ETFs and Cryptocurrencies

The big question is whether cryptocurrency ETFs will find their way onto regulated exchanges. The past few weeks have provided fuel for cautious optimism in the crypto space, with news of Bitwise filing an application with the US SEC to launch a crypto ETF. This comes hot on the heels of the SEC also receiving positive feedback on a proposed rule change that would allow the debut of a Bitcoin ETF (link).

With that in mind, we felt it made sense to clarify the different types of ETFs being discussed in the crypto space right now:

1. Bitcoin ETFs

This is an ETF whereby each share represents a beneficial interest in a trust that exclusively invests in Bitcoin. The recently proposed VanEck SolidX Bitcoin Trust fits within this category nicely, and impressively, will also offer insurance for investors covering loss or theft of bitcoin. As stated in the filing documents:

“the Trust maintains crime, excess crime and excess vault risk insurance coverage underwritten by various insurance carriers that will cover the entirety of the Trust’s bitcoin holdings”

The main value proposition of a Bitcoin ETF is that it allows retail investors to invest in bitcoin without going through the technical difficulties and concerns of storing cryptocurrency. This is what makes it such an attractive investment vehicle. Furthermore, many commentators agree that its implementation will likely have huge implications on the overall market:

“Here’s why a bitcoin ETF matters: [For Example,] with the release of an ETF, this allows investors to add BTC to their retirement portfolio. Global Pensions Market: $41.3 trillion If BTC captures just 1% of global pensions, that would create $413,000,000,000 of exposure for cryptocurrencies.” — Nicholas Merten

2. Cryptocurrency ETFs

These are a more diversified option to a Bitcoin ETF, which one would expect to track a basket of cryptocurrencies. Thus far, Bitwise is the only firm to apply for such an ETF, which suggests we could see upcoming filings that have different approaches to the instrument. For example, a different firm might select different tokens or have different choice of weightage between them.

For many, a huge barrier to crypto investments remains a lack of understanding of the different coins and their underlying technology/purpose. Hence, for investors that nevertheless wish to gain exposure to cryptocurrencies and benefit from the market in a more diversified manner, Crypto ETFs will likely provide a ready mechanism to overcome these issues.

3. Blockchain ETFs

Its important to realise that these are a different animal as compared to the Crypto ETFs or Bitcoin ETFs. Blockchain ETFs have been available on mainstream markets for some time, and these are ETFs that track the stock price of companies that invest and develop blockchain related businesses or technologies. Investopedia has a couple of insightful comments on blockchain ETFs more generally:

“In their current form, blockchain ETFs are relatively less volatile as compared to bitcoin ETFs. This is because they are not exposed to the volatility of bitcoin’s wild price swings.”

“…blockchain is a nascent technology and does not currently constitute a large market. As such, the stock prices of companies being tracked by the ETF are more susceptible to factors that do not concern or affect blockchain technology. When they are launched, bitcoin ETFs will be directly affected by policies of regulatory agencies regarding bitcoin and cryptocurrencies.”

In short, Blockchain ETFs are much more similar to other sector-based ETFs, in that the trust invests in companies and not digital assets.

4. ETF Coins

The last version of ETFs in the crypto space to take note of are the ETF coins. These are essentially cryptocurrencies that aim to replicate the function of a traditional ETF that you would find on an exchange. As of writing, the only player we are aware of are “First Crypto ETF”. First Crypto ETF states that the value of its token is pegged to the value of 10 cryptocurrencies with automatic rebalancing where necessary.

Hence, the key thing to understand here is that ETF coins are fundementally still a cryptocurrency and not a regulated security, and are thus only available on digital exchanges (i.e. crypto exchanges, rather than SGX or the NYSE). However, it aims to provide the same level of accessibility and diversification that a traditional ETF would offer, making it a worthwhile consideration for retail investors who are unwilling to wait for regulators.

We hope this overview has been helpful. By way of some personal commentary, we note that that the case against crypto ETFs probably stems from the significant concerns that crypto markets are still subject to rampant price manipulation, insider trading, pump-and-dump schemes, etc.. These activities will continue to make it difficult for regulators to accept crypto ETFs.

However, it also appears that public sentiment will likely continue to motivate regulators to accept such ETFs. The overwhelmingly positive response to the SEC’s request for comments are perhaps indicative that increasingly, retail investors would like to participate in crypto investments but would prefer to do so in a more measured and protected manner. This may as a result, push the SEC to determine whether it can tolerate the issues prevalent in the crypto markets.

It may be some time before we see Cryptocurrency ETFs, but if you would like to learn about trading cryptocurrencies directly, you can start now with Tokenize. We offer crypto-crypto pairings, as well as crypto-fiat pairings in SGD and MYR. Go ahead and click the link below to try it out for yourself!

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