A long-awaited Bitcoin futures exchange-traded fund (ETF) started trading on the New York Stock Exchange Tuesday, and it’s a key moment in the ongoing rollout of cryptocurrency. The new ETF is called the ProShares Bitcoin Strategy ETF (BITO), and it joins a narrow field of funds that offer exposure to digital currency.
The new Bitcoin-linked fund gives traders a way to speculate on Bitcoin without having to buy cryptocurrency directly or set up an account with a crypto exchange. Investors can simply buy and sell the fund like they would any other stock trading on the exchange, making it simple to get started.
“By opening up the doors to mainstream investors through Bitcoin ETFs, numerous investors can participate in indirectly investing into Bitcoin but without actually holding the digital asset itself, which can help alleviate the fears that many newcomers have,” says Peter Jensen, CEO of blockchain payments company RocketFuel Blockchain.
But the road to more crypto exchange-traded funds looks bumpy, say experts, even though many fund companies would love to get a cut of the healthy fees that can be charged for running an ETF based on the trendy asset. And this desire comes during a period when fees on traditional assets such as stocks have been slashed as competition for new assets heats up.
Here are the handful of crypto ETFs out now and the funds traders can expect in the future.
Bitcoin ETFs: The funds available now
Bitcoin ETFs can exist in two major types, depending on how a fund owns the cryptocurrency and provides exposure to investors:
- Physical ETFs, which hold actual bitcoins backing the fund
- Futures ETFs, which own crypto futures contracts traded on an exchange
“Right now, the majority of applications being considered by the SEC are for physical ETFs, but there have been a growing number of applicants for futures ETFs in the past year or so,” says Sui Chung, CEO of CF Benchmarks, a subsidiary of Kraken, a crypto exchange.
It may seem like a small detail, but being able to buy and sell cryptocurrency through the ETF structure opens up the asset to new investors.
“Bitcoin ETFs allow mainstream institutional investors to access Bitcoin without having to worry about Bitcoin storage in hot wallets, which are more susceptible to hacks, as well as regulatory and fiscal implications their funds would face if they simply bought it on a decentralized cryptocurrency exchange,” says Kay Khemani, managing director at Spectre.ai, a broker-less trading platform.
For now, the Securities and Exchange Commission (SEC) favors futures ETFs, including the new ProShares Bitcoin Strategy ETF, but there are a few existing funds that trade publicly already.
Existing crypto funds
Two existing funds that own cryptocurrency are trading publicly, and both hold it directly.
Grayscale Bitcoin Trust (GBTC)
The Grayscale Bitcoin Trust started in 2013 as a private investment with a six-month lockup that prevented investors from reselling it into the public market for that period. But some investors have since sold their shares into the market, so now anyone can buy shares in the fund. The fund charges a fee of 2 percent of assets under management annually.
The company behind the fund announced in October that it’s looking to convert to a Bitcoin spot ETF. The fund would give investors a way to track the price of Bitcoin in a familiar ETF structure.
Bitwise 10 Crypto Index Fund (BITW)
The Bitwise 10 Crypto Index Fund tracks a weighted index of the 10 largest cryptocurrencies by market capitalization (not including stablecoins and some others) and is rebalanced monthly. It started in 2017 as a private investment for accredited investors, but now trades publicly. The fund charges a hefty 2.5 percent of assets annually as a management fee.
Its largest holdings include Bitcoin (which comprises the majority of the fund), Ethereum, Cardano and Solana.
Other crypto-related funds
At least one fund – the Volt Crypto Industry Revolution and Tech ETF (BTCR) – has worked around the SEC’s preferences, and was recently approved for trading.
“The SEC approved Volt Equity’s ETF, which aims to circumvent the current SEC restrictions by not directly investing in Bitcoin but instead by tracking companies that hold a majority of their assets in Bitcoin or which derive their revenues from Bitcoin-related activities,” says Jensen.
For now, the ways to invest directly in cryptocurrency via publicly traded funds are limited. But those looking to play the emergence of blockchain technology – the tech behind these digital currencies – have a few ways to invest in funds that own companies riding that wave.
The largest blockchain ETF is Amplify Transformational Data Sharing ETF (BLOK), whose top holdings include Hut 8 Mining (HUT), Marathon Digital Holdings (MARA) and MicroStrategy (MSTR), as of October 2021.
Another player here is Siren Nasdaq NexGen Economy ETF (BLCN), whose top holdings include Silvergate Capital (SI), Marathon Digital Holdings and MicroStrategy.
The SEC and cryptocurrency ETFs
“The SEC has so far refused to approve any ETFs that directly invest into Bitcoin itself, despite there being numerous asset managers who have applied to do so with the similar setup already visibly running strong in countries like Germany, Canada, and Switzerland,” says Jensen.
So what’s holding the SEC back on approving other funds or those that own cryptocurrency directly? Experts point to a number of reasons.
“Regulatory concerns surrounding ETFs include their management fee structures, questions around Bitcoin’s true intrinsic value and of course, the fact that the underlying asset in question still has an uncertain regulatory future,” says Khemani.
Chris Kline, COO and co-founder of Bitcoin IRA, points to still other reasons.
“According to past rulings, regulators are concerned, namely, over digital assets’ ability to be manipulated, issues over volatility and the absence of surveillance,” says Kline.
“In the past, regulators weren’t quite sure how cryptos operated,” he says. “As they became more familiar with the space… the SEC is starting to understand how these assets are stored, secured, and reconciled so that it makes sense in traditional finance.”
But another key reason the SEC has shown some preference for futures ETFs over physical ETFs concerns already-existing regulation, says Chung.
“The venues where the majority of cryptocurrency trading takes place – exchanges – are currently under no legal obligation to adhere to the existing capital market regulations, such as the Securities Exchange Act,” he says. “Of course, many platforms – Kraken included – have voluntarily chosen to follow these requirements, but the SEC continues to have reservations about approving a product from a market that falls largely outside its purview.”
“But since Gary Gensler became the new SEC chair earlier this year, he has voiced preference for a futures ETF, as it will hold contracts from the Chicago Mercantile Exchange – a marketplace already regulated by its sister regulator, the CFTC,” says Chung.
Which cryptocurrency ETFs are on the horizon?
While the SEC may be slow-rolling approvals on cryptocurrency ETFs now, experts see that as largely temporary and point to already-existing crypto ETFs in Canada and Europe. When the regulatory framework is set, it could lead over time to a range of new ETFs, even if some of the most esoteric products do remain off-limits in publicly traded funds.
“Once the regulatory kinks have been ironed out, the ETFs will follow,” says Khemani.
“In the case of crypto ETFs, we are unlikely to see anything besides Bitcoin and Ethereum in the short term, but we are likely to see variation in the future as the SEC begins to more actively regulate the industry,” says Ben Weiss, CEO and co-founder at CoinFlip, the operator of a network of cryptocurrency ATMs.
And as for when traders might see a range of new crypto ETFs?
“Crypto ETFs are inevitable,” says Kline. “A product like this will eventually come to fruition since there is a demand for it, but a timetable remains uncertain.”
Increasing regulation – which can create safeguards around cryptocurrency – could open crypto to a wider range of fund companies, too.
“While a number of ETFs have been proposed by crypto specialist firms, like Valkyrie and Kryptoin, a number of new applications have also come from players in the traditional space, such as WisdomTree, Invesco and ProShares,” says Chung.
Although a clear regulatory framework and standards will help usher in a wave of crypto ETFs, don’t expect the industry to securitize all crypto products.
“ETFs on more exotic crypto concoctions like unregulated decentralized trading exchanges, lenders, staking or farming high-yield investment programs are unlikely to be approved anytime soon,” says Khemani. He points to inherent security risks in these products precluding them from a traditional ETF.
While traders wait for the SEC to lay the foundations for cryptocurrency ETFs, they’re not restricted from trading in the currencies directly, of course. It’s easy to get started with a cryptocurrency exchange such as Binance, especially if you’re familiar with online brokerages. If you select a low-cost crypto exchange, you can avoid some of the hefty management fees levied by existing ETFs, which can be 2 or 2.5 percent of your invested assets annually.
So for those investors looking for a robust market for cryptocurrency ETFs, they’ll have to continue waiting until the SEC decides how it will proceed.
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