An Exchange Traded Fund is a type of security that tracks other assets it is attached to. Think of it as a tracker in a basket full of fruits (assets). The ETF is designed to track a variety of things. From the prices of individual commodities (in our analogy, the individual fruits), to a large collection of commodities like the entire index (re: the entire fruit basket). And just like stocks, ETFs can be traded on exchanges.
While ETFs and index funds may differ in the way they are bought, the minimum amount required to invest in them and the capital gains taxes you’ll pay when you sell either an ETF or index fund. They are also very similar in the way they offer a hugely diversified portfolio to investors and to their good long-term returns for investors.
WHAT ARE CRYPTO ETFs?
ETFs in crypto, also known as crypto ETFs are ETFs that are designed to monitor and keep track of cryptocurrencies. Just like with normal stocks, crypto ETFs can also be traded. ETFs help retail investors looking to invest in cryptocurrencies like Bitcoin purchase Bitcoin without going through the whole length of properly understanding the full mechanism of Bitcoin and how it works.
Many countries have been skeptical with approving cryptocurrency index ETFs in their markets with the most popular being the U.S. Securities and Exchange Commission (SEC) but recently, with ETFs gaining traction in the Crypto space, these countries are beginning to accept the idea and are approving crypto ETFs to be traded. But still the SEC holds out.
With ETFs, investors can invest in Bitcoin without needing to wade through the technicalities of securing and storing Bitcoins. Investors also do not have to bother about creating an offline/online wallet nor registering on a crypto exchange (be it centralized or decentralized). They also do not have to regularly monitor the prices of the cryptocurrencies they buy. The ETF takes care of all of these for the investor.
Even with all of these perks, countries aren’t exactly rushing to legalize Exchange traded funds, mainly because of security concerns. Concerns that like crypto assets, these ETFs might be manipulated and might become subject to criminal activities. In February of 2021, the first Crypto ETF in Canada, the Purpose Bitcoin ETF, was launched on the Toronto Stock Exchange and in less than a month, it surpassed $1b in assets that were under management. There has since been a launch of another ETF in Brazil in April that reached upto $112m in value during the pre-offer booking period.
Also, a firm called Horizons ETFs announced plans to launch two funds. These funds were launched in April 2021 and on the 19th of May, both funds were on high alert after futures trading on bitcoin was halted following a terrible week of trading that saw bitcoin crash to as low as $30,200 at some point on Wednesday 19th. The ETFs sent alerts to its investors that they wouldn’t be able to fulfil buy and sell orders if the futures price remained low, the Financial Times reported. CEO of Horizons ETFs Steve Hawkins said “We were on high alert at 9 a.m. (Wednesday). We had to put in place all the business continuity plans for these ETFs.”
All of these developments are giving the US SEC pros and cons on whether to approve an ETF in the US, especially after the country’s biggest cryptocurrency exchange Coinbase had its IPO.
Some Popular ETFs in the Crypto space
21 Shares Ethereum ETP – This exchange-traded product tracks the value of the Ethereum cryptocurrency. The fund is listed on the Swiss stock exchange and is domiciled in Switzerland. It has about €258m in assets under management and in the last one year since its inception, it has yielded a return of 1297.79%. The ETP is fully collateralized using Coinbase as an independent regulated Institutional-grade custodian.
WisdomTree Bitcoin – The WisdomTree Bitcoin ETF tracks the value of Bitcoin. It has about €278m in assets under management and a return of 295.72% in the last year. Domiciled in Jersey, it is listed on Germany’s Börse Xetra and is currently under review by the U.S. Securities and Exchange Commission (SEC) after submitting its application to be launched in the U.S.
Iconic Funds Physical Bitcoin ETP – This exchange-traded product invests in and tracks Bitcoin. It is a small exchange-traded note (ETN) with about €9m in assets under management, it was listed and began trading on Frankfurt’s stock exchange on the week of April 26, 2021 and got listed on Börse Xetra on May 12, 2021. The ETP is physically backed by Bitcoin and domiciled in Germany.
VanEck Vectors Ethereum ETN – This is a fully collateralized exchange-traded note that invests in Ethereum. It is a small ETN domiciled in Liechtenstein with a total of €44m in assets under management. The firm’s decision to launch an ETN came after failing severally to get approval for an exchange-traded fund (ETF) from the U.S. SEC. The ETN has had a return of about 150% since its inception just over a month ago and it is listed and trading on Börse Xetra.
While there’s so far not been any approval of an ETF in the US with the SEC dismissing every Bitcoin ETF application for the past eight years, firms like Grayscale, Bitwise and others are already offering services much like what a Crypto ETF would. The feeling is that they have this model of business similar to that of Crypto ETFs because they are preparing and waiting in the anticipation that ETFs are legalized someday in the US. It feels more like a question of when and it’s wise of these companies to be prepared for that time. Being first in a market has plenty of perks and it’s certainly one of these firms that are eyeing the position of being the Market maker in the Crypto ETF space in the US.