It is believed that regulators will soon accept a Bitcoin-backed exchange-traded funds. This makes it important to understand the history of some of the first crypto ETFs approved by government agencies.
A Bitcoin-adjacent ETF was approved by the United States Securities and Exchange Commission. This allows investors to get exposure to Bitcoin via the stock market. The most recent acceptance was the ProShares Bitcoin Strategy ETF which began trading on NYSE Arca in October 19.
It is important to remember that these exchange-traded funds do not track pure crypto ETFs. They only track futures or stocks of crypto-related companies.
The SEC has yet not approved a pure crypto ETF. This is in contrast to Canada’s approval of three Ether (ETH-based) ETFs from three different firms back in spring.
Although regulators have begun to accept crypto ETFs, there are still many questions about how they were listed. There has been much speculation and anticipation about ETFs this fall and how they could help or hinder the crypto market. These are the challenges, issues and potential future of crypto-backed exchange traded funds.
In general, exchange-traded funds are investment funds that track a range of assets on the stockmarket and can be traded in much the same way as regular stocks.
There are ETFs available for almost any asset. However, there is still uncertainty about crypto and how regulators will define it. Also, how to protect consumers from risk exposure. These issues could be a problem as pure-crypto ETFs start to appear on stock market, as a lack of regulatory clarity could lead to problems in regulation across different national bodies around the globe.
For example, the different financial regulatory agencies in the United States have differing views about cryptocurrency, including when it comes taxation and trading.
The Autorite des Marches Financiers, France’s main financial regulator, responded to the guidance of the European Commission on “crypto assets” in 2020. It stated that it was still too early to define them. Cointelegraph was told by a spokesperson at the time:
“The AMF believes that a crypto-asset classification could be premature at this point. Only after receiving solid feedback will we be able judge the importance of a precise classification (e.g. “utility tokens”, “security tokens”, “payment tokens”, etc. ().
Melanion, a French fund manager, recently approved its Bitcoin-adjacent ETF. It hopes that its shares will track the price Bitcoin in France and other European markets soon.
Cointelegraph reached Jad Comair (founder and chief information officer at Melanion), who stated that it was not possible in Europe to expose investors to Bitcoin via the Undertakings for Collective Investment in Transferable Securities framework. This is “a format used in 99% of ETFs in Europe”. The firm needed to think outside the box and create a “world-unique index construction methodology that measures companies’ Bitcoin exposure.”
The ETF tracks stocks of companies that mine Bitcoin, invest in Bitcoin, or otherwise participate in the crypto market. However, it does not contain Bitcoin. Comair stated that the index picks the most exposed companies to Bitcoin and weights them according their historical correlation (beta), to Bitcoin’s performance.
Fears vs. risks?
High-volatility assets such as cryptocurrencies can still pose risks, especially if they are future-backed.
Bitcoin futures ETFs track a range of futures contracts, rather than Bitcoin. The spot price may be different from the futures price of Bitcoin. This could expose the ETF holder for some risk.
The term “contango”, which refers to a futures price that is higher than the spot, and “backwardation”, which is when the futures prices are lower than the spot.
Related: Crypto cracks Wall Street’s ETF Barrier: A watershed moment?
This high volatility could also mean that regulators could take steps to increase investor protection after the recent jumps in crypto markets. The question is:
Can an exchange-traded funds help to mitigate volatility risks?
Comair stated that the acceptance and implementation crypto futures ETFs, the latest model trading on the New York Stock Exchange, could open the doors for “real” money to step in. He said that the existing Bitcoin products were eligible for small investment pockets and that Bitcoin is difficult to invest in a regular portfolio. Even if the companies invest in Bitcoin, more serious exposure could lead to market explosions and/or stability.
As the stock market learns to interact with crypto markets, it is possible for ETF acceptance to increase. Could this be the beginning of futures-based crypto ETFs and ETFs tracking crypto companies, leading to greater adoption of crypto investing.