With regulatory organizations thought to be on the verge of accepting a pure Bitcoin (BTC)-backed exchange-traded fund, it’s critical to understand the path taken by some of the first crypto-based ETFs recently recognized by government agencies.
The US Securities and Exchange Commission recently authorized a Bitcoin-adjacent ETF, allowing investors to obtain exposure to Bitcoin through the stock market. The ProShares Bitcoin Strategy ETF, which began trading on NYSE Arca on Oct. 19, was the most recent approval.
It’s worth noting that the aforementioned exchange-traded funds aren’t pure crypto ETFs; instead, they follow crypto-related firm stocks or futures contracts.
In contrast to Canada, where authorities authorized three Ether (ETH)-based ETFs from three distinct firms in the spring: Purpose Investments, Evolve ETFs, and CI Global Asset Management, the SEC has yet to approve a pure-crypto ETF.
Despite the encouraging news that regulators are beginning to approve crypto ETFs, there are still numerous concerns regarding why they have been so difficult to list. There has been a lot of buzz and conjecture this autumn about what ETFs are and how they may help — or hurt — the crypto market as a whole. The concerns, challenges, and potential future of crypto-backed exchange-traded funds are outlined here.
Misalignment of regulatory requirements
In general, exchange-traded funds (ETFs) are investment funds that follow a basket of assets on the stock market and may be exchanged like conventional equities.
While ETFs exist for almost every asset, the issue with cryptocurrencies is that authorities are still unsure how to identify Bitcoin and other cryptocurrencies, as well as how to shield customers from risk exposure. These difficulties might pose a problem when pure-crypto ETFs begin to appear on stock exchanges, since a lack of regulatory clarity could lead to regulatory challenges across national organizations and throughout the world.
For example, the numerous financial regulatory bodies in the United States all have distinct — and often contradictory — perspectives on what cryptocurrencies are, particularly when it comes to taxation and trading.
The Autorite des Marches Financiers (AMF), France’s main financial regulator, replied to the European Commission’s guidelines on so-called “crypto assets” in 2020, noting that it is still too early to define them precisely.
The AMF considers that giving a precise classification applied to crypto-assets could be premature at this stage. It is only after solid feedback that we will be able to judge the relevance of a precise classification (e.g. ‘utility tokens’, ‘security tokens’, ‘payment tokens’, ‘stablecoins’ etc.).
Melanion, a French fund manager, just received approval for its Bitcoin-adjacent ETF, with the goal of having its shares track the price of Bitcoin, first in France and then across Europe.
Because it is not possible to directly expose investors to Bitcoin in the European market via the Undertakings for Collective Investment in Transferable Securities (UCITS) framework — which is “a format used by 99 percent of the ETFs listed in Europe” — Melanion had to get creative and create “a world unique index construction methodology that measures companies’ Bitcoin trajectories,” according to Jad Comair, founder and chief investment officer of Melanion.
This implies the ETF follows the equities of firms that invest in Bitcoin, mine Bitcoin, or are otherwise active in the cryptocurrency industry, but it does not hold Bitcoin. “The index chooses the most Bitcoin-exposed firms and weights them based on their historical correlation (beta) to Bitcoin’s performance,” Comair explained.
Fears vs. dangers?
With extremely volatile assets like cryptocurrencies, there may still be dangers, especially with a futures-backed Bitcoin ETF.
Instead of Bitcoin, Bitcoin futures ETFs follow a portfolio of futures contracts. Because Bitcoin futures prices might fluctuate from spot prices, there’s a chance the ETF won’t precisely track the price of Bitcoin, putting the ETF holder at risk.
When the futures price is higher than the spot price, it is called “contango,” whereas when the futures price is lower than the current price, it is called “backwardation.”
Furthermore, given the market’s extreme volatility, regulators may take steps to improve investor safety, particularly in light of the recent price increases in the crypto market. This raises the following question:
Is it possible that an exchange-traded fund (ETF) could assist to limit the risks associated with volatility?
With the recent acceptance and implementation of crypto futures ETFs — the most recent model now trading on the New York Stock Exchange — this could “open the doors for the’real’ money to step in,” as “the existing Bitcoin products are eligible for small investment pockets, and Bitcoin itself is very difficult to put in a regular portfolio,” according to Comair. More substantial market exposure, especially if it comes from firms investing in Bitcoin, might cause the market to explode or stabilize.
As the stock market learns how to connect with the crypto market — and vice versa — it’s likely that movements in the crypto market may push for wider ETF acceptance. Could the emergence of futures-based crypto ETFs, as well as ETFs tracking corporations investing in crypto, lead to a wider acceptance of crypto investment as a whole?