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With regulators gradually coming to terms with Bitcoin as an asset, how might this affect the current and future views of BTC ETFs?
With regulatory bodies rumoured to accept a pure Bitcoin (BTC)-backed exchange-traded fund in the near future, it is critical to understand the journey of some of the first crypto-based ETFs that have recently been approved by government agencies.
The US Securities and Exchange Commission approved a Bitcoin-adjacent ETF, allowing investors to gain exposure to Bitcoin through stock markets. The most recent acceptance was that of the ProShares Bitcoin Strategy ETF, which began trading on NYSE Arca on Oct. 19.
It’s important to note that the exchange-traded funds mentioned above are not pure-crypto ETFs, but rather track either crypto-related company stocks or futures contracts.
The SEC has yet to approve a pure-crypto ETF, in contrast to Canada, which approved three Ether (ETH)-based ETFs from three different firms in the spring: Purpose Investments, Evolve ETFs, and CI Global Asset Management.
Despite the good news of regulators beginning to accept crypto ETFs, many questions remain about why there have been so many challenges in listing them. This fall, there has been a lot of anticipation and speculation around what ETFs are exactly and how they can boost — or hinder — the crypto market as a whole. Here are the issues, challenges and possible future of crypto-backed exchange-traded funds.
In general, exchange-traded funds are investment funds that track a basket of assets on the stock market and can be traded in the same way that regular stocks are.
While there are ETFs for almost every asset, the issue with crypto is that regulators are still unsure how to define Bitcoin and other cryptocurrencies, as well as how to protect consumers from risk exposure. These issues may pose a challenge as pure-crypto ETFs begin to appear on stock exchanges, as a lack of regulatory clarity may cause regulatory issues across various national bodies and around the world.
The various financial regulatory agencies in the United States, for example, all have different – and sometimes 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, responded to the European Commission’s guidance on so-called “crypto assets” in 2020, stating that it is still too early to define them explicitly. At the time, a spokesperson told Cointelegraph:
“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, recently received approval for its Bitcoin-adjacent ETF, with the hope that its shares will track the price of Bitcoin, first in the French market and then in many other markets across Europe.
According to Jad Comair, Melanion’s founder and chief information officer, it is not possible in the European market to directly expose investors to Bitcoin through Undertakings for Collective Investment in Transferable Securities (UCITS) framework — which is “a format used by 99% of the ETFs listed in Europe” — the firm had to get smart and create “a world unique index construction methodology that measures companies’ Bitcoin exposure.”
This means that the ETF tracks the stocks of companies that invest in Bitcoin, mine Bitcoin or are otherwise involved in the crypto market, but it doesn’t contain Bitcoin itself. “The index selects the most exposed companies to Bitcoin, and weighs them according to their historical correlation (beta) to Bitcoin’s performance,” said Comair.
Fears vs. risks?
There still could be risks involved with highly volatile assets like cryptocurrencies, especially with a futures-backed Bitcoin ETF.
Bitcoin futures exchange-traded funds (ETFs) track a basket of futures contracts rather than Bitcoin itself. Because Bitcoin futures prices may differ from spot prices, there is a risk that the ETF will not accurately track the price of Bitcoin, exposing the ETF holder to some risk.
When the futures price is higher than the spot price, the term “contango” is used, whereas “backwardation” is used when the futures price is lower than the spot price.
Furthermore, the high volatility suggests that regulators may move to implement more investor protection, particularly in light of the jumps in the crypto market over the last six months. This raises the question:
Could an exchange-traded fund help mitigate the risks that come with volatility?
The recent acceptance and implementation of crypto futures ETFs — the most recent model now trading on the New York Stock Exchange — may “open the doors for the’real’ money to step in, as, for the time being, the existing Bitcoin products are eligible for small investment pockets, and Bitcoin itself is very complicated to put in a regular portfolio,” according to Comair. More serious exposure to the markets, even if it is through companies investing in Bitcoin, could cause the market to explode and/or stabilise.
As the stock market learns how to interact with the crypto market, it is possible that changes in the crypto market will push for more ETF acceptance — and vice versa. With ETFs tracking companies investing in crypto and the onset of futures-based crypto ETFs, could this lead to more widespread adoption of crypto investing as a whole?