If you’ve been following crypto
news for more than a few months, chances are you’ve heard of an exchange traded fund
). Considered the holy grail of the crypto industry’s quest for mainstream adoption, regulators have yet to approve a spot Bitcoin ETF in the United States despite years of lobbying and dozens of failed applications. Instead of the spot ETF, a few Bitcoin futures ETFs were approved by the Securities and Exchange Commission (SEC) last year.
The difference is huge. Spot Bitcoin ETFs trade around Bitcoin’s actual price, while futures ETFs trade based on the index-determined price of Chicago Mercantile Exchange (CME)’s Bitcoin futures product.
It’s widely believed that a crypto ETF (if approved) in the U.S. will bring about a change in the perception of cryptocurrencies from an unregulated and risky digital asset to a legitimate asset class. Many believe that a Bitcoin ETF would put crypto on equal footing as an investment choice with other commodities such as gold and silver over time, thanks to the greater regulation and due diligence that the ETF issuer will be subject to in a traditional market.
Some investors believe that the price of the underlying crypto asset would go up (this is not financial advice), as it would not only open Bitcoin up to a much broader investor market — who would not need to worry about buying and storing the BTC themselves — but would also require the approved ETF to collateralize their fund by purchasing and holding the underlying crypto asset, thereby driving up demand.
While the SEC has staunchly resisted a Bitcoin spot ETF approval thus far, there was widespread optimism during the 2021 bull run that 2022 would finally be the Year of the Crypto ETF.
Unfortunately, things didn’t quite pan out that way. Instead, we first got the watered-down Bitcoin futures ETFs
, a combative new crypto antagonist in SEC chairman Gary Gensler
, a prolonged bear market and the Luna T(er)ragedy
, to name a few. And after several rejected Bitcoin spot ETF
applications, still no cigar.
Tempers are flaring, and patience is running out. In June 2022, Grayscale Investments’s application to convert its pioneering Grayscale BTC Trust into a Bitcoin ETF was rejected by the SEC, forcing it to join a Class of 2022 ETF Rejects that include Bitwise
, Fidelity Investments, New York Digital Investment Group (NYDIG) and Global X, One River and Skybridge Capital.
In response, Grayscale filed a suit against the financial regulator
, asking the U.S. Court of Appeals to review the decision. A ruling is only expected by mid-2023.
In August 2022, the SEC delayed the highly touted Van Eck Bitcoin ETF application
, the third of its kind, by another 45 days. What gives? Will we ever see a spot Bitcoin ETF approved in the US?
In this article, we’ll review what an ETF is and if/when we’ll see one approved in the US.
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An ETF (exchange-traded fund)
is a type of investment fund
made up of a collection of securities such as
stocks, bonds, commodities and currencies and is listed for trading on conventional stock exchanges. An ETF tracks the price movements of an underlying asset. Utility tokens, despite being mere virtual currencies
, may also be part of an ETF.
ETFs are somewhat identical to mutual funds, except that their shares trade on a 24-hour cycle, similar to directly interacting with a company's shares on a stock exchange. Mutual funds trading, on the other hand, hinges on its price at the end of a trading day.
A crypto ETF is an ETF
that tracks the value shifts of one or more digital currencies. Fundamentally, it works like a traditional ETF and is traded like a standard share on a stock exchange.
In short, a Bitcoin or crypto ETF will enable mainstream retail investors to put their money into a regulatory compliant asset that represents Bitcoin or other crypto assets. This removes the need to physically own or manage crypto, which can get very tricky even for experienced users, due to the plethora of hacks and scams out there. Nearly $2 billion in crypto losses
were recorded in the first half of 2022 alone.
For a cryptocurrency
ETF to work, the company issuing and listing it on an exchange needs to bear custody of the underlying digital coin
. Then, investors buy shares to represent their rights into the exchange-traded fund. As such, the investors gain indirect exposure to the volatility
of the base cryptocurrency.
Blockchain ETF vs Crypto ETF
ETFs provide a less risky way to invest in blockchain-powered assets. In some cases, a blockchain
-related investment may involve buying into a blockchain ETF. Here, an investor interacts with ETFs that mimic holding stocks of a firm dealing with blockchain technology, the same technology that powers digital currencies.
An example of a blockchain ETF is BLOK
, which launched
in 2018. The exchange-traded fund plows 80% of net assets into firms interacting with decentralized ledger technology (DLT)
In August 2022, Schwab Asset Management launched its Schwab Crypto Thematic ETF,
which doesn’t provide any exposure to crypto assets, but rather the companies that invest in them, such as MicroStrategy, Coinbase and Riot Blockchain. While this is clever, it’s still not a pure crypto ETF, and there are already calls
that there are too many crypto-themed ETFs out there.
For a crypto ETF to be active, it must receive a regulatory green light from financial watchdogs in its preferred operating jurisdictions. For instance, a crypto ETF seeking to attract investments from U.S. residents must get a regulatory nod from the country's Securities and Exchange Commission (SEC)
The ETFs that are available today (for most of the world, non-Bitcoin ones) can be bought on retail-friendly mobile applications such as the Fidelity app, Robinhood, and TD Ameritrade, and they differ slightly from mutual funds, since they trade continuously throughout the day.
What Is a Bitcoin Spot ETF?
A Bitcoin spot ETF is an exchange-traded fund that tracks the price
of BTC, and if it was approved in the U.S, it would be available for trading on traditional stock trading avenues like the New York Stock Exchange (NYSE).
However, as of today, BTC mostly trades on crypto exchanges
such as Binance
— not in the form of an ETF.
Note that a Bitcoin mutual fund is an investment vehicle under a professional money manager's stewardship. A Bitcoin ETF, however, gives investors indirect exposure to the leading cryptocurrency without the risks of holding the actual cryptocurrency.
Notably, investors' stake in the ETF fluctuates according to the price of the top cryptocurrency. Therefore, when the BTC's value rises, the ETF's value also increases and vice versa.
What Is a Bitcoin Futures ETF?
A Bitcoin futures exchange-traded fund issues publicly traded securities that offer exposure to the price movements of Bitcoin futures contracts, and not its current value. Futures contracts enable traders to speculate on Bitcoin’s price, by agreeing to buy or sell BTC at a certain price in the future
. They require minimal investment capital upfront as traders instead borrow leverage to get the funds needed.
Regulators Are Yet to Open the Gates
Unfortunately, regulators in major countries are yet to give a Bitcoin ETF regulatory approval, despite a handful of applications. For example, the founders of the Gemini cryptocurrency exchange, the Winklevoss twins, filed an exchange-traded fund tracking the price of the leading cryptocurrency with the SEC. Their application for a Bitcoin ETF was rejected twice by the SEC, the second time
in July 2018. Since then they have shifted their attention elsewhere to countries like Canada and Australia.
Canada Leads the Way to Crypto ETFs
Canadian financial regulators have become one of the first watchdogs to give the green light for a crypto ETF. In February 2021, the country welcomed a BTC ETF that hit
over $420 million in assets under management in 48 hours.
Filed by Purpose Investments, the ETF opened its doors to investors on the Toronto Stock Exchange (TSX) with the symbol "BTCC."
Another Bitcoin ETF, known by ticker "EBIT
," soon traded on the TSX and is under the custody of Evolve Funds Group. EBIT gives investors exposure to Bitcoin by tracking its daily price fluctuations in terms of the US dollar.
By June 2022, a research report by National Bank Financial found that Canada boasted around 40 cryptocurrency ETFs such as Bitcoin and Ethereum funds, and the sector recorded a total asset value of $4.3 billion. Best of all, the country’s economy hasn’t imploded yet under the weight of those silly investments by citizens that keep handing their money over for that magic internet money.
What Is an Ethereum ETF?
An Ethereum exchange-traded fund is a crypto ETF that gives investors exposure — via trading on stock exchanges — to the second-largest cryptocurrency. The ETF is comparable with stocks or bonds, only that the underlying asset here is Ethereum (ETH)
With the complexities and dangers that come with storing ETH safely, non-technical crypto enthusiasts view Ethereum ETFs as a great way to invest in the cryptocurrency without having to buy actual ETH.
Investing in an ETF also means that people would not have to own the ETH themselves, which could be safer for some investors, as a custodian would typically have more security mechanisms in place than the average investor.
Facts are, there’s never been a better time to approve an ETH ETF than right now. Undoubtedly the biggest crypto event of 2022 is September’s Ethereum Merge
, which will raise the stakes considerably (so to speak) for ETH HODLers as the biggest smart contract network transitions from a proof-of-work (PoW)
to the environmentally friendly proof-of-stake (PoS) consensus mechanism, which will reduce its energy consumption by 99.95%.
With energy prices at record highs around the world, Ethereum’s transition will make it very appealing for institutions seeking ESG-compliant investment. This, coupled with other innovations like its deflationary EIP-1559 burning mechanism
, promises a bright future and positive price action for ETH, depending on macro-economic stability, and could eventually turn it into a must-own asset. Of course, nothing is certain, and this is certainly not financial advice either!
The big question should rather be, will Ethereum’s transformation impress regulators enough to let an ETH ETF sneak in first and frontrun a BTC ETF? The answer: unlikely. Despite numerous filings of an Ethereum ETF in the U.S., the country's financial watchdog is yet to give a thumbs-up, citing crypto price volatility and security issues.
Canada, on the other hand, approved three Ethereum ETFs
— Purpose Investments, CI Global Asset Management and Evolve ETFs — in one day during April 2021, and continues to greenlight more funds.
What makes crypto ETFs such a powerful and desirable financial tool for investors? Simply put, there are many benefits to an ETF approval that would make it a massive boon to the cryptocurrency industry, ranging from image rehabilitation, to price action, to security concerns, to opening the likes of Bitcoin and Ether up to a world of non-crypto-crazy investors that seek the safest investments possible.
Merging of Traditional Finance and Crypto
Despite hitting over $2 trillion in market cap last year (then losing more than 50% of it in 2022), the crypto market is still minuscule compared to the tens of trillions sitting in large traditional hedge funds, mutual funds, insurance firms and other institutions. For example, the world’s biggest investment fund, BlackRock, which made waves after integrating Coinbase’s services into its Aladdin platform
, alone holds over $10 trillion assets
under its control in January 2022.
Crypto ETFs could potentially close the gap between the crypto economy and the rest of the world's economies. And broader market participation is likely to have a positive impact on the valuations of not only Bitcoin, but also the rest of the cryptocurrencies.
First, note that an ETF can contain more than one asset. For instance, an Ethereum ETF (despite its name) could also hold Bitcoin or even Facebook stocks. Consequently, it gives investors a way to diversify their portfolios
This option also helps investors hedge against the risks inherent in denominating a portfolio in a single asset. Furthermore, interacting with a regulated stock exchange enables investors to utilize existing portfolios further.
Cryptocurrency ETFs mask the hassle of buying, selling and storing virtual currencies. They also eliminate the need to learn the technology behind blockchain-based assets. Generally, a crypto ETF simplifies investors' indirect entry into the crypto ecosystem.
Efficiency During Tax Filing
The unregulated nature of cryptocurrencies prohibits major bodies such as pension funds from allowing the purchase of digital assets directly, but leveraging regulated platforms such as stock exchanges can allow for the efficient tax filing of cryptocurrency ETFs.
Another advantage of crypto ETFs is that they come from regulated firms and are traded on regulated avenues. Therefore, non-crypto investors can put their money in them with much more confidence, knowing everything is continuously monitored.
Despite numerous benefits, crypto ETFs also have their shortcomings. Some factors hindering cryptocurrency ETFs include:
ETFs Are Centralized
Cryptocurrencies have lessened the reliance on centralized financial entities, such as central banks. Additionally, they provide a greater level of privacy compared to government-issued currencies.
While these are good reasons for adopting cryptocurrencies, the use of crypto in ETFs sacrifices one crucial aspect of cryptocurrencies: decentralization. Investing in crypto ETFs means allowing a custodian to hold your digital assets. This leaves crypto ETFs open to the watchful eyes of financial watchdogs, which water down the benefits of decentralization
The year 2022 has indeed seen a resurgence in the Not Your Keys, Not Your Crypto
movement as events like the Celsius and Three Arrows Capital meltdown
and Tether and Circle’s freezing of Tornado Cash
-related USDT and USDC addresses caused widespread consternation and a call to use cold storage wallets
ETFs Are Costly to Manage
The convenience of crypto ETFs comes with a management fee. Since the cost is usually a percentage of the total shares, investments into a cryptocurrency exchange-traded fund can attract high management premiums proportional to the duration of the investment.
ETFs Are Not Tradable with Other Currencies
BTC, ETH and other currencies are normally tradeable against each other on digital currency exchanges. Unfortunately, crypto ETFs aren't tradeable with other cryptos. Furthermore, with a crypto ETF, it's impossible to pay for goods and services, unlike the underlying crypto asset
, which some merchants may already accept.
Accuracy Isn't Guaranteed
We've seen that a crypto ETF can contain more than one asset, including non-crypto ones. And although an ETF mimics the price movements of its underlying assets, multiple assets in a portfolio can affect the tracking accuracy. For instance, a 60% increase in ETH's value may display as a 45% rise in the ETF. Therefore, the tracking may be inaccurate compared with the same asset in the spot market.
Liquidity May Be a Risk
risk sets in if the ETF fund manager sells short. When that happens, shareholders pay the price. Additionally, ETFs are likely to cause a dramatic change in the price of the tracked cryptocurrencies as more investors are exposed to them.
The absence of approved crypto ETFs in the U.S. is largely due to a regulatory environment that wants to see a reduction in cryptocurrencies' volatile nature, in order to protect retail investors. With no central authority and watchdog, the SEC considers the crypto industry prone to manipulation by whales
, or wealthy investors, and fraudsters, and it is also increasingly going after crypto exchanges like Coinbase
and contemplating whether certain assets are indeed securities
This negative approach by the SEC continues to be a thorn in the side of the crypto industry, who thought that its new chairman — Gary Gensler, a former professor who lectured on blockchain at MIT and deeply understands the technology — would be sympathetic to its case. Crypto holders hoped that Gensler would grasp that a regulatory limbo was actually hurting the United States’ prospects of maintaining its edge in this new fintech sector over other countries.
In fact, not only is the SEC stifling crypto innovation, but it’s also grappling
with other U.S. federal regulators such as the Commodity Futures Trading Commission (CFTC) in a battle over who gets to regulate what in the States.
In 2017 and 2018, the SEC cited volatility as the primary reason for rejecting an ETF, a rejection some cite as one of the reasons behind the market downturn at the time. The SEC reiterated this reason in 2021, warning mutual fund investors against the “highly volatile” speculative nature of Bitcoin.
In 2022, it’s clear that despite the remaining price volatility, the crypto sector has made great strides towards maturity and adoption. The proof is irrefutable, with institutional interest on the rise
and the likes of TradFi giants like BlackRock and MasterCard
rolling out the red carpet for crypto ownership.
We have witnessed that the market efficiency has improved, the regulatory watch has evolved, audit processes have strengthened and advanced custody products are now on the market.
Unfortunately, it's not yet clear whether the crypto market has fulfilled the SEC's definition of maturity, and the negative volatility and avalanche of project implosions, crypto scams and market manipulation certainly hasn’t helped the case for a crypto ETF.
In fact, we can expect more regulatory scrutiny after the Terra Luna fiasco and its subsequent contagion that did irreparable damage to the CeFi sector.
Van Eck Verdict Extended to 11 October
Crypto’s best ETF shot right now remains the Van Eck Spot BTC ETF application
, which was first filed on June 24, shortly before the SEC rejected the Grayscale Investments and Bitwise Asset Management ETFs at the end of June
. Its deadline was extended from August 27 to Oct. 11, 2022. Could we see another extension of that into 2023?
According to the SEC
, “the Commission finds that it is appropriate to designate a longer period within which to take action on the proposed rule change so that it has sufficient time to consider the proposed rule change and the issues raised therein.”
While there’s no indication that this ETF application will be approved, it is clear that the SEC is taking their decision very seriously by requesting more time.
Despite this, hope springs eternal and it’s nearly inevitable that the SEC will eventually run out of excuses and be forced to cave.
This could come sooner rather than later, possibly expedited by president Joe Biden’s March 2022 executive order
. This order calls for a sweeping review of the federal crypto regulation, and could see the U.S. take a more progressive stance in order to stop the brain drain to other countries and build a stronger domestic industry. And fill their tax coffers, of course.
Meanwhile, influential TradFi giants like BlackRock could also have plans to launch a spot Bitcoin ETF, following its onboarding of crypto for accredited investors. Such an application would be very hard for the SEC to reject, considering the sway of influence BlackRock holds. The firm at present still denies any such plans though
It’s also important to note that previous spot Bitcoin ETF applicants are likely to try again and will indeed have learned from previous failed attempts, bringing stronger cases for approval with them. There are currently (August 2022) 25 Bitcoin ETF applications waiting for an SEC greenlight, with many of these for Bitcoin spot ETFs. If at first you don’t succeed, try again and again, because the potential rewards of success are simply too lucrative to ignore.
So putting all these what if’s together- What are the odds that a truly horrendous year for crypto investors might end with best news ever for the crypto industry?
In all honesty, very slim. If history have shown us anything, it’s best not to hold your breath, at least not for the remainder of the year. Then again, stranger things have happened, and remember, anything is possible in crypto. And after a global pandemic in 2020 and 2021 and war and record inflation in 2022, that 3rd extension in Van Eck’s application or even that 3 in 2023 could just be a lucky charm.
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