Zack is a crypto enthusiast who has been published on Yahoo! News and received the Yahoo! Hot 500 award several times.
Investors Believe the Future of Cryptocurrency Lies Within ETFs
There are many investors that are excited about the future of cryptocurrency and rightfully so. We hear about Bitcoin in the news on a daily basis, and it only seems to grow more popular as time goes on.
Most of all, Americans want to know why there aren't any Bitcoin ETFs available on the New York Stock Exchange (NYSE) yet. It's a great question. This article explains why the Securities and Exchange Commission has not yet approved a bitcoin ETF.
What Is an ETF?
ETF is short for exchange-traded fund (ETF), which is a grouping of securities that trade on an exchange in a similar manner to a stock. ETFs can be bought and sold and see price fluctuations throughout the day. In contrast, a mutual fund is different from an ETF, because it is only traded once a day after the market closes. ETFs are generally passively managed, while mutual funds are generally actively managed. This is why mutual funds typically have higher fees and higher expense ratios than ETFs.
Both ETFs and Mutual Funds have the potential to be less risky than buying an individual stock because they spread your investment across multiple securities, but this doesn't necessarily guarantee less risk. Savvy retail investors should know that different ETFs and mutual funds have different risk levels. Some can be more conservative, while others can be more aggressive and thus carry more risk.
ETFs can contain a mix of stocks, bonds, and commodities. Investopedia notes that "an ETF can own hundreds or thousands of stocks across various industries, or it could be isolated to one particular industry or sector. Some funds focus on only U.S. offerings, while others have a global outlook."
The prospectus—a formal document that is required by the Securities and Exchange Commission (SEC)—states the comprehensive details of the investment offering for every U.S. stock, bond, ETF, and mutual fund.
Canada Leads the Way in Crypto ETFs
Canada launched their first bitcoin ETF, known as the Purpose Bitcoin ETF (BTCC), in February of 2021. It reached a trading volume of $400 million shares in just two days. Only a week later, the Purpose Investment bitcoin ETF had reached $590 million in assets.
Canada's market is only about 8% of the size of the U.S. market, with only $215 billion in assets. For another comparison, there are similar exchange-traded products in Europe that have already reached about $6.5 billion in assets (Bloomberg).
Days later, the second bitcoin ETF in Canada, Evolve Fund Group's Bitcoin ETF (EBIT) launched, with a smaller splash of about $14.5 million shares of assets. Bloomberg is quick to note that Canada's ETF market was the first for many non-traditional products. See the chart below for more information.
|Canada Firsts||Year of Launch|
First fixed-income ETF
First marijuana ETF
First SPAC ETF
First psychedelics ETF
First Bitcoin ETF
According to Yahoo! Finance, both Canadian ETFs offer closed-end trusts and operate by purchasing Bitcoin and holding it in "cold storage" in a manner that does not risk exposing investors to trading at premiums that would affect the value of the ETF's underlying holdings. This allows investors to gain exposure to bitcoin without having to buy or sell it themselves.
A Third Canadian ETF Launched in March 2021
A third Canadian ETF was listed on the Toronto Stock Exchange in March of 2021. CI Global Asset Management launched the CI Galaxy Bitcoin ETF under the ticker BTCX. It gives investors exposure to bitcoin via direct investment into cryptocurrency with holdings that are priced with the Bloomberg Galaxy Bitcoin Index.
The CEO touts their ETF as being at a highly competitive price point. The Purpose Bitcoin ETF has a 1% management fee, and the Evolve Fund Group's Bitcoin ETF has a 0.75% management fee. BTCX's management fee, on the other hand, is a mere 0.40%.
Why Hasn't the SEC Approved a BTC ETF in the U.S.?
With all of the success of Canadian Bitcoin ETFs, what is the NYSE waiting for? Why have they yet to approve a Bitcoin ETF in the U.S.?
The SEC Wants to Protect US Investors From Fraud
The Securities and Exchange Commission (SEC) in the US has rejected many applications for bitcoin ETFs in recent years. They have cited two main concerns that prices can be manipulated, and liquidity is insufficient. As a result, US investors have turned to the Grayscale Bitcoin Trust (GBTC) as an investment vehicle (discussed further down), but it is not an ETF. It has more risk and trades at higher premiums, which is not favorable for investment.
Famous Investors Cameron and Tyler Winklevoss' Bitcoin ETF Was Denied
Even the famous investors Cameron and Tyler Winklevoss (linked to the founding of Facebook; see the movie "The Facebook"), were rejected twice for a proposed bitcoin ETF. In response, Cameron Winklevoss said: "Despite today's ruling, we look forward to continuing to work with the SEC and remain deeply committed to bringing a regulated bitcoin ETF to market and building the future of money."
According to Dale Brady, writer at Coindesk, the SEC rejected nine different ETF proposals in August 2018 from firms ProShares, Direxion, and GraniteShares.
Why Do Non-Tokenized-ETFs Keep Getting Rejected?
There is a reason why so many ETFs have been rejected to date, and the main reason is that non-tokenized ETFs track the price of Bitcoin, but the SEC believes that Bitcoin's price is "prone to manipulation."
What Is the Tokenization of Assets?
The tokenization of assets is the process of issuing a blockchain (security) token that digitally represents a real tradeable asset. It allows for securing the value of assets.
The SEC Is Focused on Protecting Investors
Maxim Nurov, a fund manager of Black Square Capital, says that "the main focus of the SEC is investor protection."
Despite all of the ETF applications being rejected to date, that doesn't mean that there is no hope for the future of bitcoin ETFs, but there is a catch.
The former chairman of the SEC, Jay Clayton said in a webinar with the Chamber of Digital Commerce: "It may very well be the case that [stocks] all become tokenized," and in reference to ETFs, he said, "We're willing to try that; our door is wide open. If you want to show how to tokenize the ETF product in a way that adds efficiency, we want to meet with you, we want to facilitate that."
For an ETF application to be accepted by the SEC, it should be tokenized, to guarantee more protection to investors.
It should be noted that Jay Clayton served as the Chairman of the SEC until December 23, 2020, and the new Chairman may have a different opinion.
Numerous Firms Have Filed Applications to Offer Bitcoin ETFs on the NYSE
Van Eck first attempted to file an ETF application in 2019, and was unsuccessful. Then they refiled an application again in December 2020 to offer the VanEck Bitcoin Trust ETF.
Valkyrie Digital Assets, a cryptocurrency subsidiary of Valkyrie Investments, is ready to offer a bitcoin exchange-traded fund (ETF) on the New York Stock Exchange (NYSE), pending first approval from the US Securities and Exchange Commission (SEC). It should be noted that there is a rather long history of bitcoin ETFs getting rejected by the SEC in recent years.
As of March 2021, the Chicago Board Options Exchange (CBOE) officially filed, requesting permission to list shares of Van Ecks's bitcoin ETF. This started a legal review period of 45 days for the SEC to either approve or deny the ETF application. As of the publication date of this article, it is worth noting that the SEC has not officially acknowledged that it is reviewing the Van Eck application. The SEC also has the option to extend their review period up to 240 more days before making a final decision.
Fidelity Files for a Bitcoin Trust
Asset management firm Fidelity has filed an application, dated 24 March 2021, called the "Wise Origin Bitcoin Trust." The application was filed under the name FD Funds Management LLC as the sponsor of this fund, and the address for this sponsor is the same address as the Fidelity headquarters. The application states that the investment objective is to track the performance of bitcoin.
Grayscale Bitcoin Trust Is a Bitcoin Investment but Not an ETF
As mentioned previously, the Grayscale Bitcoin Trust (GBTC) is currently available as an investment in bitcoin, but it is not an ETF.
The company profile says that the fund invests in Bitcoins. It invests through derivatives such as futures, swaps and other CFTC-regulated derivatives that reference digital currencies. The fund seeks to track the performance of the TradeBlock XBX Index. Grayscale Bitcoin Trust was formed on September 25, 2013 and is domiciled in the United States.
Grayscale's website says: "Grayscale Bitcoin Trust is solely and passively invested in Bitcoin, enabling investors to gain exposure to BTC in the form of a security while avoiding the challenges of buying, storing, and safekeeping BTC directly."
The Grayscale Bitcoin Trust has about $34 billion in assets.
Grayscale's Investment Is Sold at a Premium
Tim Hakki, writer at Decrypt, says that Grayscale investment offering often "sells shares worth far more than the Bitcoin it represents." Prior to the introduction of Canada's first ETFs, US investors willingly paid a 7.5% premium to invest, and end up paying an average of 37% over the lifetime of the investment (Bloomberg).
The Future of Crypto ETFs on the NYSE
Based on all of the information presented in the news, Canada has shown the US that bitcoin ETFs are very popular among retail investors, and many Americans would readily invest in a bitcoin ETF. Just look at the popularity of the Grayscale Bitcoin Trust.
In the meantime, Americans will continue to wish for the day when bitcoin ETFs become a reality on the New York Stock Exchange.
- Akhtar, Tanzeel. "Third Bitcoin ETF Expected to Launch in Canada This Week. Yahoo! Finance. URL: https://finance.yahoo.com/news/third-bitcoin-etf-expected-launch-145535476.html
- Ballentine, Claire and Sam Potter. "Raging Success of First Bitcoin Fund Shows Who Leads ETF Market." Bloomberg. Article URL: https://www.bloomberg.com/news/articles/2021-02-21/raging-success-of-first-bitcoin-fund-shows-who-leads-etf-market
- "CBOE Kicks Off Bitcoin ETF Clock With VanEck Filing." Coindesk. URL: https://www.coindesk.com/cboe-kicks-off-bitcoin-etf-clock-with-vaneck-filing
- Chen, James. Exchange Traded Fund (ETF). Investopedia. URL: https://www.investopedia.com/terms/e/etf.asp
- Dale, Brady. "VanEck Proposes ETF for Bitcoin, Once Again." Coindesk. Article URL: https://www.coindesk.com/vaneck-proposes-bitcoin-etf-again
- Decrypt Staff. "SEC Chairman Open to Crypto-based Exchange-Traded Fund." Decrypt. Article URL: https://decrypt.co/43803/sec-chairman-open-to-crypto-based-exchange-traded-fund
- Grayscale corporate website. URL: https://grayscale.co/bitcoin-trust/
- Guzman, Zack. "World's first bitcoin ETF soars past $500 million in assets under management." Yahoo! Finance. Article URL: https://finance.yahoo.com/news/worlds-first-bitcoin-etf-soars-past-500-million-in-assets-under-management-213407975.html
- Hakki, Tim. "Valkyrie Digital Assets Becomes Latest Company to File for Bitcoin ETF." Decrypt. Article URL: https://decrypt.co/55141/valkyrie-digital-assets-becomes-latest-company-to-file-for-bitcoin-etf
- McSweeney, Michael. "Asset management giant Fidelity files for a bitcoin ETF." Article URL: https://www.theblockcrypto.com/linked/99279/fidelity-bitcoin-etf-filing
- "SEC Rejects 9 Bitcoin ETF Proposals" Coindesk. Article URL: https://www.coindesk.com/sec-rejects-7-bitcoin-etf-proposals
- Valinsky, Jordan. "The Winklevoss twins' bitcoin ETF was rejected." CNN Business. Article URL: https://money.cnn.com/2018/07/27/technology/business/winklevoss-twins-bitcoin-etf/index.html
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2021 Zack Love