How long before a BTC ETF?

For the investor, crypto currencies are an emerging asset class. They are not securities and so are not regulated. This poses a risk since, without regulatory oversight, crypto currencies can be manipulated. A crypto currency ETF would call for regulatory frameworks that protect investors while also providing exposure to the digital assets in a transparent and accountable way.  Of the several crypto currencies that are candidates for an ETF, Bitcoin is perhaps the most likely though crypto currencies ETFs, when they are eventually launched, may offer opportunities to invest in several crypto currencies including Bitcoin. A Bitcoin ETF would be an investment fund that derives its value from BTC price.

However since crypto currencies are an emerging space that is seeing considerable volatility, a crypto ETF has not been approved yet in the US. While an approved crypto ETF or even an approved crypto market index is yet to be launched in the US, there has been considerable momentum in trying to introduce a variety of financial instruments to indirectly trade crypto currencies. As the pandemic has made investors look for alternatives to financial instruments that are susceptible to inflation, including the US Dollar, ETFs offering exposure to digital assets were attractive options.

ETFS offering indirect exposure to crypto currencies:

In other words, investors have the chance to enter the space through other ETFS. These ETFs invest in companies that use blockchain technology that digital assets also use.

The ARK Next Generation Internet ETF (ARKW)  was launched in 2014 and is an actively managed fund that focuses on growth from technological advancements in Cloud Computing & Cyber Security, E-commerce, Big Data and Artificial Intelligence, Mobile Technology and Internet of Things, Social Platforms and Blockchain and peer-to-peer systems. It has an expense ratio of 0.76% and has $2.9 billion in assets under management. Its top holdings include Tesla Inc., Roku Inc., Square Inc-A, Pinterest Inc-Class A and Facebook. Its performance has been spectacular this year returning over 100% year to date, partly due to the unprecedented rally in Tesla and Facebook.

The Amplify Transformational Data Sharing ETF BLOK invests in companies that use blockchain technologies.  Its top holdings include Galaxy Digital Holdings Ltd., Square Inc., Silvergate Cap Corp., GMO Internet Inc., and Z Holdings Corp. The fund was launched in 2018 and has an expense ratio of 0.70%. It has returned 34.7% year to date and has $135 million in assets under management.

RealityShares Nasdaq NextGen Economy ETF (BLCN) seeks to invest in companies that use blockchain technology. Launched in 2018, its top holdings include Square Inc.-A, JD.Com Inc-ADR, Alibaba  Group Holdings-SP ADR, Microsoft Corp, and Tencent Holdings. With $133 million in assets under management, and an expense ratio of 0.68%, it has returned 32% year to date. It tracks the Reality Shares Nasdaq Blockchain Economy Index

The Goldman Sachs Finance Reimagined ETF (GFIN) was launched in 2019 and has $47 million in assets under management. Top holdings include  Square Inc., Mastercard Inc., PayPal Holdings Inc, Visa Inc, and Intuit Inc.  With an expense ratio of  0.50% it has returned 6.9% year to date.

The First Trust Indxx Innovative Transaction & Process ETF (LEGR) was launched in 2018 and has $43 million in assets under management.  It has a significant cash position and its top holdings include Fujitsu Ltd., Micron Technology Inc., Nvdia Corp, Infosys Ltd. and SGS SA. With an expense ratio of 0.65% is has returned -1.97% year to date. It tracks the Indxx Blockchain Index.

The Innovation Shares NextGen Protocol ETF (KOIN) was launched in 2018 and has $32 million in assets under management. With an expense ratio of 0.95%, it has returned 13.4% year to date. It tracks the Innovation Labs Blockchain Innovators Index. Its top holdings include Nvidia Corp, Taiwan Semiconductor Manufacturing Co Ltd., Salesforce.Com Inc., PayPal Holdings Inc., and Amazon.com Inc.

Recent Developments

In October, SEC Chairman, Jay Clayton stated that the organization may be willing to look at tokenization of crypto currencies. Tokenization will allow cryptocurrencies to trade like securities and this could help launch an approved ETF eventually.

In September, the Bermuda Stock Exchange announced that the Hashdesk Nasdaq Crypto Index ETF will trade on its platform. The product will track an index that will be developed by Nasdaq. Three million shares at $1000 per unit were made available through private placement.

In July, Wilshire Phoenix filed for approval with the SEC to launch a publicly-traded trust called Bitcoin Commodity Trust.  The ETF would directly compete with Grayscale’s Bitcoin Trust (GBTC).

The Wilshire Phoenix has applied for SEC approval earlier in February to launch a BTC ETF but the application was rejected on the grounds that crypto currencies were susceptible to manipulation.

In September last year, Franklin Templeton sought to get SEC approval to launch a money market fund on the blockchain Stellar.

In 2018, Bitwise Asset Management filed for similar approval for a BTC ETF that would track its Bitwise HOLD 10 Index holding the 10 largest cryptocurrencies.

Earlier the Chicago Board Options Exchange filed for a BTC ETF backed by VanEck SolidX Bitcoin Trust. Both proposals by Bitwise and by CBOE were withdrawn later.

Earlier crypto exchange Gemini’s proposal for a crypto ETF got rejected twice by the SEC.

Back in 2019, the SEC highlighted two concerns that would need to be addressed before a  BTC ETF could be approved: the susceptibility of cryptocurrencies to fraud and manipulation and the need for surveillance by a regulated market that is significantly big.

At present, the Grayscale Investment Trust (GBTC) which invests passively in bitcoin and allows investors to get exposure to BTC through the traditional method of purchasing a unit is the only crypto fund that is classified as a reporting investment company by the SEC.

While the SEC is still holding off on approval due to several concerns, pressure to bring a BTC ETF seems to be mounting. Institutional investors such as Fidelity and JP Morgan have joined the cryptospace. The US government has approved digital custody at banks and Wyoming has followed by giving approval to Kraken crypto exchange to offer digital banking services.  As Anthony Pompliano of Morgan Creek Digital tweeted in 2019, a BTC ETF approval is not a question of if, but when.

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