Top Bitcoin ETFs You Should Familiarize Yourself With
On October 19th, a major milestone for the cryptocurrency world was crossed with the debut of the Bitcoin futures exchange-traded fund in the US, ProShares Bitcoin Strategy ETF, followed by another launch a few days later.
A cryptocurrency exchange-traded fund is simply a fund that holds cryptocurrencies. A spot cryptocurrency ETF will track the price of one or multiple digital tokens. Depending on investor interest in the exchange-traded fund, the share prices of these ETFs will fluctuate daily just like those of stocks.
The launch in the US wasn’t that of a spot cryptocurrency ETF but that of a cryptocurrency futures ETF. A crypto futures ETF invests in the Bitcoin futures contracts. These are simply agreements to trade -buy or sell- crypto assets at a price that has been pre-agreed upon. The futures ETF does not directly invest in a Bitcoin or any other cryptocurrency.
The rise of crypto ETFs is expected to catalyze a rapid growth in crypto investments by hitherto ‘mainstream’ investors who have shunned cryptos over the past years. We are going to see some of the money FOMOing into an uncertain cryptocurrency trade finding its way into the safer and stabler cryptocurrency exchange-traded funds.
The crypto ETFs will also permit investors to trade through their regular and familiar investment accounts which takes the novelty out of the crypto trade with its jargon and slightly hi-tech trading platforms and environments. This simplifies things for investors and lets them bypass the complexity and security concerns often associated with cryptocurrency exchanges.
Two crypto ETFs have already debuted in the US and one was launched in Australia early in the month. There are also pending crypto ETF applications in the US that are expected to launch soon, pending regulator approval.
However, the launch of ProShares Bitcoin Strategy ETF and Grayscale Bitcoin Trust a few days later in the New York Stock Exchange are the surest signs that the SEC is finally contemplating the possibility of US-based ETFs holding cryptocurrency futures. ETFs that hold physical cryptocurrencies are still not allowed by the regulator but many advocates and investors are bullish that these will eventually make their way into the mainstream market.
The US regulator allowing crypto ETFs, even if only for crypto futures, has been a significant industry development. This is happening at a time when many governments, along with their agencies, are keen on controlling the crypto markets and on getting some leverage on the trade to prevent the abuse of crypto assets on such nefarious activities as funding terrorism, drug trade, money laundering or the use of cryptocurrency by hackers as the currency of choice for ransomware attacks.
Some cryptocurrencies such as stablecoins are pegged to real external assets like the US dollar or gold for stability and regulating these is key to guaranteeing the effectiveness of monetary policies and ensuring the stability of both country and global financial systems.
Government agencies are also recognizing the fact that a lot of positive innovations are happening in the crypto space. For instance, there is lots of innovation in the digital infrastructure anchoring cryptocurrencies and such innovations could be extended into the mainstream financial systems to provide positive benefits for customers and industry at large.
By granting greater acceptance to the industry through vehicles like exchange-traded funds, regulators can, in turn, gain greater leverage in regulating the sector which will also shed light on the industry and its major players while also cutting down on illegal activities and giving crypto investors greater protections.
Are Spot Bitcoin ETFs Inevitable?
Cryptocurrency investors have been wanting spot crypto ETFs for a long time. Crypto ETFs aren’t just a stable investment vehicle but they could also open a pathway for mainstream investors to get some exposure to cryptocurrencies. With Bitcoin futures ETFs already rolling out, it is only a matter of time before we see spot Bitcoin ETFs in the US.
Bitcoin ETFs aren’t a new concept. There have been efforts to establish them as far back as 2013. Below is a look at some of the top existing and upcoming Bitcoin ETFs and cryptocurrency funds.
ProShares Bitcoin Strategy ETF (BITO)
Expense Ratio: 0.95%
Assets Under Management:
Market Price: $34.44 as of Non 28 2021
ProShares Bitcoin Strategy ETF (BITO) made big news when it became the first Bitcoin futures ETF to be launched in the U.S. This exchange-traded fund gives investors exposure to Bitcoin futures. Its launch was a watershed moment in the industry.
It is important to keep in mind that BITO does not hold actual Bitcoins directly. Rather, it tracks cash-settled and front-month Bitcoin futures. These are Bitcoin trading contracts that have a very short time maturity.
BITO invests in Bitcoin futures contracts that are regulated by the Commodity Futures Trading Commission at the Chicago Mercantile Exchange (CME). They are, thus, subject to CME rules.
BITO can also invest in both U.S. Treasury Bills and Repurchase Agreements as a form of short-term investment vehicle if you are looking for a cash position. This ETF can use leverage, too.
BITO will work pretty much like the United States Oil Fund (USO) that invests in oil futures without necessarily tracking the price of oil. It is not a “physical” exchange-traded fund like the SPDR Gold Shares that directly invests in an underlying asset and tracks its spot price.
An important fact about futures-based products is that they will not necessarily mimic the performance of the underlying market. The Bitcoin ETF not only grants recognition and legitimacy to Bitcoins but it will open up the market to a new batch of investors who are comfortable playing in traditional finance than in the Wild West that is the cryptocurrency markets.
Crypto investors and traders expect BITO will considerably boost the flow of investments into cryptocurrencies.
On its debut, BITO closed at $41.94, 2.59% up. More than $1 billion worth of shares were traded on its first day, under the ticker BITO.
Valkyrie Bitcoin Strategy ETF (BTF)
Expense Ratio: 0.95%
Assets Under Management: $50 Million
Market Price: $21.29 as of Nov 28 2021
Launched three days after the BITO launch to a much more muted response, Valkyrie Bitcoin Strategy ETF (BTF) is an actively managed ETF under NASDAQ exchange that does not invest directly in the Bitcoin cryptocurrency but instead invests in bitcoin futures contracts. BTF invests in front-month Bitcoin futures on the Chicago Mercantile Exchange via a Cayman Islands subsidiary which means you won’t have to grapple with filing K-1 forms for the IRS when investing in this crypto future. The trading in futures is regulated by the Commodity Futures Trading Commission.
The company says this is the first of a series of futures-based Bitcoin ETFs it believes it can launch in the coming weeks.
The BTF is actively managed and debuted to a slow start with just $5 million in assets under management compared to BITO which gathered more than $1 billion in assets under management (AUM) in under 48 hours.
Grayscale Bitcoin Trust
Market Price: $44.33
Grayscale Investments is the largest digital currency asset manager in the world with $38 billion assets under management representing 3.4% of the global Bitcoin supply. Most of these assets consist of Bitcoins.
Grayscale Investments has been running the Grayscale Bitcoin Trust, a crypto investment product in the form of a closed-end grantor trust that allows individual investors to trade in their brokerage accounts. It issues shares that follow the Bitcoin price based on CoinDesk Bitcoin Price Index.
On October 19th, it made a filing with the U.S. SEC to have its closed-end Bitcoin trust transformed into a Bitcoin spot ETF. Its application came on the day when ProShares Bitcoin Strategy ETF (BITO) debuted its exchange-traded fund that invests in Bitcoin futures. The US Securities and Exchange Commission has so far given the green light to two derivatives-based cryptocurrency ETF products but it is yet to approve a cryptocurrency-based spot ETF, which is the same model used by Grayscale, currently the biggest cryptocurrency fund in the world with $38 billion in AUM. Keep an eye on this. Should the SEC give a go-ahead on this, it will open the way for an avalanche of applications of non-derivatives-based cryptocurrency ETFs.
Many advocates and investors believe that with the launch of ProShares Bitcoin Strategy ETF (BITO), a derivatives-based crypto ETF, the next logical industry step would be the approval of physical or spot-priced Bitcoin ETFs such as the one floated by Grayscale since the futures and spot pricing are somehow intertwined.
Siren Nasdaq NexGen Economy ETF
Expense Ratio: 0.68%
The Siren Nasdaq NextGen Economy ETF (BCLN) is a crypto fund seeking to invest in companies that are developing, researching, or using blockchain technologies. This is a passively managed fund. This exchange-traded fund tracks the Nasdaq Blockchain Economy Index’s performance. It holds the stocks which support blockchain technologies or which leverage blockchain in their business.
This fund had been around since January 2018 and currently has 63 holdings. It tracks companies with a market cap of more than $200 million that exhibit the characteristics of a blockchain company. These companies are subsequently assigned a “blockchain score” which is BCLN’s proprietary screening methodology which rates the companies according to their capacity to benefit from blockchain technology.
The BCLN is highly diversified with its top ten holdings accounting for only 20% of its whole portfolio. It tracks blockchain-powered enterprises in various sectors including technology (43%), financials (33%) and communications at 11%. Nor is it an exclusively US-focused fund. The U.S. market, in fact, accounts for 53% of its assets with Japan and China accounting for 13% each.
Global X Blockchain ETF
The Global X Blockchain ETF (BKCH) aims to pump investments in companies looking to derive benefits from the global blockchain solutions market, a market that could surpass $19 billion by 2024.
This exchange-traded fund tracks the Solactive Blockchain Index, a selection of stocks with operations that make use of or benefit from blockchain technologies and digital assets.
BKCH categorizes these companies into three groups: –
- “Pure-play” stocks get at least 50% of their revenues from blockchain activities.
- “Pre-revenue” firms that are primarily in blockchain technology but aren’t generating revenue yet.
- “Diversified” are companies that are generating under 50% of revenues from blockchain activities.
The BKCH index is weighed by a free-float market cap although there are some rules that the index enforces at every rebalancing. There is no component in the BKCH that accounts for more than 12% of the portfolio or less than 0.3%.
All the stocks in the index that have a weighting of more than 4.5% can’t collectively make up more than 45% of the portfolio. The remaining stocks are capped at 4.5%.
The diversified companies and pre-revenue firms can’t account for over 10% of the firm collectively while individually, they cannot be weighted at more than 2%.
72% of the BKCH’s assets consist of technology with the financials accounting for 15% while communication services account for 7%. Three countries, the U.S., China, and Canada, account for close to 92% of the portfolio.
The largest holding in the fund is Marathon Digital which has a weighting of over 17% while Coinbase accounts for just over 12%.