• Arjuna Gomatam

Bitcoin ETFs


ETFs are investment vehicles that track the performance of an asset or a group of assets and were first introduced in response to the passive-investing phenomenon in the late 1980s and early 1990s. In 1993, the first official ETF was launched, which tracked the S&P 500 in the US.


In January of 2009, the digital currency Bitcoin was developed by the mysterious Satoshi Nakamoto. Created, traded, and stored using blockchain technology, the cryptocurrency has gained immense popularity since its inception and has even paved the path for hundreds of other digital currencies, known as altcoins.


Back in September 2013, The Grayscale Bitcoin Trust was created to act as a vehicle for legacy investors to get secure exposure to Bitcoin. This was done by investing in GBTC, a publicly traded share that went live in May, 2015. Since then, Grayscale has accumulated over 35 billion dollars in Bitcoin. However, if the Trust is working so efficiently, why do we need an ETF for Bitcoin, or for any other cryptocurrency for that matter? The answer to this lies in the fact that GBTC is not like an ETF at all. Bitcoin ETFs (exchange-traded funds) are just like regular ETFs- investment vehicles that track the performance of an asset or a group of assets. A Bitcoin ETF will track the value of Bitcoin on a traditional market exchange, without the need for traders to directly buy or sell the asset on a cryptocurrency exchange.


When people buy shares of a Bitcoin ETF, the fund will buy Bitcoin while creating new shares representing Bitcoin. When shares of the ETF will be sold, the fund will sell the equivalent amount in Bitcoin and return the investors the profit or loss made.


A Bitcoin ETF will unburden investors from the security procedures involved in holding cryptocurrencies and give them the ability to leverage traditional exchanges to invest in cryptocurrencies (given that cryptocurrency exchanges don’t enjoy the same degree of accessibility of regulator confidence.) This will also allow investors to diversify their portfolio and mitigate risks, as an ETF can hold multiple assets. Matt Hougan, chief investment officer at Bitwise Asset Management, says that ETFs will make it easier for financial adviser to allocate Bitcoin to their clients.


“ETFs might bring a whole new zone of capital into the market”

Matt Hougan


As with GBTC, it can an act as a gateway for those looking to invest in Bitcoin but are averse to the technicalities of buying and selling. Individuals and organizations looking to invest would not be obligated to learn how the digital currency works and won’t have to sign up on a cryptocurrency exchange. This eventually may lead to an increase in adoption of the cryptocurrency. The SEC’s Hester Peirce, was recently quoted as saying "It’s well past time that we approve an exchange traded product in Bitcoin, we have a lot more information now than we did."


However, there are still a good number of people in the cryptocurrency space who think ETFs will be bad for the asset in the long run.


One of the downsides is that institutions may start to manipulate the price of Bitcoin as they are doing with other assets such as gold. Additionally, if the Bitcoin blockchain was to fork (splits in the transaction chain based on different user opinions about transaction history), the institutions behind the ETFs would have a lot say in deciding which fork gets adopted. Long story short, Bitcoin may turn into a corporate asset, the very thing it swore to destroy. This leads to the argument that a Bitcoin ETF goes against the fundamental purpose of cryptocurrencies, which is to replace the current financial system, and not become a party to its flaws.


Additionally, price tracking may not be entirely accurate. Some ETFs may directly hold Bitcoin, while others may replicate the asset synthetically. Different structures will give different results when tracking moves in the price of the asset. In addition to this, the ETF may have multiple holdings in order to diversify the portfolio. So a certain rise in the price of Bitcoin may not be reflected entirely in the value of the ETF due to the other assets.


In 2017, Cameron and Tyler Winklevoss of Facebook fame had their petition to launch the Winklevoss Bitcoin Trust turned down by the SEC (U.S. Securities and Exchange Commission). The Commission cited the unregulated nature of cryptocurrency exchanges as a potential problem, exposing it to fraud and manipulation.


The SEC has since rejected several organizations and exchanges, including Cboe Global Markets, and VanEck and SolidX. The financial watchdog has argued that the Bitcoin market is too volatile, lacks sufficient surveillance, and is too easily manipulated.


However, there are signs of hope for those looking to establish Bitcoin ETFs as evidenced by the huge success of The Purpose Bitcoin ETF in Canada. Within a week of its launch on the Toronto Stock Exchange (TSX), the ETF gathered $590 million in assets under management, and hit the $1 billion mark in a month. Soon after, two more Bitcoin ETFs were launched on the TSX. The BTC bought by Purpose Investments is held by The Gemini Trust, and 200 million dollars of that Bitcoin is insured. Additionally, gains from trading can be protected from taxes as this ETF is compatible with two-tax free savings accounts in Canada. The only downside is that it levies a heavy 1% management fee, which could hurt HODLers. However, there is a possibility of the fee being slashed because of the emergence of two new ETFs from Evolve (which reduced its fee to 0.75% shortly after its launch) and Galaxy Digital on the TSX.


However, the latest crash in the cryptocurrency market is sure to hurt the chances of seeing a Bitcoin ETF this year. Two funds operated by Horizons ETF Canada went on “high alert” as the Chicago Mercantile Exchange halted BTC futures trading mid the crash. In response to this, Steve Hawkins, chief executive of Horizons ETFs, said: “I’m hoping this has opened the eyes of the retail investing public to understanding how volatile this asset class is,” adding fresh support to the SEC’s concerns.


Newly appointed chairman of the SEC Gary Gensler, an MIT professor specializing in blockchain and digital currencies, has emphasized regulation of cryptocurrencies and continues to stress investor protection. Gensler told Congress that the cryptocurrency market “could benefit from greater investor protection.” His comments are likely to act as a reality check for crypto enthusiasts and investors, as they show how the SEC’s long-stated demands for oversight of the crypto industry have not been met.


Now all that remains to be seen is what actions the regulatory body will take after the latest developments. Given the recent crash in the market, and Gensler’s remarks on the industry, it appears that the odds of seeing a Bitcoin ETF this year are long.


 

References:


Edmondson, Brian. “What Are Bitcoin Forks?” The Balance, 28 Sept. 2020, www.thebalance.com/what-is-a-bitcoin-fork-4684459


Guzman, Zack. “World's First Bitcoin ETF Soars Past $500 Million in Assets under Management.” Yahoo! Finance, Yahoo!, 21 Feb. 2021, www.finance.yahoo.com/news/worlds-first-bitcoin-etf-soars-past-500-million-in-assets-under-management-213407975.html


Reiff, Nathan. Bitcoin ETFs Explained. 29 Aug. 2020, www.investopedia.com/investing/bitcoin-etfs-explained/


Greifeld, Katherine, and Claire Ballentine. “Bitcoin ETF Approval Odds Grow Longer After Gensler Critique.” BloombergQuint, 11 May 2021, www.bloombergquint.com/markets/bitcoin-etf-approval-odds-grow-longer-after-gensler-critique.


Oliver, Joshua. “Canadian Bitcoin ETFs Rattled by Crypto Tumult.” Financial Times, 21 May 2021, www.ft.com/content/dc583136-113b-4161-b846-766f2db6fac7.


Rao, Rheaa. “Hopes for US Crypto ETFs Recede after SEC Warning.” Financial Times, Financial Times, 19 May 2021, www.ft.com/content/c36013a0-65a9-4f1c-901d-314577cc5266.


Demos, Telis. “ETFs Could Rock the Bitcoin World.” The Wall Street Journal, Dow Jones & Company, 12 Apr. 2021, www.wsj.com/articles/etfs-could-rock-the-bitcoin-world-11618227019.

Related Posts

See All