Bailey McCann writes from New York that 2021 was a wild ride for ETF issuers hoping for a Bitcoin ETF.
The SEC has finally approved two bitcoin futures ETFs, the ProShares Bitcoin Strategy ETF (BITO) and the Valkyrie Bitcoin Strategy ETF (BTF). Those products have been heavily traded since launch but the SEC seems reluctant to approve anything else.
Shortly after BITO and BTF hit the market, WisdomTree and VanEck filed for spot Bitcoin ETFs. Both products were rejected after multiple delays. Those actions prompted a letter to the regulator from Grayscale who also has hopes of converting its Bitcoin Trust GBTC to a spot ETF. The letter, from Grayscale’s lawyers, Davis Polk, argued that if investors are already allowed to trade the derivatives market it only follows that spot products should be available. The SEC responded by delaying its decision on Grayscale’s filing through February. It also delayed its decision on a similar product filing from Bitwise until February. The SEC has the option to delay several more months before it has to make a final decision.
So what does this mean for investors hoping for a crypto ETF? It’s hard to say, the SEC stands by its argument that until there are clear regulations for the crypto market, it’s not comfortable giving investors broad access through an ETF. However, that hasn’t stopped asset managers from working on new products and investor interest in the crypto market is growing exponentially. 2022 is likely to see a pipeline of new products spring up that provide some type of exposure to bitcoin and the crypto market even if they have to take a roundabout route.
Morningstar’s Ben Johnson, director of global exchange-traded fund research, puts it this way – “Given the growth that we have seen in crypto, I think you’re going to continue to see asset managers pull out all the stops to get products in market. There are already new trusts that provide access to other coins and ETF filers are trying everything with the SEC from being nice to making strong legal cases. I don’t see any reason why that would slowdown next year.”
Everything but the coins
In lieu of spot crypto ETF, issuers are pivoting toward products that provide access to coin miners, coin exchanges, blockchain infrastructure or companies like MicroStrategy that have so much bitcoin on their balance sheets that it has become a proxy for investing in the coin directly.
VanEck recently launched its Digital Transformation ETF (DAPP), a play on all of these themes. “We recognise that there is already a significant economy around digital assets and that is also an opportunity for investors,” Ed Lopez, head of ETF Product at VanEck tells ETF Express.
Other issuers in this space include Global X which has the Global X Blockchain ETF (BKCH), Amplify’s Transformational Data Sharing ETF (BLOK), and Bitwise’s Crypto Industry Innovators ETF (BITQ). More thematic plays on the blockchain economy are likely over the next one or two years.
Financial advisers are also offering crypto exposure through trusts like GBTC, and other ’40 Act funds. There is significant retail investor interest in companies like MicroStrategy. Investors can also trade coins directly on exchanges. But these moves raise questions. ETFs have experienced significant growth over the past 20 years in part because they provide a layer of liquidity between the underlying asset and the structure allows investors to get in and get out when they want in a transparent way and at generally low cost. That is less true for investors in trusts or ’40 act funds, and investors in companies like Microstrategy may have to accept an additional layer of volatility if the market is making bets on the company itself in addition to its bitcoin holdings. Additionally, if the SEC argues that crypto exchanges aren’t regulated enough for ETFs, there’s a bit of a disconnect allowing any user with money to spare onto coin exchanges.
As we move into 2022, the SEC will be under pressure to find an answer for that disconnect as well as for filers like Grayscale and others who want to convert their products into ETFs and launch new funds. Bitcoin is only the tip of the iceberg. Ethereum products are already available on the Toronto exchange and VanEck’s Lopez notes that the SEC doesn’t appear ready to consider other coin futures yet. “We were asked to pull our Ethereum filing by the regulator,” he said.
In November, Grayscale launched a new trust – Grayscale Solana Trust (SOL) that provides exposure to Solana, a token of the Solana smart contract network. Solana is a network for developers that want to create large scale blockchain based applications.
The trust is the latest in a growing pipeline from Grayscale and others that are putting products into market as soon as certain digital assets hit critical mass in terms of size and volume. Trusts take longer to create and launch than ETFs but they may be the way forward at least for the time being.
Grayscale’s head of ETFs David LaValle says that he expects investor interest in the space to continue to grow. Grayscale has crafted its product lineup with the intent for many if not all of them to eventually become ETFs as regulations allow. “We think investors are comfortable with the trust structure but it’s not the same as ETFs. The ETF is a widely accepted, battle-tested structure. Being able to wrap digital assets in an ETF is an important point in the maturity and credibility of the ETF market,” he tells ETF Express.
Morningstar’s Johnson notes that even as pressure increases on the SEC to provide answers about its regulatory approach, it could be well into 2023 or beyond before we see that materialize. “If you look at how long it took for the SEC to get comfortable with semi-transparent ETFs for example, we could see the same thing there. I can’t remember how many line changes there were on that, but the SEC wants to make sure that they’re creating the best solution for investors and they aren’t going to move on a product until they feel like they have met that standard.”