Crypto ETFs: Temporary Fad, or Pillar of a New Crypto Economy?

  • Posted: 06.10.23

If you follow the broader crypto world at all, you know that the industry has a proven enemy in financial regulators, particularly the SEC.

It also has a well-known hero – Bitcoin, the original cryptocurrency.

There’s a battle brewing between the hero and the villain, and it centres around an ordinary financial investment vehicle; the exchange-traded fund, or ETF.

Are Bitcoin ETFs a sign of the future? Or are they yet another short-lived crypto fad?

Let’s dive in.

What Is a Cryptocurrency ETF?

A cryptocurrency exchange-traded fund (ETF) is an investment vehicle that tracks the price of a specific cryptocurrency, like Bitcoin. Cryptocurrency ETFs provide investors with an opportunity to gain exposure to digital assets without having to purchase them directly or manage a wallet.

By keeping a pool of assets under management, ETFs are designed to offer investors a low-fee and convenient way of investing in cryptocurrencies. They can be bought and sold on major stock exchanges, just like stocks or mutual funds. This means investors can benefit from the liquidity of the ETF and don’t need to worry about finding a buyer for their asset in order to realize their profits.

Cryptocurrency ETFs can be bought and sold throughout the day, meaning that investors can take advantage of short-term price movements without having to own any underlying digital currencies directly.

Regulatory Status of Cryptocurrency ETFs

Cryptocurrency exchange-traded funds (ETFs) are becoming increasingly popular as investors look to gain exposure to the cryptocurrency market. But with growing popularity has come ever-more-intense scrutiny from regulators.

In particular, the US Securities and Exchanges Commission (SEC) has adopted an aggressive stance towards ETFs. Over a half-dozen spot ETF applications are currently being considered; all have been delayed by SEC investigative proceedings. 

Why all the delays?

ETFs have the potential to broaden support for and participation in crypto investing. With an ETF, there’s no need for a wallet to hold crypto directly. Investors simply purchase shares of the ETF on the stock market, and are still able to take advantage of price moves by the underlying assets under management.

The SEC appears unwilling to have Bitcoin and Ethereum achieve the market success most analysts assume would come from an ETF, fearing it would spur further adoption of what the SEC considers largely lawless and unregulated currencies.

And despite a major setback in the courts, the SEC seems poised to continue its resistance to a Bitcoin ETF. In the meantime, support for an ETF investment vehicle continues to grow, with support from Congress as well as investors.

What Is a Bitcoin ETF?

A Bitcoin ETF (exchange-traded fund) allows investors to purchase shares in an underlying pool of crypto assets, gaining exposure to cryptocurrencies without taking on all the risk. The investment firm offering the ETF collects management fees. There are two primary types of ETFs.

Futures ETFs

Bitcoin or Ethereum futures contracts trade at the Chicago Mercantile Exchange. Futures ETFs track the price of those futures contracts, giving investors a way to participate in the crypto market remotely. The funds rarely hold the underlying crypto directly.

Spot ETFs

Pools of cryptocurrency (or multiple cryptos) are sold as shares on the open market, similar to common stock options. The value of the pool, and the shares, rises and falls with the given crypto.

Spot vs Futures ETFs and the SEC

All ETFs are highly regulated and must conform to well-established standards set by the SEC. The crypto market has been seeking permission for a spot Bitcoin ETF since 2013, but every request so far has been rejected by the SEC.

On the other hand, the SEC granted permission for a futures ETF in 2021. Why the difference?

Because they don’t hold the underlying asset directly, futures ETFs can operate at a bit of distance from the market. They carry their own unique set of risks and benefits (transparency being one such risk), but aren’t as subject to direct price swings as spot ETFs.

Since spot ETFs rely on pools of the underlying asset, markets need to have sufficient liquidity to support those pools. One of the SEC’s arguments so far has been that the Bitcoin market, in particular, wasn’t big enough to support a spot ETF.

Benefits of Cryptocurrency ETFs

ETFs are a classic investment vehicle. They’re a way for investors to get involved with crypto by purchasing shares of companies offering the ETFS, without fully participating in the cryptocurrency economy. That means no digital wallets, no private keys, and no dealing with centralised or decentralised crypto exchanges.

In short, crypto ETFs are:

  • Easier – no need to purchase crypto directly
  • Simpler – one share of an ETF can represent a single crypto currency or even a basket of currencies
  • More trustworthy – Bitcoin ETFs are planned from major investment funds with proven track records

Why ETFs, and why now?

What’s the rush for Bitcoin ETFs? 

In a word, adoption.

Many traditional investors either don’t fully understand crypto, or don’t want to deal with the hassle of a separate infrastructure, one that often includes complicated fiat-to-crypto on-ramps, multiple exchanges, and dedicated hot and cold wallets.

In contrast, those same investors do understand common stock. They often have a deep knowledge of how traditional finance operates. A Bitcoin ETF functions in a well-known, well-regulated way. While the performance of such a fund won’t be predictable (it is crypto, after all), it will be understandable.

An easily-accessible Bitcoin ETF could tap into a whole new market of crypto investors. Just how big is that market?

By some estimates, a Bitcoin ETF (or number of Bitcoin ETFs) could unlock a $600 billion market. That would double the current market cap for Bitcoin alone. 

The potential is nearly endless. A Bitcoin ETF could open the door for ETH ETFs, or for ETFs based on a pool of cryptocurrencies. That would follow the same path as futures ETFs; following on from the first futures Bitcoin ETF in 2021, an ETH futures ETF is expected as soon as early October 2023.

Fad – or Future?

ETFs, especially spot ETFs, are yet another sign of growing tradfi/crypto convergence. The more regulators push against crypto, the better-established the underlying technology seems to be. 

The blue-chip cryptocurrencies, notably Bitcoin and Ethereum, stand to benefit the most. They have the longest history, the largest market caps (outside of stablecoins), and the broadest adoption so far. ETFs could only help that by bringing BTC and ETH to investors who would otherwise never be involved in the crypto market.

At Plexus, we see a spot Bitcoin ETF as a major step forward for the industry. These aren’t shady NFT collections offered by pump-and-dump scam artists; they’re proven financial instruments coming from major financial institutions in the US and Europe.

They’re another sign that crypto is part of the future of finance, and they’re nearly certain to spur further adoption of cryptocurrencies.

“Crypto ETF’s offer better diversification and regulatory oversight within crypto. 

They allow investors to diversify their exposure across a range of coins and instead of picking individual digital assets, investors can buy a single ETF that tracks a basket of cryptocurrencies. This diversification spreads risk and reduces the impact of poor performance in a single crypto. For the regulation benefit, ETF’s are typically subject to regulatory oversight and security measures, which can provide a level of investor protection.”

– Jayden Lazarus, Consultant at Plexus

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