulated decentralized trading exchanges, lenders, gambling, or high-yield agricultural investment programs are unlikely to be approved anytime soon," Khemani says. It points out the security risks inherent in these products that preclude them from a traditional ETF.
Bottom line
While traders expect the SEC to lay the groundwork for crypto ETFs, of course, they have no restrictions on trading the currencies directly. It's easy to get started with a cryptocurrency exchange like Binance, especially if you are familiar with online brokerages. By selecting a low-cost crypto exchange, you can avoid some of the steep management fees charged by existing ETFs, which can account for 2 or 2.5 percent of your invested assets annually.
So for those investors looking for a solid market for crypto ETFs, they will have to continue to wait until the SEC decides how it will proceed.
