Cryptocurrency exchange-traded funds are coming to America.
While the U.S. Securities and Exchange Commission has yet to weigh in on the March 1 filing from Cboe BZX Exchange to approve listing and trading of the VanEck Bitcoin Trust, the weight of the water behind the regulatory dam appears so great at this point that le deluge is inevitable.
Even with cryptocurrency exchange-traded products already available in Europe and Canada, a U.S.-listed product could send a shock wave through the investing world.
“It will be the single most important force in driving down the cost of investing in cryptocurrency,” said Matt Hougan, chief investment officer at Bitwise Asset Management. Mr. Hougan sees the emergence of a U.S. bitcoin ETF as a watershed moment similar to the 2004 listing of the SPDR Gold Trust.
According to the World Gold Council, gold ETFs held $198 billion in assets globally through March 5, with half of that in U.S.-listed products. And similar to gold and other commodity exchange-traded products, the proposed product from VanEck, as well as similar offerings from NYDIG, Valkyrie, and WisdomTree Investments, would be structured as grantor trusts under the Securities Act of 1933, as opposed to mutual funds regulated by the Investment Company Act of 1940.
Retail and institutional investors already have many ways to invest in or use cryptocurrencies such as bitcoin and ether (tracked on a blockchain built for smart contracts), but these methods — including direct holding — can include complicated security and custody arrangements.
The advent of a U.S. ETF and the associated investor protections will ultimately “bring more liquidity, more utility and more adoption to crypto,” Mr. Hougan said.
The footsteps of a possible U.S. ETF have been so great that shares of the $37 billion Grayscale Bitcoin Trust have recently traded at a discount to its bitcoin holdings per share after years at a premium. Launched in 2013, GBTC has an annual fee of 2% and takes creations through periodic private placements. It trades on over-the-counter markets but has no redemption mechanism directly with the trust.
On March 10, Digital Currency Group, the parent of GBTC sponsor Grayscale Investments, announced it would buy up to $250 million of GBTC shares. Grayscale has also posted several ETF-related job listings. (The ARK Next Generation Internet ETF held roughly 8 million shares of GBTC as of March 15.)
Other rumblings in the cryptocurrency world have also helped to pump up the ETF hype machine.
On Feb. 19, the market value of outstanding bitcoin topped $1 trillion for the first time, and the price of an individual bitcoin has hovered over $50,000 for the past few weeks. On Feb. 25, U.S.-based digital asset brokerage and custody firm Coinbase Global Inc. filed for an initial public offering that could value the company at nearly $100 billion, according to private transactions cited by Bloomberg News.
On Feb. 26, the SEC’s division of examinations published a risk alert for investment advisers, broker-dealers, national securities exchanges and transfer agents on the scope of their examinations related to digital assets. And on March 11, a piece of digital art was sold by Christie’s for $69.3 million in ether.
While volatility and hype still mar the reputation of cryptocurrency, the market has shaken off questions of legitimacy as institutional-quality custody evolves, from State Street’s partnership with Gemini Trust to homegrown efforts from Fidelity Investments and BNY Mellon.
“Several custodians now have a track record of operating with high standards and without fail,” said Jan van Eck, CEO of Van Eck Associates Corp. His company first filed for a bitcoin ETF in 2016 before shelving that initial effort in September 2019.
“Since then, a futures market has developed and there are tens of millions of owners,” said Mr. van Eck, “but there’s still a lot of room for education with institutional investors. Our conversations have really accelerated over the last six months.”
In its IPO filing, for example, Coinbase indicated that it has approximately 7,000 institutional customers and plans to expand its institutional coverage team “to educate hedge funds, corporate treasurers, family offices, and other institutions.”
A handful of publicly traded companies, including Tesla and Square, have also purchased bitcoin through corporate treasury.
“At this point, the clients talking the most about cryptocurrency are endowments and foundations,” said Christopher Levell, partner at consultant NEPC. “In particular, some are getting donations in appreciated bitcoin and other cryptocurrencies, which they have procedures to sell. But some bequests have asked that the crypto be held for a period of years.”
“Donated crypto is seen as a speculative investment,” said Mr. Levell, “but clients are interested in its potential value in a period of fiat currency weakness. It has similarities to gold, but has greater convexity. Bitcoin could go to zero or $1 million.”
Bitwise’s Mr. Hougan said that family offices and hedge funds are among the primary investors in the company’s current private placement products, including the $1 billion Bitwise 10 Crypto Index Fund. But an ETF could open the retail and intermediary floodgates.
In a Bitwise/ETF Trends December 2020 survey of nearly 1,000 financial advisers, only 9.4% said that they allocate to cryptocurrency in client accounts. Yet 47% of financial advisers surveyed said the launch of a bitcoin ETF would make them more comfortable allocating to crypto assets, up from 37% the prior year.