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Crypto Goes Mainstream: What's The Big Deal About An ETF?

By

Mary

Driscoll

WriterETHNews.com

The first in a series on what investors large and small should know about digital asset investments.

Intrepid digital asset investors want to turn over a new leaf, forget last year's price bath, and look for opportunities as the crypto markets decompress, redefine, and move mainstream.

Putting idealism aside, many investors are looking forward to incremental regulatory acquiescence, clarity on securities pricing mechanics, and transparent fee structures when opting for crypto investments from a portfolio manager or wealth advisor. Toward that end, some are pinning their hopes on a successful SEC registration of two (or at least one) bitcoin exchange-traded fund (ETF) in the coming months. 

Innovations Apace

There are several factors sparking investor interest. The most powerful is a growing sense among institutional investors (such as college endowments) that prices will stabilize in 2019 after the boom and bust of 2017-2018. We are also seeing a maturation of surrounding infrastructure, such as the enabling technology and business models, needed to make the crypto space feel safe for highly regulated organizations.

Consider digital asset custody and trading solutions now being unwrapped by Fidelity Investments. Beyond that, crypto futures are newly available from the Chicago Mercantile Exchange (CME), an organized exchange for the trading of futures and options. Another breaking wave of product innovation involves security token offerings (STOs) linked to real estate or equity shares in companies. Both versions of so-called tokenization, brought to life with blockchain technology, have been heralded as "the next hot crypto thing." These opportunities will soon be packaged for limited issuance to accredited investors. And why not? Endowments, pension funds, and financial advisors to wealthy clients want to slice some crypto into their model portfolios.

Yet of all these, a bitcoin ETF is viewed as the "Holy Grail" for cryptocurrency and its adoption.

What Is a Cryptocurrency ETF?

A cryptocurrency ETF works, in theory, like any other ETF. While old-school ETFs track an index of familiar securities such as stocks, bonds, precious metals, or commodity futures, a cryptocurrency ETF would track one or more exchange-traded digital tokens.

While this might sound similar to an index fund, an ETF trades more like a common stock on an exchange. Furthermore, a crypto ETF would be subject to changes in price throughout the day as investors buy and sell, unlike a standard index fund, which settles at the end of the day.

Crypto index funds already exist: An example is the Bitwise 10 Large Cap Crypto Index, which reflects a collection of the largest coins, weighted by 5-year diluted market capitalization and rebalanced monthly.

In all, the progression unfolds as follows: An asset management firm builds a digital coin index and then offers accredited investors an ETF that tracks that index.

The word is that investment managers and advisors plan to increase their investing clients' exposure to crypto asset investments in the coming months. The motivation comes from wealthy clients calling with questions about crypto, according to a recent survey of US advisors by Bitwise Asset Management and ETF Trends, a digital news site. "The survey shows that interest in crypto investing from financial advisors not only survived [last year], but grew," said Matt Hougan, global head of research for Bitwise Asset Management, in the Bitwise press release. Survey respondents included independent registered investment advisors, independent broker-dealer representatives, and financial planners in the US.

The class of investors that wealth managers refer to as "high net worth" (HNW) or the even richer "very high net worth" (VHNW) have a growing appetite for ETFs in general, according to the Bitwise and ETF Trends survey mentioned above. Given that many advisory clients already invest in digital coins outside of their advisor-managed portfolios, it's a good bet that bitcoin ETFs, once approved by the SEC, would appeal to these jetsetters.

Promoters of bitcoin ETFs are quick to point out their benefits over direct investments. First, existing digital wallets and crypto exchanges are susceptible to hacks and thefts. An investor in a digital currency ETF, however, would ostensibly have an added layer of security with a super-fast and efficient digital asset custodian bank that supports the ETF. Another benefit of the digital currency ETF is that it can be used to track multiple digital tokens at once. Without the ETF structure, the process of investing in, say, 20 different tokens demands a lot of time and attention. A cryptocurrency ETF would, hypothetically, eliminate much of the time now required by investors to track those same 20 tokens.

The Candidates

Last June, investment firm VanEck sought SEC approval of its then-proposed bitcoin ETF. Late last year, VanEck's director of digital strategy, Gabor Gurbacs, told Cheddar's Crypto Craze that an exchange-traded funded would help Bitcoin to "grow up." He argued that "bitcoin has emerged as a legitimate investment option, as a type of 'digital gold' that may make sense for investors' portfolios." After some modifications to its proposal and a second submission, VanEck is still waiting for the green light.

And as reported by ETHNews in January, Bitwise Asset Management, the provider of index and beta funds for the crypto asset space, prepared a so-called "physically held" bitcoin exchange-traded fund. Bitwise believes the newly proposed bitcoin ETF will address some of the SEC's major concerns about such a fund. At press time, Bitwise was still waiting to hear back from the SEC, which is collecting public comments for the next two weeks. Bitwise explained that if regulatory approval comes through, the fund will be listed on NYSE Arca, which is touted as the first all-electronic exchange in the US.

Things are indeed heating up. ETHNews reported just last week on the launch of J.P. Morgan's own digital coin. All this activity points to a growing volume of money aiming at digital asset securities. That, in turn, would give institutions greater trading opportunities, and, as the saying goes, away we go! With blockchain technology helping in the build-out of the infrastructure needed for crypto market maturity, and barring unforeseen negative events, crypto markets should enjoy a beneficial network effect.

Mary Driscoll

Mary Driscoll covers finance and business trends as a staff writer for ETHNews. She formerly served as an editor for management and finance at the Economist Intelligence Unit and a research principal at APQC. In addition, she has written for The Wall Street Journal CFO Report, HBR-online, and strategy + business. Her book on corporate treasury management was published by John Wiley & Sons, Inc. Mary enjoys hiking and skiing in the Sierras with family. Her goal in life is to win big on Jeopardy.

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