Bitcoin ETFs Aren’t New. Here’s How They’ve Fared Outside the US

·6 min read

Trading for the first bitcoin futures exchange-traded fund (ETF) approved by the Securities and Exchange Commission (SEC) began this week for U.S. investors, and the cryptocurrency market appears to be rallying around its launch. The ProShares Bitcoin Strategy ETF (BITO) was the first to list on the New York Stock Exchange, with trading starting on Tuesday.

However, it’s vital to note what the approved ETF actually looks like and how much potential demand there might be for these products. One way to gauge interest is to see how other ETFs around the world have performed and what investors are actually looking for in a bitcoin investment vehicle.

This article is part of Crypto 2022: Policy Week, a look at how regulators and legislators are shaping cryptocurrency and how the industry is fighting back.

The SEC-approved bitcoin ETF is a futures-based trading products and does not hold any of the underlying crypto assets. A futures-based ETF tracks a derivative of bitcoin, rather than the actual asset. According to CoinDesk Learn, “Bitcoin futures may diverge from the spot price of bitcoin due to the prevailing market sentiment, so bitcoin futures ETFs might also occasionally track the price of bitcoin inaccurately.”

In contrast, spot-based ETFs hold the underlying asset and give investors direct exposure to the price movements of bitcoin. However, these investment products have been repeatedly rejected by the SEC.

Read more: What Is a Bitcoin Futures ETF?

Looking north: ETFs in Canada

As Americans attempt to understand the effects of the futures ETF, there is no better place to look than Canada for contrast. The upstairs neighbor has several crypto-focused ETFs trading on the Toronto Stock Exchange with billions of dollars in assets under management. 3iQ Coinshares, Purpose Bitcoin and CI Galaxy Bitcoin are three of the largest funds; Purpose is the largest with $1.2 billion (CAD $1.64 billion) in assets under management (AUM) as of Oct. 13.

More importantly, the top three ETFs by AUM are all directly invested in spot bitcoin with the futures-based alternative drawing in only $7.6 million (CAD $10.48 million) AUM or about 0.3% of Canadian ETFs, providing insight to the preference of investors.

An interesting fact comes to bear if we look at the holders of the Purpose and CI Galaxy ETFs. According to FactSet, the Purpose Bitcoin ETF is held by “unknown entities” while ~28% of CI Galaxy ETF holders are institutions, namely Bain Capital Public Equity and CI Investments.

This likely means the holders of Purpose are individual investors or smaller investment advisors, which aligns with the ethos of the requisite parties. CI GAM and Galaxy’s focus is on institutions, while Purpose Investments markets itself as an innovative consumer financial services company. With that, given the growth of crypto has been largely retail-driven, it might be unsurprising that Purpose’s ETF has more than three times the AUM of CI Galaxy’s.

What’s more, Purpose Investments recently announced that it has applied for three more crypto-focused ETFs along with a privately offered fund offering exposure to decentralized finance.

Spot ETFs favored globally

Investors around the world, including in Germany and Switzerland, are flocking to physically backed exchange-traded products (ETPs). The 21Shares bitcoin ETP, which is 100% exposed to spot BTC, is listed on both the Swiss Exchange and several German exchanges and is nearing half a billion dollars in AUM. Much like the Canadian ETFs, 21shares ETP has 100% exposure to single asset bitcoin and has significantly more demand than their crypto indexes and multi-asset counterparts, of which the largest has $215 million in AUM.

One of the newer entrants to the bitcoin ETF world, Brazil, also went with the spot based option. QR Capital’s bitcoin ETF is trading on the São Paulo exchange and holds 100% BTC with $41 million (BRL $227.5 million) in AUM.

Why do investors prefer physically backed or spot bitcoin ETFs?

According to Bitwise CIO Matt Hougan, futures ETFs could cost an additional 5% to 10% per year to roll into new futures contracts at each expiry alongside another 1% to 2% in fees. Furthermore, futures ETFs are only 85% exposed to the underlying asset, with the remaining 15% being invested in other asset classes.

Spot ETFs track the price of the underlying asset much more closely than their futures-based counterparts for less of a cost, making the product more attractive to investors who want direct exposure to bitcoin without custody risk. For example, according to Bloomberg, Horizon’s Front Month Rolling Bitcoin Index has returned 530% over the past two years, while bitcoin itself returned 660% over the same period.

If we look at price correlation of bitcoin, a bitcoin spot ETF (Purpose) and a bitcoin futures ETF (Horizon Betapro), we see that the futures ETF does an adequate job of tracking the price of bitcoin. However, the spot ETF maintains slightly closer price correlation.

Given the cost of maintaining a spot ETF is lower than maintaining a futures ETF, it follows that a spot ETF would be a better option strictly for tracking the price of bitcoin. Note that the correlation chart included considers the direct price correlation rather than a correlation on returns to showcase how well the ETFs track bitcoin on a dollar basis, as we are not looking cross-asset.

Why is the SEC adamant on approving a less favorable alternative?

The chairman of the SEC has been outspoken about investor protection and the oversight that comes alongside futures markets and other derivatives. Gensler deemed the spot bitcoin market susceptible to manipulation and an illegitimate source for an exchange-traded product. However, Bitwise argues the regulated CME bitcoin market is now the leader in price discovery, making it a viable option for spot-based ETFs.

The addition of any bitcoin ETF was a long time coming in the United States, but hopeful ETF providers have had even less luck in other countries, with France and Australia just beginning to offer “crypto-focused” equity funds. Holding stock in mining companies or in crypto-invested strategic companies like MicroStrategy has been a loophole for investors to gain exposure to the growth of the crypto industry. The United States’ recent decision may pave the way for regulation worldwide, considering its sheer dominance throughout other ETF markets.

While futures-based ETFs are not investors’ first choice, the combination of crypto and ETFs could make a big splash, introducing a new class of investor to both sectors. Consider that the global ETF industry currently has $9.4 trillion in assets under management, growing at an annual rate of 26%, while crypto’s market capitalization sits at $2.75 trillion – and most of its value is being held on retail exchanges, in trusts like Grayscale (a CoinDesk sister company) or on-chain where it can be used as intended. The U.S. represents $5.47 trillion in ETF AUM, or 70% of the overall market, signaling its adoption of crypto ETFs could be unprecedented.

Sufficient demand for the futures product could also lead to an influx of capital to ETF markets and increase buying pressure on BTC. If the first day of trading was any indication, the U.S. market has clearly been waiting for easier access to bitcoin. ProShares’ BITO ETF did over $1 billion in volume, the second highest of any ETF at launch.

Furthermore, the launch of futures-based ETFs may be a stepping stone to the maturity of bitcoin trading markets and the eventual listing of a spot-based product. If the SEC agrees with Bitwise, that the regulated CME market is responsible for price discovery, a wave of true spot ETFs might not be far off.

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