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Bitcoin-Related ETPs Take Off

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The first bitcoin-related exchange-traded fund has listed in the US while Europe has overtaken Canada to hold the world’s largest, physically-backed, single asset crypto exchange-traded product.

The ProShares Bitcoin Strategy ETF, which invests primarily in bitcoin futures contracts and does not directly invest in bitcoin, listed on the NYSE on 19 October after being approved by the US Securities and Exchange Commission.

Eric Balchunas, senior ETF analyst for Bloomberg, said the new ETF had reached over $500m (€430m) in early trading and it had become the biggest new launch of 2021 by trading volume. 

By the end of the first day of trading volume had exceeded $1bn:

https://twitter.com/ArcaneResearch/status/1450768209167126530

KBW analyst Kyle Voigt said in a report that the bitcoin futures ETF launch presented incremental revenue opportunity for CME Group which has listed bitcoin futures. The analyst estimated that CME’s full-sized and micro bitcoin futures generated approximately $6m of revenue for the exchange in the second quarter of this year, which was 0.5% of total group revenues, and will increase if bitcoin future ETFs gain meaningful traction.

However, he highlighted that exchange-traded products that gain exposure to the underlying asset through futures positions provide imperfect exposure to the underlying asset. Voigt gave an example of USO, the largest oil ETP, which gains exposure to oil prices by holding crude oil futures.

“Because of the shape of futures curves and the need to roll contracts (among other reasons), these futures-based ETP structures typically experience underperformance vs. the underlying asset (in this case, BTC) over time,” added the report. “This is important because Voigt doesn’t think these futures-based ETFs will simply be a replacement for gaining exposure to underlying crypto markets, as significant price discrepancies will likely arise over time.”

Ben Johnson, Morningstar’s global director of ETF research, warned on investing in an ETF that tracks bitcoin futures and the issues related to maintaining that exposure. The fund invests in front-month futures contracts which will expire and the next futures contracts may be trading at higher  prices than the fund currently owns.

“In futures markets, the shape of that curve is often known as contango, which is not a dance, but a way to lose money by trying to maintain exposure to an underlying commodity, or bitcoin in this instance, by virtue of investing in it through regularly rolling futures contracts,” he added. “And it’s something that, depending on the shape of the futures curve, so if it particularly steep can be particularly costly.”

In addition, there is a strict limit on the amount of futures contracts that the ETFs can own which could lead to the suspension of new share issuance.

Johnson added: “I would not be surprised that a month or two months from now we see a minimum of a half dozen different bitcoin futures-based ETFs out there on the market competing for investors assets.”

Bradley Duke, chief executive of ETC Group, agreed in an email that bitcoin futures-based ETFs that have been approved by the SEC will not track bitcoin efficiently and will be very costly to roll positions.

 Bradley Duke, ETC Group

“So one problem is being solved but at a cost to the investor in poorer overall return when compared to some of the ETPs in Europe,” he added.

Duke highlighted that in Europe the good Bitcoin ETPs are 100% backed by bitcoin.

“Products that are 100% backed and fully fungible with the underlying bitcoin (like ETC Group’s BTCE) track the underlying price very faithfully and are also very liquid,” he added. “The assets are stored in institutional grade custody.”

ETC Group

ETC Group provides institutional quality, 100% physically-backed, high-liquidity digital asset backed securities.

BTCE, ETC Group’s physical bitcoin ETP, has become the world’s largest physically backed single cryptocurrency ETP with over $1.3bn in assets under management according to a statement from the issuer.

As a result ETC Group’s total assets under management reached $1.5bn. The issuer launched BTCE, its first product 16 months ago on Deutsche Börse’s Xetra exchange. BTCE was the the first crypto product to be centrally cleared when it listed on Xetra.

ETC Group said in a statement: “Research released this month by  CryptoCompare also shows that BTCE is the most traded listed crypto ETP with average daily trading volumes of $26.3m, more than seven times its nearest competitor.”

In September Eurex, the derivatives arm of Deutsche Börse Group, launched Bitcoin ETN Futures based on the ETC Group’s BTCetc Bitcoin Exchange Traded Crypto, which is listed on the Frankfurt Stock Exchange.

The issuer now also lists bitcoin, ethereum, litecoin and bitcoin cash ETCs across multiple exchanges in Europe and is planning to further expand its suite of products.

Duke said in a statement: “We’re delighted to be leading the charge for Europe, whose regulatory regime, multiple exchanges across different countries, and investor awareness has put it at the forefront of exchange traded cryptocurrency investment.”

Grayscale Investments

In the US Grayscale Investments, the digital currency asset manager, said in a statement that NYSE Arca has filed with the SEC to convert the Grayscale Bitcoin Trust (GBTC) into a bitcoin spot ETF.

“The move comes on the heels of the SEC’s clearance of a bitcoin futures ETF,” added Grayscale.

Michael Sonnenshein, chief executive of Grayscale Investments, said in the statement that GBTC has helped move the entire digital currency ecosystem forward by becoming the first crypto SEC reporting investment vehicle.

“As we file to convert GBTC into an ETF, the natural next step in the product’s evolution, we recognize this as an important moment for our investors, our industry partners, and all those who realize the potential of digital currencies to transform our future,” added Sonnenshein.

Grayscale Bitcoin Trust launched in 2013, received a public quotation in May 2015, and became an SEC reporting company in January 2020. The trust holds approximately 3.4% of all bitcoin in circulation according to issuer and has assets under management of nearly $40bn.

Grayscale has publicly committed the firm’s intent to convert GBTC as well as its other 14 investment products into ETFs.

Dave LaValle, global head of ETFs at Grayscale Investments, said in the statement: “We believe that if regulators are comfortable with ETFs that hold futures of a given asset, they should also be comfortable with ETFs that offer exposure to the spot price of that same asset. GBTC proves that there’s strong investor demand for physically-backed Bitcoin investment vehicles.”

Grayscale had more than $53bn in assets under management as of October 18 2021.

The SEC has yet to approve a Bitcoin ETF. The Fidelity Digital Assets’ 2021 Institutional Investor Digital Assets Study found that nearly two-thirds, 62%, of US investors expressed a neutral-to-positive view about a potential Bitcoin ETF.

The report said that European investors showed a greater propensity for digital assets than surveyed US investors for the second year in a row.

“A regulatory structure for exchange-traded products holding Bitcoin exists in Europe and Asia and, not surprisingly, these products remain appealing to surveyed investors in these markets – only 33% of European and 22% of Asian investors found a Bitcoin ETF unappealing,” added Fidelity.

Fidelity said this ongoing trend may be in part due to a greater number of regulated investment products that offer digital asset access in European markets, which offer a familiar structure to retail investors and may help build trust with institutions.