Will Cryptocurrency Exchange Traded Funds (ETFs) Finally Come to the United States of America? Dozens of cryptocurrency-based ETFs or ETF-like products are currently sold on regulated exchanges in Europe, while Canada and Brazil have already introduced their own versions this year. Yet for the past eight years, not a single investment firm has gained approval from the U.S. Securities and Exchange Commission (SEC) for a cryptocurrency-backed ETF. The winds may now be changing.
“A futures-based Bitcoin ETF will be approved in the next few weeks, not months,” John Sarson, co-founder and CEO of Sarson Funds LLC, told Cointelegraph, adding that “the Bitcoin futures market is now extremely well tested and very liquid after three years ”.
The outlook wasn’t all that promising a month ago, but things picked up momentum on Aug. 3 when SEC chief Gary Gensler noted in a statement that the U.S. regulatory agency was not necessarily opposed to ETFs. Bitcoin (BTC) based on futures.
Gensler said he was awaiting his staff’s reviews of recent submissions from firms looking to trade exchange-traded funds with indirect exposure to the world’s leading cryptocurrency, “particularly if those [fund offerings] they are limited to CME ”, that is, Chicago Mercantile Exchange,“ Bitcoin Traded Futures ”.
“Gensler took us all by surprise,” Kathleen Moriarty, senior advisor at Chapman and Cutler LLP, told Cointelegraph. Gensler’s statement, coupled with the subsequent withdrawal of Ethereum (ETH) ETF filings by fund managers VanEck and ProShares, led two Bloomberg analysts to opine that a futures-based Bitcoin ETF could be approved at from October.
Is this reading too much on the agency’s tea leaves? Is a futures-based BTC ETF really imminent, and if so, why can’t an ETF take direct ownership of Bitcoin? Gensler, who once headed the CFTC that regulates the US derivatives markets, including futures, may believe that a futures-based crypto ETF offers another layer of investor protection, namely CFTC oversight in addition to SEC oversight.
Also consider that a futures-based BTC mutual fund, Bitcoin Strategy ProFund (BTCFX), got SEC approval in July without much fanfare. Perhaps the SEC is using futures-based crypto funds as a transitional product to test the regulatory waters with physical-based crypto ETFs to follow in 2022, say, if all goes well. On the other hand, it is a model based on futures Is Bitcoin ETF Really The Best Product For Investors?
Are Bitcoin ETFs at your fingertips?
Chris Kuiper, Vice President of CFRA Research, told Cointelegraph: “We just think it’s a matter of time. Since the SEC allows futures-based gold ETFs, it would be difficult for them not to eventually approve a Bitcoin ETF also based on the now well-established Bitcoin futures market. “
How Bloomberg analysts Eric Balchunas and James Seyffart might interpret VanEck and ProShares’ withdrawal from Ethereum ETF proposals as a good sign for crypto ETFs may be puzzling at first glance, but as the CEO of Banz Capital, John Iadeluca to Cointelegraph: “While VanEck and ProShares quickly withdrew their Ethereum Futures ETF apps, they didn’t do the same with your Bitcoin Futures ETF applications, which appears to be a positive sign for the approval of a Bitcoin ETF. ”When those funders saw a door open, there was presumably no need to keep an eye on all the doors.
Iadeluca further noted that when the Chicago Mercantile Exchange took its first steps towards cryptocurrency futures, it started with Bitcoin futures and Ethereum futures several years later. “It would make sense for the same order to occur with futures ETFs, and recent ETF application activity seems to hint that that will happen sooner than expected,” Moriarty added:
“The other funny thing that nobody has mentioned is that on May 11, 2021, the [SEC’s] The Investment Management Division issued a statement regarding its current views on funds registered under the 1940 Act investing in Bitcoin futures. The statement said that it does not yet allow the offering of funds registered in the 1940 Act which are ETFs that provide exposure to Bitcoin by investing in Bitcoin futures. “
Clearly, some ambiguity persists. “About an October approval, that’s anyone’s guess,” said Moriarty, who worked with Cameron and Tyler Winklevoss on the SEC’s first filing for a Bitcoin ETF in 2013, finally rejected by the agency in 2017.
The best product for investors?
Why might the SEC approve a future-based crypto ETF before a physical one? After all, “futures-based Bitcoin funds do not invest directly in cryptocurrency, they do not track BTC as closely as funds that are physically held,” and can be more expensive, Kapil Rathi, CEO and co-founder of a cryptocurrency institutional. Exchange CrossTower, he told Cointelegraph. The firm “is not convinced that it is the best vehicle for investors. It creates significant inefficiencies in terms of constant negotiation and renewal costs ”.
Neena Mishra, Head of ETF Research at Zacks Investment Research, told Cointelegraph: “Investors would prefer physical Bitcoin ETFs, but if investors don’t see any physical BTC, they will buy futures ETFs.” She believes that the approval of the futures-based version is likely to be soon, perhaps in November.
Of course, this is not the crypto ETF that most were waiting for: Balchunas compared to “serve O’Doul’s [non-alcoholic beer] when the party wants real beer, ”but Sarson, for example, was unfazed.
“A futures-based BTC ETF will be very popular, just like futures-based commodity ETFs are very popular with investors,” he told Cointelegraph. “I think it will hardly differ from a physical commodity ETF.” Nor will the “unavoidable K-1” tax forms deter many from investing in the futures-based product, he added.
Could a futures-based ETF approval open the floodgates for other crypto-based ETFs in the US? “Launching a BTC ETF could bolster the prospects for ‘physical’ backed ETFs in the near future,” Rathi told Cointelegraph. Managers looking to launch physically backed ETFs might point to the working futures-based ETF as something of a proof of concept. Rathi added: “They could present clear data to the SEC on why a physically backed ETF would be significantly better for investors than a futures-based ETF.”
Market manipulation concerns
Another question is why the SEC (apparently) believes that a futures-based Bitcoin ETF would offer more investor protection than one that invests directly in the digital currency. After all, “the commodity futures market has been beset by large-scale market manipulations since its inception,” as law professor JW Markham explains. wrote a few years ago, and it’s still a problem.
In April, US regulators launched “one of the largest oil market manipulation investigations in history” in which traders allegedly squeezed the oil futures markets.
Kuiper acknowledged that such a position would be “somewhat odd,” given that a key SEC concern regarding Bitcoin ETFs is the lack of regulation in the spot market and concerns about market manipulation, telling Cointelegraph :
“While the futures market is more regulated, futures are a derivative and are therefore extracted from the underlying commodity. Therefore, it appears that there should be more concern about possible market manipulation with the Bitcoin futures market given that it is leveraged and settled in cash, with no need to trade or settle actual Bitcoin. “
Additionally, Rathi added: “Gensler is solving counterparty credit risk by backing a futures ETF. He’s also pushing for a product the SEC has seen in the past, like VXX. [a volatility ETF] and USE [an oil ETF], which are also futures-based. “However, he believes that while a Bitcoin futures ETF” solves a problem, it creates significant cost inefficiency. It also increases the risk that futures market makers will try to play with the trades that the ETF manager would be doing every month. “
As noted, the SEC approved ProFunds’ BTC open mutual fund in July, which invests primarily in Bitcoin futures contracts, and some believe this approval prompted more fund managers to apply for futures-based Bitcoin ETFs.
ETFs are becoming increasingly popular against mutual funds due to their lower fees, tax efficiency, and ability to trade like stocks. Among the companies that came forward to offer futures-based Bitcoin ETFs in August were Invesco, VanEck, Valkyrie Digital Assets, Galaxy Digital and ProShares, a subsidiary of ProFunds.
Timeline for a ‘physical’ Bitcoin fund
When can you expect a US ETF to invest directly in digital assets like Bitcoin and Ethereum, that is, the “real beer”? “A real Bitcoin ETF backed by the holding and storage of real Bitcoin, similar to GLD with gold, is not yet likely,” Toroso Investments co-founder and chief investment officer Michael Venuto told Cointelegraph. Candidates for imminent approval are all Bitcoin strategies, he added, using futures and other securities “in an attempt to track Bitcoin’s behavior. The tracking error could be quite high. “
Mishra views futures-based Bitcoin ETFs as a transitional product. Multiple approvals from the US could come in November, and if they go smoothly, then the SEC could approve physical ETFs in the first half of 2022, maybe.
When physical and futures ETFs are finally available to investors, Mishra expects the physical ETF to be more popular than the futures-based one. In fact, many of those holding futures-based Bitcoin ETFs might as well migrate to physical ETFs.
Related: The Big Crypto Shift: Can Ethereum Overtake Bitcoin?
What about an Ethereum ETF? “There is no time soon,” Mishra said, adding that it is only likely after a physical BTC ETF is finally approved. Would the approval of a physically backed ETF in the US be a big event? “Overall, it would be a positive for the crypto world,” he told Cointelegraph. Many investors have avoided investing in cryptocurrencies due to security concerns, such as losing access to their wallets. “An ETF would be safer and easier to trade.”
Overall, it seems that a futures-based crypto ETF might be easier for the SEC to approve at this point, even if its tracking of Bitcoin is imperfect and its fees are higher. It could play a positive role as a transition product, making both investors and regulators more comfortable with the new crypto ecosystem. That said, “a physically backed ETF, more in the vein of GLD, would clearly be the optimal vehicle for investors,” as Rathi told Cointelegraph.