U.S: Why investing in Bitcoin without crypto-exchanges and digital wallets possible in 2021

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Looking for the adrenaline rush to invest in Bitcoin but without the trouble of crypto-exchange and digital wallets? An exchange-traded fund might appeal, except that an investor won’t find a bitcoin tracking in the US$5.8 trillion. ETF Universe—at least not yet. Although exchange-traded crypto-tracking products operate in Europe, U.S. regulators have repeatedly blocked attempts to implement crypto-tracking products citing concerns about possible abuse and thin liquidity. Yet, with the world’s largest digital coin rallying to new heights and a transition in leadership at the Securities and Exchange Commission, the possibility of the first U.S. Bitcoin ETF appears to be on the rise.

1. What would a Bitcoin ETF look like?

ETFs are part of a wider family known as exchange-traded goods, but people sometimes use “ETFs” to refer to them all since they are by far the largest and most common contingent. ETPs trade as stocks and can track (almost) any asset class by directly purchasing securities or replicating performance by derivatives. Niche ETPs monitor everything from cannabis stocks and uranium mines to space based investments and daily currencies. The largest Bitcoin ETP—€1.7 billion Bitcoin Tracker on the Stockholm Stock Exchange—invests in swap contracts to represent the returns of the cryptocurrency. Meanwhile, many U.S. investment trusts follow Bitcoin and are close to, but limited to, ETFs. The Grayscale Bitcoin Trust (GBTC ticker) is physically backed, meaning that it contains Bitcoin. The ETF proposed by VanEck Associates Corp. also plans to keep the cryptocurrency physically.

2. Is there demand for an ETF?

There’s a legitimate reason to think that way. GBTC grew in size during Bitcoin’s bull run into early 2021, with total assets increasing to more than $27 billion from $2.8 billion a year earlier. Demand for crypto-related goods has been so steadfast that investors have crept into trust, even as their market value has risen to 40 percent higher than the value of Bitcoin it kept. The recently launched Bitwise 10 Crypto Index Fund (BITW ticker) rose to more than $700 million in valuation at the beginning of February following its December debut, which means that it was priced at 63% above its nett asset value.

3. Why would investors pay such premiums?

Since purchasing investment trusts is better than buying the coins themselves. Shares can be purchased and sold on brokerage platforms without the need to set up digital wallets or transfer money to a crypto exchange. Industry analysts claim that the premiums on trust products will be reduced if the Bitcoin ETF were authorised. Unlike ETFs, the issue with trusts is that new shares cannot be generated rapidly. For example, only accredited investors can set up BITW shares with a minimum initial stake of $25,000. The lock-up period bars the selling of new shares for 12 months. The supply constraints helped to add to these rising premiums.

4. Why have regulators shunned a Bitcoin ETF?

What’s happening on the markets

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As well as concerns that prices could be manipulated and liquidity inadequate, there is also concern that bitcoin’s popular volatility may be too much for daily investors. Bitcoin’s last three full-year returns were 74 percent loss, followed by 95 percent and 306 percent gains. The regulator also questioned whether the funds will have the knowledge required to properly value cryptocurrencies or related items. Questions have also been raised regarding validating the ownership of the coins owned by the funds and the threat from hackers.

 

5. Who is interested in launching one?

The only successful filing with the SEC at the beginning of February was the request submitted by the VanEck Bitcoin Trust in December. The fund will value its shares on the basis of prices contributed by what the index provider deems to be the top five cryptocurrency exchanges. Bitwise Asset Management is also looking to launch a wider ETF cryptocurrency. It’s one of the many issuers who have tried to launch the Bitcoin ETF, starting with the Winklevoss twins in 2013. Other attempts have been made by Direxion, ProShares, First Confidence, Grayscale, WisdomTree and GraniteShares, all without success.

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6. What are the current hurdles to approval?

Wild price swings—in the early weeks of 2021 Bitcoin grew by more than 40 percent, then dropped by 24 percent before growing by more than 50 percent—have recurred concerns about exposing ETF investors to such uncertainty. In addition, Secretary of the Treasury Janet Yellen acknowledged that Bitcoin is an area of concern for terrorist and criminal funding. Critics also argue that problems surrounding industrial coercion are yet to be resolved effectively. Since the sum of bitcoin is finite, the concern is that large investors will be able to drive the price.

7. So what are the chances of an ETF this year?

Market watchers say they’re improving as Wall Street heavyweights like Paul Tudor Jones and Stan Druckenmiller embrace cryptocurrencies and like Robinhood and PayPal make it easier to use and sell Bitcoin. Some crypto fans were inspired by President Joe Biden’s selection as SEC Chairman of Gary Gensler; Gensler once taught a class at MIT’s Sloan School of Management called “Blockchain and Money.” But he also recognised industry problems with fraud and light regulation. Don’t expect a decision until the new president is in place between now and July.

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-Bloomberg

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