ETF is an acronym for exchange-traded funds. It is a particular type of security that tracks an asset class which could be an index, a sector, a commodity, or a large and diverse collection of securities. But what makes ETFs unique is that they can be purchased or sold on a stock exchange the same way you trade a stock.
In the traditional finance market, the types of ETFs may include bond ETFs, industry ETFs, commodity ETFs, currency ETFs, or inverse ETFs. While the names of the bond, commodity, and currency ETFs are self-explanatory in terms of what assets they track, an industry ETF tracks a particular industry such as technology, banking, or the oil and gas, and an inverse ETF attempts to gain from declining stocks by shorting them.
SPDR S&P 500 (SPY) is one of the oldest and most renowned ETFs that track the S&P 500 index. Sector ETFs such as OIH and XLE tracks sectors such as Oil and Energy. USO and UNG are commodity ETFs that represent crude oil and natural gas.
The overall market for ETFs is significantly large. According to the latest available estimates, the global market of ETFs reached a volume of $8 trillion in 2020. The US represented nearly 70% of this market, with $5.47 trillion in assets under management (AUM). ETF AUM in Europe reached $1.28 trillion by the end of 2020, whereas greater China registered $270 billion in ETF AUM.
While ETFs, in general, have been gaining immense popularity and trust worldwide, crypto ETFs are also gaining traction. Before discussing crypto ETFs that came into the market in the recent past, we must look at what Bitcoin or Ethereum ETFs imply as a category.
What are Bitcoin ETFs?
Like any other category-specific ETF, a Bitcoin ETF is an exchange-traded fund that tracks the value of Bitcoin. What is distinctive here is that Bitcoin ETFs do not trade on cryptocurrency exchanges. They trade on traditional finance market exchanges allowing a much larger volume of investors to leverage the benefits of digital assets without having to leave the trading platform they are accustomed to.
The operating mechanism of Bitcoin ETFs is the same as the other ETFs. If the value of Bitcoin appreciates, so does the value of the Bitcoin ETF, and vice versa.
What are Ethereum ETFs?
Similar to Bitcoin ETFs, Ethereum ETFs are funds that invest directly in ether (ETH), the Ethereum network’s native cryptocurrency. Like Bitcoin ETFs, Ethereum ETFs are also supposed to trade on traditional stock exchanges and track the price of ether.
Active Bitcoin ETFs
- Purpose Bitcoin ETF (ticker: BTCC), the first-ever Bitcoin ETF, started trading on the Toronto Stock Exchange in mid-February 2021. As reported on 17th March 2021, the ETF was trading at 10.77 CAD at the time of the market close.
- The Toronto Stock Exchange has two more Bitcoin ETFs. At the time of market close on 17th March 2021, the Bitcoin ETF launched by Evolve Funds Group Inc. was trading at 27.63 CAD. It trades under the ticker EBIT.
- The third Bitcoin ETF, trading on the Toronto Stock Exchange (TSX), was launched by CI Galaxy and, at the time of the 17th 2021 market close, it was trading at 10.99 CAD.
- In the United States, the Security and Exchange Commission has started considering VanEck’s 19b-4 Form for its Bitcoin exchange-traded fund (ETF) application. The SEC has got a window of 45 days to either approve or reject the application. If approved, it would be the first ETF first open bitcoin exchange-traded product in the US.
Status of Ethereum ETFs
- CI Global Asset Management has filed a preliminary prospectus in Canada. If approved, it would become the world’s first ether ETF.
- After CI global’s filing, Evolve Funds Group in Canada also filed a similar prospectus for their Ethereum ETF.
Why Are Crypto ETFs in Demand?
The frequent filing of crypto ETFs gives rise to one pivotal question: what are the advantages of bringing in crypto ETFs to the traditional finance market. Here, we will look at the advantages of crypto ETFs and try to understand why one after another institutional fund managers are filing for Bitcoin or Ethereum ETFs.
Exploring the Tremendous Scope that Traditional Finance Market Offers: As we have already seen, the global ETF market alone is $8 trillion strong, whereas the total global market capitalization of the entire crypto market still hovers around $1.7 trillion. These numbers make it amply clear that there exists a tremendously large market consisting of traditional hedge fund investors, mutual funds, and insurance firms outside the reach of the crypto assets.
Crypto ETFs would bridge that gap. Investors active in the traditional finance market would become eligible to invest in digital currencies without leaving their comfort zone. It would have a positive impact on the valuation and trading volume of not only Bitcoin or Ethereum, but the entire ecosystem of cryptocurrencies.
Trading in Crypto Assets Would Become Easier: Traditional finance market investors are often reluctant to invest in crypto assets. Trading through crypto exchanges is an entirely different paradigm. You need to have crypto wallets. You also need to have basic knowledge about how blockchain-based assets operate. Many traditional finance market investors also have a deep-rooted conviction that crypto assets and crypto exchanges are subject to frequent hacks and cyber attacks. Therefore, if they get investment opportunities in digital assets through exchanges they trust, they would show more interest in investing.
Convenience in Tax Filing: Cryptocurrencies still suffer from their unregulated nature. There is a lack of clarity on how income from dealings in crypto assets is to be taxed. Such inconsistencies prohibit major institutional investors to take part in crypto trading through crypto exchanges. If regulated stock exchanges start offering avenues to invest in digital assets, major bodies, such as pension funds, will feel more confident to invest.
A Truly Diversified Investment: Although crypto ETFs get their names after a particular digital currency, they are not barred from holding more than one asset in their portfolio. For instance, a bitcoin ETF may comprise revered tech stocks such as Apple or Facebook, apart from Bitcoin. This provision allows crypto-ETF holders to diversify their portfolios and mitigate risk.
ETFs Lower the Barrier to Entry: With bitcoin prices surging through the roof, it often becomes immensely difficult for small-scale investors to leverage the benefits of Bitcoin’s growth. They require tens of thousands of dollars to substantially invest in the currency and enter the exchange to make some sizable gains. ETFs allow investors across all economic strata to secure exposure to crypto investments.
Owing to all these advantages as cited above, cryptocurrency-backed ETFs are fast becoming the talk of the town. The Purpose Bitcoin ETF, within a day of its launch in the Toronto Stock Exchange, witnessed an exchange of $165 million worth of shares.
The astounding bull run of Bitcoin, over the past few months, has also played a major role in making such funds popular. Tech giant Tesla’s recent 1.5 billion dollars worth of Bitcoin purchase has sent a strong and positive signal about Bitcoin’s long-term investment value across the investor community worldwide.
As we have already seen, the United States occupies a major chunk of the overall ETF market of 8 trillion. Yet, the US still does not have a full-fledged ETF listed in any of its exchanges. But, that does not mean that investors are not keen enough. The absence of an ETF has compelled interested investors to leverage the growth of Bitcoin through alternative avenues.
The Grayscale Bitcoin Trust or GBTC is one such avenue. GBTC has increased its AUM rapidly reflecting strong demand for Bitcoin ETFs. But, at the end of the day, it is not an ETF. With each of its trade-unit representing a fractional share of Bitcoin, GBTC tracks the price of Bitcoin but charges a premium to allow investors to make a purchase.
Therefore, a major chunk of the investment that is otherwise destined to go directly into crypto assets is coming via an expensive route. It harms ordinary investors by forcing them to shell out more money than what is required.
All these indicate that the multi-trillion-dollar ETF market is ready for the arrival of full-fledged crypto-ETFs to be traded on reputed stock exchanges worldwide. With Toronto Stock Exchange already signed up to explore the opportunity, we will have to wait and watch how long it takes before other major exchanges also join the game!
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