In the realm of investment, two distinct assets have garnered substantial attention from investors, and now they're converging to offer a unique opportunity for simultaneous capitalization. Enter the fusion of exchange-traded funds (ETFs) and cryptocurrencies, particularly the likes of bitcoin. This marks a historic alignment, bringing together the world of traditional investment instruments with the innovative landscape of digital currencies. However, the journey towards the official launch of cryptocurrency ETFs is not without its hurdles and complexities. In this article, we will delve into the realm of cryptocurrency ETFs, exploring their nature and significance, the rationale both for and against their existence, and an overview of existing cryptocurrency ETFs that have already made their debut in the market.
Disclaimer: We want to emphasize that this is not financial advice. Cryptocurrencies operate in a volatile market, where values can drastically fluctuate in a blink of an eye. It is imperative to conduct thorough research and seek guidance from a qualified financial advisor before investing.
How Does a Bitcoin ETF Work?
An ETF, or exchange-traded fund, serves as an investment vehicle designed to mirror the performance of specific assets or a collection of assets. It offers investors an avenue to gain exposure to these assets without requiring direct ownership. This mechanism provides a streamlined approach for investors who are primarily interested in tracking the fluctuations in value, simplifying their engagement compared to individually acquiring and selling assets. Moreover, ETFs offer a means to diversify holdings as they typically encompass a broader spectrum of assets that share certain commonalities.
Enter the concept of a bitcoin or cryptocurrency ETF, which replicates the price movements of renowned cryptocurrencies on a global scale. Through cryptocurrency ETFs, investors can participate in the market's dynamics without the intricacies of directly trading cryptocurrencies. Additionally, as these investors are not directly engaged with the underlying cryptocurrency assets, concerns related to the complex aspects of storage and security, inherent in traditional cryptocurrency investments, are alleviated.
Why Not Just Invest In Bitcoin?
While a bitcoin and cryptocurrency ETF essentially replicates the price movements of cryptocurrencies, there are several compelling reasons for investors to opt for this approach rather than investing directly in cryptocurrencies.
Firstly, the intricate processes of trading and securely storing cryptocurrencies can be daunting for many investors. Navigating the cryptocurrency exchange landscape can be particularly overwhelming for newcomers. By choosing an ETF, investors bypass these complexities and gain a more accessible entry point. They can seamlessly buy and sell ETF shares on traditional exchanges without grappling with the intricacies of cryptocurrency trading.
Additionally, cryptocurrency ETFs offer a unique advantage: the ability to engage in short-selling. This means investors can sell shares of the ETF if they anticipate a decline in the cryptocurrency's price. This short-selling capability is not readily available in the conventional cryptocurrency market.
Importantly, ETFs enjoy broader recognition and comprehension within the investment realm compared to cryptocurrencies, which, despite their growing popularity, remain relatively unfamiliar to many. Opting for a cryptocurrency ETF allows investors to leverage their existing knowledge of traditional investment vehicles, making the transition into the digital currency space smoother and more approachable. In essence, they can engage with a vehicle they understand rather than delving into the perceived complexities of cryptocurrencies.
The Road to Bitcoin ETF Approval
The journey to launching cryptocurrency ETFs has been marked by significant obstacles, primarily revolving around regulatory challenges.
The inaugural attempt at introducing a bitcoin ETF came from Cameron and Tyler Winkelvoss, renowned for their early involvement in Meta (formerly Facebook) and their Gemini cryptocurrency exchange. Their bid to launch the Winkelvoss Bitcoin Trust, a bitcoin ETF, was met with rejection by the SEC in 2017.
The SEC's decision was rooted in concerns about bitcoin's association with largely unregulated exchanges, leaving it vulnerable to potential fraud and market manipulation. However, undeterred, the Winkelvoss twins persisted. In 2018, they secured a patent from the U.S. Patent and Trademark Office for Winklevoss IP LLC, paving the way for potential exchange-traded products.
Beyond the Winkelvoss twins, others in the cryptocurrency community also sought to usher in a bitcoin ETF. Cboe Global Markets, known for introducing bitcoin futures, expressed hope for SEC approval of cryptocurrency-related ETFs. Cboe's acquisition of Bats Global Markets, the exchange initially intended for the Winkelvoss ETF, underscored their commitment.
In parallel, SolidX and VanEck, a fintech firm with interests in bitcoin and cryptocurrencies, unveiled plans for the VanEck SolidX Bitcoin Trust ETF. This ETF targeted institutional investors, entering the market with a $200,000 share price. The ETF, denoted as XBTC, sought to track an index encompassing multiple bitcoin trading desks. This approach aimed to alleviate the SEC's concerns by diversifying the ETF's focus beyond direct bitcoin exposure.
Despite these earnest efforts, the launch of cryptocurrency ETFs remains contingent on navigating the intricate regulatory landscape and addressing concerns surrounding market integrity and investor protection.
Some of the Bitcoin ETFs in the Market
ProShares Bitcoin Strategy ETF
Launched in October, ProShares Bitcoin Strategy ETF (BITO) became the first U.S. ETF to provide investors with exposure to Bitcoin futures. One important thing to note is that BITO does not invest in Bitcoin directly, which provides a close one-to-one exposure as you could want. Instead, the ETF invests in cash-settled, front-month Bitcoin futures, which are contracts with the shortest time to maturity.
The futures contracts that BITO invests in are regulated by the Commodity Futures Trading Commission. These contracts are only traded on the Chicago Mercantile Exchange and are subject to the rules of the CME.
Valkyrie Bitcoin Strategy ETF
Launched just three days after ProShares’ Bitcoin futures ETF went public in October, the Valkyrie Bitcoin Strategy ETF (BTF) launched.
BTF is very similar to BITO in that it does not invest directly in Bitcoin, but in front-month Chicago Mercantile Exchange Bitcoin futures through a Cayman Islands subsidiary. Therefore, investors do not have to file K-1 forms with the IRS. The Commodity Futures Trading Commission regulates the trades.
The Tennessee-based company, Valkyrie, already offers trusts for various cryptocurrencies, including Bitcoin, Polkadot, Algorand, and several others. However, BTF is the company’s first cryptocurrency ETF. However, BTF has not gained the same market traction as BITO and has accumulated less than $60 million in assets under management, according to Morningstar data.
VanEck Bitcoin Strategy ETF
The VanEck Bitcoin Strategy ETF (XBTF) launched its first U.S.-listed Bitcoin-linked ETF on Nov.15, and it entered the field as the low-cost leader among Bitcoin futures ETFs at 0.65% in expenses.
The Head of Active Trading for VanEck, Greg Krenzer, who is the ETF’s portfolio manager, boasts more than two decades of trading experience, including experience in futures. This is beneficial because XBTF - similar to other Bitcoin-linked ETFs that have launched over the past couple of months - invests in Bitcoin futures listed on the CME.
Global X Blockchain & Bitcoin Strategy ETF
The Global X Blockchain & Bitcoin ETF (BITS), launched in November and is the ETF provider’s second ETF related to the blockchain. The first is the passively managed Global X Blockchain ETF (BKCH).
Following the trend of all other Bitcoin ETFs that launched in recent months, BITS is intended to be a bet on Bitcoin futures. However, BITS also invests in blockchain-related equities found in BKCH. Equities that are considered for selection include companies involved in digital asset mining, blockchain, and digital asset transactions and companies with blockchain applications and software services.
Grayscale Bitcoin Trust
The Grayscale Bitcoin Trust (GBTC) is one of the few ETF-esque funds that are nonetheless not ETFs, nor mutual funds, for that matter. Instead, it is what’s described as a closed-end grantor trust. What this means is that it issues a fixed number of shares when it goes public, and then those shares are traded over the counter (OTC).
GBTC shares are intended to follow the price of Bitcoin based on the CoinDesk Bitcoin Price Index. At the moment, each share of the Grayscale Bitcoin Trust represents 0.00093535 bitcoins, but that price is not fixed. That’s because, unlike an ETF, closed-end trusts such as GBTC can trade at a discount or premium to their underlying assets.
Bitcoin ETFs: Conclusion
ETFs and cryptocurrency are two of the most popular topics in the investment world at the moment, and it was only a matter of time before they merged to allow investors to invest in products that give them the best of both worlds. With bitcoin ETFs, investors now have the opportunity to invest in cryptocurrencies, such as Bitcoin, without having to deal with the complexities of buying and selling cryptocurrency themselves or securing and exchanging with cryptocurrency on various exchange platforms. Although Bitcoin ETF’s only launched recently, firms have been trying to launch them since 2017, with the first ETF attempt made by the Winkelvoss twins. The reason that it took so long for bitcoin ETFs to receive approval is that cryptocurrency is trading on unregulated exchanges, which opens up the possibility for digital assets to be used for fraud and money laundering. However, firms looking to launch bitcoin ETFs have finally received the approval to do so, with approximately 20 ETFs entering the market in the last year.