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Sunday, December 3, 2023

Bitcoin and Ethereum ETFs: Why are These Brick-and-Mortar Tools Important for Crypto Development?

Explore the significance of Bitcoin and Ethereum ETFs in cryptocurrency development. Learn how they connect traditional finance with digital currencies, fostering accessibility and mainstream adoption.

Some experts predicted the approval by the U.S. Securities and Exchange Commission, SEC for short, of applications for spot Bitcoin ETFs before November 17, but the miracle did not happen. The SEC once again postponed the decision on applications to launch an ETF, i.e., an exchange-traded fund on BTC.

Introduction: Exchange Traded Funds vs. Mutual Funds

Exchange-traded funds, commonly abbreviated as ETFs, are a type of investment fund that are available for trade on regular stock exchanges. They present an opportunity for the average investor who may not have expertise in choosing individual stocks to invest in a collection of securities such as bonds, stocks, or commodities, that are designed to trace the progress of a particular index or sector. Similar to mutual funds, ETFs provide investors with a diversified portfolio in a single investment, but with the added advantage of being listed and traded like individual stocks. This feature makes them convenient for investors who wish to gain exposure to a particular market or asset class.

When compared to alternative investment choices, ETFs offer a number of benefits. One such advantage is their capacity for flexibility when it comes to buying and selling. They can be bought and sold throughout the trading day, enabling investors to respond in a timely manner to market changes. Furthermore, ETFs generally feature lower expense ratios in comparison to mutual funds, making them an economical option for investment.

The reason for our interest in this matter is due to the recent surge of requests from traditional investment funds to the U.S. Securities and Exchanges Commission. These requests aren’t usual, since they are almost all — as one — aimed at the public offerings of ETFs linked to Bitcoin and, more recently, Ethereum. It is important to note that this spike in interest hasn’t appeared out of thin air, but rather been maturing for many months, as investors from all walks of life have shown a significant appetite towards these forms of innovative investments.

ETFs are relatively new market phenomena. Their predecessor form was mutual funds, which were also a type of collective investment. However, mutual funds have become nearly obsolete due to several factors such as low liquidity, inadequate exposure, and other outdated features that gradually made them ineffective. A mutual fund is an investment tool that pools together funds from several investors to invest in a diversified portfolio of bonds, stocks, or other securities. These funds were managed by licensed fund professionals or accredited investment firms.

Mutual funds back in the early 90s offered several benefits to investors. Firstly, they provided diversification, as the pooled money is invested in a range of securities, reducing the risk associated with investing in a single asset. Additionally, mutual funds are managed by professionals who have expertise in selecting and managing investments. This eliminates the need for individual investors to make complex investment decisions.

Overall, ETFs have become increasingly popular due to their simplicity, diversification, and transparency, making them a valuable tool in the modern investment landscape. They also provide better transparency, as the composition of such funds is tracked and published daily, enabling investors to monitor their investments more closely. 

Exchange Traded Funds Became a Perfect Tool to Introduce Crypto as a Traditional Investment 

To date, only one exchange-traded fund — Grayscale Bitcoin Trust (GBTC) — is copying Bitcoin's dynamics, which is not really focused on Bitcoin, but on its derivatives — futures traded on the Chicago Derivatives Exchange. On July 14, the SEC acknowledged acceptance of similar applications from BlackRock, VanEck, Fidelity Investments, Invesco, and WisdomTree for Bitcoin spot trading, but after the expiration of the statutory trial period, it decided to postpone the verdict on their launch “until better times,” still reluctant to say a firm “no”

In June, the corresponding asset manager Grayscale sued the regulator for refusing to convert its flagship GBTC trust into a real Bitcoin ETF. The company submitted an application to the SEC to convert the investment product as far back as October 2021.

The court of appeal ruled that the Commission must revoke its derogatory decision. Recall that in July 2022, Craig Salm, head of Grayscale's legal department, estimated the possible timeframe for a trial with the SEC at one or two years. So far, the U.S. financial regulator has not granted an approval for the launch of spot ETFs for these ‘alternative assets’. So far, in its contradictory move, the Commission made an exception for similar products based on futures on the first cryptocurrency from ProShares and Valkyrie Investments.

In reality, the much-expected authorization to launch spot Bitcoin funds is crucial for investors and various funds wishing to diversify their investment portfolios with top crypto assets. It is no secret that until now, official banks and funds managing the funds of their depositors have not been granted the legal right to invest any of their funds’ assets in crypto. And yet, interest in Bitcoin, Ethereum, and other coins, such as Ripple and Solana, has been growing exponentially. Both the U.S. and European investors tirelessly solicit their brokers to find a way to get exposure to crypto-assets. Speaking about the current “overclocking” stage, ETFs should become a more profitable investment tool for mass investors compared to the currently offered alternative crypto products of the mass market — such as trusts and futures, the market of which is estimated at $21 billion. As a result of these ongoing efforts, it is estimated that the inflow of relevant funds may increase by $27 billion by 2024 and by $39 billion by the year 2025.

Here are more accurate figures: “The American capital management industry is likely to be the most affordable and direct market that will receive the largest net inflow of funds from the approved Bitcoin ETF. As of end-October 2023, the total amount of assets managed by broker-dealers ($27 trillion), banks ($11 trillion) and asset managers ($9 trillion) was $48.3 trillion.” Of course, we are not even talking about half of these gigantic funds in the projection of interest to invest precisely into Bitcoin or even across the entire crypto sector, and yet, the potential of new opportunities is mind-boggling!

According to a number of reputable crypto resources, including Cointelegraph, exchange-traded funds (ETFs) of spot Bitcoins (BTC) can attract at least $14.4 billion in the first year after their mass launch.

Given that Bitcoin's current market capitalization is about $725 billion, the most conservative estimate of the price effect from the net influx of fund purchases alone will be about 2.2% by the end of this year. Next year, by all indications, this should translate into a sustained upward momentum, as in addition to the fund inflows’ aftermath — already at 4% of Bitcoin's current capitalization — the expectation of the much-talked-about Halving-2024 will come into play, which will amplify the resulting effect thereby pushing Bitcoin price higher by tens of percent.

In this respect, recently, Ark Invest’s renowned CEO Cathie Wood recently forecasted a cryptocurrency market valuation of $25 trillion by 2030. That prediction came on the back of Ark Invest's recent SEC filings to approve as many as five new exchange-traded funds (ETFs) in partnership with 21 Shares. Kathy Wood ironically added that she was “very impressed” with some questions posed by the SEC. She also said she didn't understand Chairman Gary Gensler's hostility towards Bitcoin, as she considered him to be “definitely very knowledgeable about the asset”.

Current Bitcoin ETFs in the Pipeline

Currently, there are several Bitcoin ETF names eagerly waiting for approval from the U.S. Securities and Exchange Commission. One of the most prominent ones is the VanEck Bitcoin Trust, which aims to track the performance of Bitcoin by holding its underlying physical asset. Alongside this is the Bitwise Bitcoin ETF, designed to provide exposure to Bitcoin through the use of futures contracts. Additionally, the Valkyrie Bitcoin Trust is seeking SEC approval, intending to invest directly in Bitcoin as well. Another notable name in the club is the SkyBridge Bitcoin ETF, proposed by Anthony Scaramucci's firm, SkyBridge Capital. This ETF would offer institutional investors a way to gain exposure to Bitcoin's potential upside. 

All these Bitcoin ETF names highlight the growing interest and demand for regulated investment vehicles in the cryptocurrency space. Investors and enthusiasts are anxiously awaiting the SEC's decision, as the approval of these ETFs could pave the way for a new era of mainstream adoption and legitimacy for Bitcoin.

In its turn, the product of the well-known alternative investment fund called Franklin Bitcoin ETF will consist primarily of Bitcoins held by Coinbase Custody Trust Company. If approved, the investment vehicle will be launched on the CBOE BZX exchange. CF Bitcoin from the Chicago Mercantile Exchange will be used as a benchmark.

The total assets under management of Franklin Templeton nowadays amount to approximately $1.4 trillion. The company is a very well-known fund manager for its generally innovative approach to investments, and therefore its intention to join other runners in the race for Bitcoin-ETFs did not come as a surprise.

BlackRock's Spot Bitcoin ETF is Now Listed on the Nasdaq Trade Clearing System

In the meantime, the good news is that investment giant BlackRock (BLK) has recently announced its iShares spot Bitcoin fund is now listed on the Depository Trust and Clearing Corporation (DTCC), indicating possible imminent approval from the U.S. Securities and Exchange Commission. The DTCC listing is “part of the overall process” of launching a cryptocurrency ETF.

The iShares Spot Bitcoin ETF, which filed in June and trades under the ticker IBTC, could soon be listed on the Nasdaq exchange. Some Wall Street insiders speculate that BlackRock may have already received SEC approval to list the ETF.

Judging by the date of BlackRock's filing, the SEC has time until January 10, 2024, to make a final decision on ETF approval or disapproval, but the latter would evoke a lot of critique and discontent from reputable financial sector participants. So, if BlackRock's application is approved, it could open the door to a number of an avalanche of cryptocurrency ETFs pending before the SEC, including applications from ARK Investment, Fidelity, and Valkyrie.

The Bitwise Bitcoin ETP, also known as the Bitwise Bitcoin Exchange Traded Product, is another unique investment vehicle allowing investors to gain exposure to Bitcoin. Its white paper says that the investment tool seeks to maximize potential roll returns through a selective analysis of Bitcoin futures beyond front- or near-month contracts. Just like Grayscale Bitcoin Trust, Bitwise Bitcoin ETP can be bought and sold just like any other stock or ETF on a regulated exchange. Bitwise Bitcoin ETPs are managed by professional investment firms that handle all the technical aspects of owning and storing Bitcoin. 

The first spot Bitcoin exchange-traded fund to launch in the European market has been classified as a Section 8 fund by its issuer, London-based Jacobi Asset Management. Article 8 of the European Sustainable Finance Disclosure Regulation (SDFR) covers funds that “promote environmental and/or social characteristics”. Launched on August 15 on Euronext Amsterdam, the fund is the first traded Bitcoin ETF in Europe and the first fund to apply “EU environmental, social and governance investment rules”.

Current Ethereum ETFs in the Pipeline

Meanwhile, the Ethereum community eagerly awaits the approval of several Ethereum ETFs by the Securities and Exchange Commission (SEC). These ETFs are expected to provide investors with a convenient way to gain exposure to the world's second-largest cryptocurrency. While there are several ETF proposals that have been filed with the SEC, their names are yet to be finalized as they are subject to regulatory scrutiny.

One prominent proposal is the Ether ETF filed by VanEck, the very same well-known asset management firm that simultaneously filed for Bitcoin ETF. Since VanEck has a history of arranging for the launch of Bitcoin ETFs, their Ethereum ETF will be a nice addition, aiming to capitalize on the growing popularity and adoption of Ethereum as a source of countless smart contracts. The proposed ETF is eagerly anticipated by investors, as it could potentially offer a more accessible and traditional investment vehicle for Ethereum.

Another notable contender is the WisdomTree Ethereum Trust, which also seeks SEC approval nowadays. WisdomTree is a leading provider of ETFs, and their Ethereum Trust would allow investors to gain exposure to ETH without directly owning the crypto. This ETF could attract an equally wide range of investors looking to diversify their portfolios and participate in the potential upside of Ethereum.

And last (but certainly not the least), is the Fidelity Ethereum Fund which is paving its way to becoming a U.S.-regulated spot ETF for this second-largest cryptocurrency by market capitalization and market interest. However, as stated in Fidelity's 19b-4 filing, options for U.S. investors looking to gain exposure to Ethereum via this medium are currently restricted to an over-the-counter (OTC) ETH fund that comes with steep fees and fluctuating premiums.

If a spot ETF receives approval from Fidelity, it would be a significant triumph for safeguarding investors in the realm of cryptocurrency. The 19b-4 account shares similarities with Blackrock's newest proposal for a spot Ethereum ETF, which mirrors the same reasoning and challenges.

While the names of these Ethereum ETFs are yet to be officially announced, the anticipation surrounding their approval is already palpable within the crypto community. Investors are eagerly awaiting the SEC's decision, as these ETFs could provide a regulated and mainstream investment avenue for Ethereum.

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