Bitcoin ETFs Explained
Bitcoin ETFs have been the buzz of the crypto industry lately, with a spot Bitcoin ETF proposed by Vaneck resulting in a rejection by the SEC recently. So what is an ETF and why should we care? In this piece, we look at what an ETF is and evaluate the current state of play with Bitcoin ETFs.
What is an ETF?
ETF stands for Exchange-Traded Fund and traditionally tracks a commodity, an asset, a stock, etc., allowing for these to be purchased and sold on a stock exchange easily. ETFs typically consist of numerous investment types and are viewed as a low-risk investments due to high diversification levels.
One of the most popular ETFs is the Vanguard S&P 500 (VOO). Vanguard’s ETF tracks the returns of the S&P 500 index. The Vanguard S&P 500 allows investors to buy and sell the S&P 500 index fund with relative ease.
VOO is appealing to many small and large investors due to it being low risk and highly diverse. This is because the index tracks the 500 largest public limited companies (PLCs) in the USA. The table below illustrates the top ten VOO holdings.
|Berkshire Hathaway Inc||BRKB||1.4%|
|JPMorgan Chase & Co||JPM||1.3%|
|Johnson & Johnson||JNJ||1.2%|
Are There Currently Crypto-Related ETFs?
At the time of writing, there are already numerous cryptocurrency-related ETFs. However, most of these ETFs consist of blockchain companies that are tradeable on the stock market, rather than cryptocurrencies themselves. For example, one of the most popular ETFs currently available in the USA is ‘Amplify Transformational Data Sharing ETF’ (BLOK, not Bloktopia).
Amplify Transformational Data Sharing ETF
The BLOK ETF asset class is equity-based and has assets totalling $1.5bn. BLOK consists of numerous blockchain/crypto-related stocks. The top 15 (by portfolio %) are as follows:
|GLXY||Galaxy Digital Holdings Ltd.||5.71%|
|SI||Silvergate Capital Corp. Class A||5.64%|
|COIN||Coinbase Global, Inc. Class A||4.86%|
|HUT||Hut 8 Mining Corp.||4.53%|
|RIOT||Riot Blockchain Inc||3.94%|
|MARA||Marathon Digital Holdings Inc||3.86%|
|HIVE||HIVE Blockchain Technologies Ltd||3.84%|
|VOYG||Voyager Digital Ltd.||3.12%|
|CME||CME Group Inc. Class A||3.09%|
|SQ||Square, Inc. Class A||2.97%|
|PYPL||PayPal Holdings, Inc.||2.90%|
|8473||SBI Holdings, Inc.||2.90%|
Are there currently any forms of cryptocurrency ETFs available?
There are currently multiple options for investors wishing to invest in cryptocurrency-based ETFs. The first identified is BITO, the ProShares Bitcoin Strategy ETF.
BITO was the first cryptocurrency ETF approved by the SEC and allowed to trade in the USA. What is special about BITO is that it does not spot hold BTC. Rather, the ETF holds futures contracts, meaning that the ETF never purchases actual Bitcoin.
Another similar ETF is the BTF ETF. BTF was launched on the NYSE shortly after BITO was announced. BTF ETF is similar in many ways to BITO as it does not invest in Bitcoin through the spot market, but rather through the futures contracts.
What would a spot Bitcoin ETF consist of?
Rather than being backed by futures contracts, a spot ETF would be backed by physical Bitcoin. There is a lot of speculation as to whether this would be beneficial to Bitcoin’s price. However, the general consensus is that it would open up access to the world's largest investors which would likely be beneficial to price.
Despite the recent spot ETF filing, it seems unlikely that we will see a spot BTC ETF anytime soon. Many exchanges have filed for a spot ETF, but none have succeeded in getting it approved up to now. This is due to regulators wanting to increase regulatory structures surrounding exchanges. Additionally, there are potential custody issues surrounding a spot BTC ETF.
Are cryptocurrency ETFs available in all countries?
The USA, Sweden, Germany, and Canada have allowed for some form of ETF. However, many countries such as the United Kingdom have outright rejected the proposal of ETFs. In the UK, these approaches have been blocked by the FCA who cite the high volatility of cryptocurrencies as a partial reason why ETFs have been blocked (despite ETFs being highly diverse, decreasing risk and potential exposure to volatility).
In conclusion, there is still a lot of progress to be expected in relation to Bitcoin ETFs. Currently, there are many high-quality blockchain-based ETFs available, particularly in the USA. However, there is a severe lack of spot-based cryptocurrency ETFs worldwide.
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