ETF Expectations: Awakening of the Crypto Market

As cryptocurrencies gradually enter the mainstream over the past decade, starting with Grayscale’s GBTC, the inflow of traditional market capital into the cryptocurrency market has garnered increasing attention. The market has warmed up recently, closely related to traditional institutions. According to CoinShares’ crypto asset flow data, starting from early October, except for a minor sell-off in one week of December, there has been a continuous inflow for over ten weeks. Bitcoin’s price has also risen from around $25,000 to over $45,000.

The market generally believes this reflects investors’ expectations that the U.S. SEC will approve several traditional asset management giants’ bitcoin spot ETF applications in January. Based on past ETF approval processes, the SEC’s final approval time is up to 240 days. Hashdex, Ark&21 shares, as the earliest institutions to submit applications for bitcoin spot ETFs, face a deadline for SEC approval by January 10, 2024. If these bitcoin spot ETFs are approved, it’s highly likely that subsequent applications, such as those from BlackRock and Fidelity, will also be approved.

Before the approval of bitcoin spot ETFs in the U.S., there have already been compliant channels for accessing crypto assets. As early as 2013, Grayscale’s GBTC was launched, allowing investors to purchase shares of the GBTC trust through traditional brokerage channels, thereby indirectly holding bitcoin.

In recent years, Europe has seen hundreds of crypto-related ETPs (Exchange Traded Products) launched in traditional markets, allowing investors to purchase crypto assets through traditional channels. Major asset management giants have also issued bitcoin spot ETF products in non-U.S. capital markets, such as Fidelity’s bitcoin spot ETF FBTC traded on the Toronto Stock Exchange (TSX) in Canada in 2021.

With numerous channels already available for purchasing crypto assets, why is there such a focus on U.S. bitcoin spot ETFs? How do these products differ from existing compliant crypto asset purchase channels?

Current State of Compliant Crypto Asset Investment Channels

According to weekly statistics from the digital asset issuance agency CoinShares, global compliant crypto asset products’ capital flows include products issued by major institutions that invest in crypto assets and are traded in traditional financial channels, including various ETPs and trust products. This data reflects traditional finance capital, especially institutional investor capital, in and out of crypto asset investment, with the latest data up to December 31, 2023. The data is divided by the trading venue’s region, and the assets primarily invested in include:

The major asset providers include:

The main asset providers are:

The top five issuers by asset management scale and their product structures are as follows:

Grayscale Investments LLC

• Introduction: Grayscale Investments is a leading global crypto asset manager headquartered in the United States. Grayscale was founded in 2013 as a subsidiary of Digital Currency Group and launched GBTC, a Bitcoin trust product, in 2013.
• Main product: Grayscale Bitcoin Trust (GBTC)
• Legal Structure: Trust (Physical Security)
• Fees: 2% management fee
• Trading platform: OTCQX
• Release date: 2013.09.25 (inception date)
• Investor requirements: Only for qualified investors and institutional investors
• Total asset management of the issuer’s crypto assets: 33,370 (unit: million US dollars, 2023.12.31)

CoinShares XBT

• Introduction: CoinShares is a leader in the cryptocurrency ETP industry, providing investors with convenient and reliable access to exchange-traded products (ETPs) of diverse digital assets. CoinShares’ XBTProvider is the first entity in Europe to offer investors easy access to Bitcoin and Ethereum with compliant products.
• Main product: Bitcoin Tracker One (COINXBT SS)
• Legal Structure: Tracking Certificate (Synthetic Guarantee)
• Fees: 2.5% management fee
• Trading platform: Nasdaq Stockholm
• Release date: 2015.05.18
• Investor requirements: Nordic retail investors
• Total asset management of the issuer’s crypto assets: 2,374 (unit: million US dollars, 2023.12.31)

21 Shares AG

• Introduction: 21Shares is the world’s largest issuer of cryptocurrency exchange-traded products (ETPs). It was founded in 2018 and is headquartered in Zurich, Switzerland. Its products include the first physically-backed Bitcoin and Ethereum exchange-traded products (ETPs).
• Main Product: 21Shares Bitcoin ETP (ABTC)
• Legal Structure: Debt Security (Physical Security)
• Fees: 1.49% management fee
• Trading platform: SIX Swiss Exchange
• Release date: 2019.2.25
• Investor requirements: Nordic retail investors
• Total asset management scale of the issuer’s crypto assets: 2,336 (unit: million US dollars, 2023.12.31)

ProShares ETFs

• Introduction: ProShares is one of the world’s largest issuers of ETFs, with more than $65 billion in assets under management.
• Main products: Bitcoin Strategy ETF (BITO)
• Legal Structure: Futures ETF (Synthetic Guaranteed)
• Fee: 0.95%
• Trading platform: New York Stock Exchange (NYSE) Arca
• Release date: 2021.10.18
• Investor requirements: US retail investors
• Total asset management scale of issuer’s crypto assets: 1,846 (unit: million US dollars, 2023.12.31)

Purpose Investments Inc ETFs

• Introduction: Purpose Investments is an asset management firm with over $18 billion in assets under management. Purpose Investments has a relentless focus on client-centric innovation and offers a range of managed and quantitative investment products. Purpose Investments is led by renowned entrepreneur Som Seif and is a division of independent technology-driven financial services company Purpose Financial.
• Main Product: Purpose Bitcoin ETF (BTCC)
• Legal Structure: Spot ETF (Physically Secured)
• Fee: 1.00%
• Trading platform: Toronto Stock Exchange (TSX)
• Release date: 2021.2.25
• For investors: North American retail investors
• The issuer’s total crypto assets under management: 1,764 (unit: million US dollars, 2023.12.31)

How do these products differ from spot ETFs?

Compared to spot ETFs, where do these products differ? According to the legal structure of products, the compliant cryptocurrency products on the market can be divided into ETPs (Exchange Traded Products) and Trusts. Among them, ETPs can be further divided into ETNs (Exchange Traded Notes), ETFs (Exchange Traded Funds), and ETCs (Exchange Traded Commodities), with crypto asset-related products mainly being ETFs and ETNs. ETFs can offer investors better accessibility, allowing investment in multiple assets with lower fees, and are suitable for long-term investment. However, ETFs can experience tracking errors, where the value of assets in the ETF differs from the benchmark value it is supposed to track, potentially leading to lower than expected returns. Additionally, ETFs have higher complexity in terms of taxation, subscription and redemption processes, and liquidity. ETNs are debt structures, typically unsecured debt instruments issued by financial institutions. Investors buy the issuer’s debt, which carries higher risk due to credit issues. Compared to ETFs, ETNs generally have poorer liquidity. However, ETNs offer a more diversified range of asset types, don’t have tracking error issues, and are more flexible in taxation. Among these products, 21Shares Bitcoin ETP is a typical ETN product. Trust structures are relatively complex, generally only traded on the OTC market, like Grayscale’s GBTC which trades solely on OTCQX, where liquidity and investor numbers are lower, and the total daily trading volume of OTCQX reached only 1.3 billion USD (2024.01.02). Moreover, Grayscale GBTC is issued through a trust structure, allowing only one-way subscriptions and no redemptions; investors can trade their shares on the secondary market only after six months from subscription, leading to GBTC experiencing positive premiums in bull markets and negative premiums in bear markets. Further, these products can be divided into two categories based on the underlying assets: physically backed and synthetically backed. Physically backed ETPs purchase and hold the physical underlying assets, so the product share price can track the price of the underlying assets. The performance of physically backed products is directly related to the performance of the related assets. For example, Purpose Investment’s BTCC is a spot ETF listed on the Toronto Stock Exchange, where each ETF share corresponds to a certain amount of bitcoin directly held by the ETF manager, typically held by professional custodians like Gemini Trust Company and Coinbase Trust Company. Synthetically backed ETPs use swap agreements with counterparties (usually banks) to provide the returns of the underlying assets. To ensure daily return delivery, swap counterparties usually need to deposit collateral held by an independent custodian (typically government bonds or blue-chip stocks), with the required collateral amount fluctuating with the value of the tracked assets. For instance, ProShares BITO is a bitcoin futures ETF on the New York Stock Exchange, investing in bitcoin futures on CME.

What kind of market impact will the SEC’s adoption of a Bitcoin spot ETF have?

The SEC’s approval of a bitcoin spot ETF would have significant market impact. These types of crypto financial products traded through traditional financial channels provide investors with a one-stop channel to gain exposure to crypto assets, bypassing various technical and compliance barriers faced by investors directly obtaining cryptocurrencies like bitcoin and Ethereum, such as private key management, taxation, and fiat currency transactions, thereby attracting trillions of dollars into the crypto market. Compared to the various products already available in the financial market, why is the US SEC’s approval of a bitcoin spot ETF so important? There are two main reasons: It reaches a larger pool of funds: More investors. The US is one of the largest financial markets, and a bitcoin spot ETF listed on mainstream exchanges can reach qualified investors, institutional investors, and retail investors simultaneously. In contrast, trust-structured products like GBTC are only available for qualified investors on the OTC market, and similar bitcoin spot ETF products in Europe and Canada have poorer liquidity and smaller capital volumes compared to the US market. Broader investment channels. Traditional asset management sectors, such as various fund managers and financial advisors, would find it difficult to include crypto assets in their portfolios without a bitcoin spot ETF. Better acceptance: Products like bitcoin spot ETFs issued by institutions such as Blackrock and Fidelity would be more easily accepted by mainstream funds due to these institutions’ brand endorsements. It addresses compliance issues with crypto assets; these products would have higher compliance clarity, attracting more investment and the development of related ecosystems. As the largest capital market, the US’s approval of a bitcoin spot ETF would bring significant impact to the crypto asset market, not only in terms of a broader source of funds but also regarding the compliance of various participants in the global bitcoin network and changes to bitcoin network activities. We will continue to observe the impact of asset compliance on crypto assets, looking forward to crypto assets shaping a new generation of capital markets. Disclaimer: 1. This article is reproduced from chaincatcher, copyright belongs to the original author [DigiFT]. If there are objections to the reproduction, please contact the Gate Learn team, who will handle it according to relevant procedures. 2. Disclaimer: The views and opinions expressed in this article represent only the author’s personal views and do not constitute any investment advice. 3. Other language versions of the article are translated by the Gate Learn team, and without mentioning Gate.io, no copying, dissemination, or plagiarism of the translated articles is allowed.

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