exchange traded fund

Bitcoin the ‘main beneficiary’ as crypto funds notch 10-week streak

Nearly $1.8 billion flowed into crypto investment products over the last 10 weeks, which hasn’t been seen since Bitcoin futures were launched in October 2021.

Bitcoin (BTC)-related investment products have become the “main beneficiary” of recent investor interest in crypto amid growing anticipation of a spot Bitcoin exchange-traded fund (ETF) approval in the United States.

A total of $1.76 billion of investors’ funds have flowed into crypto products over 10 weeks, making up the most significant inflows over such a period since October 2021 when Bitcoin futures launched, according to a Dec.

CoinShares’ weekly reports over the past 10 weeks show that at least $1.44 billion of inflows went to Bitcoin investment products over the period, with the price of Bitcoin jumping from $26,600 to $37,700 during the period.

Meanwhile, the week ending Dec. Bitcoin investment products were the “main beneficiary,” said Butterfill, recording $132.8 million of inflows over the past week, while Ether (ETH) and Solana (SOL) products tallied $30.8 million and 4.3 million, respectively.

Digital asset flows (in millions) week by week in 2023. Source: CoinShares

Related: Bitcoin prices should ‘logically’ correct in January, but crypto’s a ‘wild card’

The inflows come as spot Bitcoin ETF applications are inching closer toward potential approval in the United States.

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Institutions ‘extremely interested’ in crypto ETFs, but buying has cooled: Survey

Almost half of the fund managers surveyed plan to add crypto ETFs to their portfolio in 2023, but only a quarter will be increasing digital asset exposure.

Institutional interest in cryptocurrencies hasn’t budged despite the market being down 60% from its all-time highs, as a majority of asset managers stated they’re “extremely interested” in crypto-themed Exchange Traded Funds (ETFs).

On April 3, financial services firm Brown Brothers Harriman (BBH) released its 2023 Global ETF Investor Survey, which polled 325 institutional investors, financial advisers and fund managers from the United States, United Kingdom, Europe and China.

It found nearly three-quarters of institutional investors claimed they’re “extremely” or “very” interested in crypto ETFs, but the effects of crypto winter appear to have chilled their appetite. Only a quarter said they’re expecting to increase allocation to crypto ETFs over the next 12 months, a 6% fall from 2022.

While crypto-themed ETFs fell down the priority list for some, nearly half still plan to add crypto ETFs to their portfolios this year to diversify investments.

58% of fund managers in China are looking to add crypto ETFs to their portfolios, followed by the U.S. (55%) and Europe (29%). Source: BBH

BBH explained the rise in interest for crypto ETFs is partly due to fund managers learning to stomach the inevitable volatilities in the crypto market:

“As investors adapt to volatility, they are diversifying their portfolios and adding more innovative products. Even with a tumultuous year in crypto, interest hasn’t cooled entirely.”

BBH believes a clearer crypto regulatory framework will further increase the demand for related ETF exposure as it will provide more “comfort” when doing business with the crypto sector:

“Initiatives such as the draft regulation from the EU’s Markets in Crypto Assets proposal is expected to significantly ‘derisk’ investments in crypto assets for asset managers and provide an ‘additional layer of comfort’ for fund managers to engage with crypto exchange.”

More than 40% of the respondents claimed to manage assets worth more than $1 billion and over half said to have more than a quarter of their portfolio invested in ETFs.

Related: Samsung investment arm to launch Bitcoin Futures ETF amid rising crypto interest

Among the largest crypto ETFs are ProShares Bitcoin Strategy (BITO), available on the New York Stock Exchange (NYSE), and the Bitwise 10 Crypto Index Fund (BITW). BITO was reportedly the first bitcoin-linked ETF launched in the United States, while BITW tracks the top 10 largest cryptocurrencies by market cap.

Grayscale’s Bitcoin Trust (GBTC), while not an ETF, is one of the largest digital asset investment products by market cap traded on a stock exchange, with a current value of $11 billion according to Google Finance.

Not all crypto ETFs have fared well, as the effects of the crypto market winter saw two Australian crypto ETFs — BetaShares Crypto Innovators ETF (CRYP) and Cosmos Global Digital Miners Access ETF (DIGA) — take the title as the worst-performing ETFs in the country.

This resulted in DIGA, along with Cosmos Purpose Ethereum Access ETF (CPET) and Cosmos Purpose Bitcoin Access ETF (CBTC), being delisted at the end of 2022.

Magazine: Crypto winter can take a toll on hodlers’ mental health

Two crypto-related ETFs were the worst-performing in Australia for 2022

ETFs tracking crypto companies have seen significant drawdowns over the year as a result of major macroeconomic headwinds.

Cryptocurrency-related exchange-traded funds (ETFs) have taken the two top spots for the worst-performing ETFs in Australia for the year, with the same story playing out in the United States.

BetaShares Crypto Innovators ETF (CRYP) and Cosmos Global Digital Miners Access ETF (DIGA) have provided investors Down Under with respective negative returns of nearly 82% and 72% year to date (YTD) throughDec. 30.

BetaShares launched its ETF on the Australian Securities Exchange (ASX) in October 2021, mere weeks before most cryptocurrencies hit all-time highs that they’re yet to regain.

CRYP was down slightly over 81.8% YTD at the time of writing. Image: Google Finance

CRYP provides exposure to publicly listed blockchain and crypto companies such as Coinbase and mining company Riot Blockchain, among others. The largest current holding at 12.3% of its portfolio is Mike Novogratz’s investment firm Galaxy Digital.

Cosmos’ DIGA ETF tracked the performance of a portfolio of companies focused on mining Bitcoin (BTC) or other cryptocurrencies through the Global Digital Miners Index.

DIGA was similarly listed at a poor time in October 2021 on the Cboe Australia exchange.

Only a year later Cosmos requested the ETF, along with two others tracking BTC and Ether (ETH), to be delisted from Cboe as declining interest in crypto saw the funds’ net asset value dip below $1 million.

U.S.-based ETFs have seen a similar pattern, with the top four worst-performing ETFs being crypto-related, according to ETF.com data. This however excludes inverse and leveraged funds.

The worst performer was the Viridi Bitcoin Miners ETF (RIGZ), which aims to provide exposure to publicly listed crypto miners such as Riot and CleanSpark. It provided investors with a negative 87% return YTD.

RIGZ has dropped just over 87% for the year. Image: Google Finance

VanEck Digital Transformation ETF (DAPP), the Bitwise Crypto Industry Innovators ETF (BITQ) and the First Trust SkyBridge Crypto Industry and Digital Economy ETF (CRPT) followed closely behind. All tracked the crypto industry through holdings in crypto firms such as Jack Dorsey’s Block Inc., Coinbase, Riot, Galaxy and others.

DAPP and BITQ gave investors a YTD negative return of nearly 86% and 84.5% respectively while CRPT was down nearly 81.5% over the same time.

Related: What to expect from crypto the year after FTX

However, the losses this year haven’t been limited to the crypto industry alone. Over the past year, U.S. bonds, stocks and even real estate have recorded their worst-performing year in decades, and in some cases, centuries.

A traditional portfolio consisting of a respective 60/40 mix of stocks and bonds has seen the worst performance since the middle of the Great Depression in 1932.

MAMAA stocks, the collective name for Big Tech players Meta, Apple, Microsoft, Amazon and Alphabet (Google) have seen share price falls of up to 70% over the year. Meanwhile, the cryptocurrency market cap fell around 64.5% over the year.

Institutions ‘moving very, very fast’ into crypto — Coinbase exec

D’Agostino also said the recent battles between the SEC and CFTC are a good thing for crypto because it indicates that it will be a “vitally important piece of market structure” moving forward.

Institutional adoption of digital assets is “moving very, very fast,” and much faster than the rate nascent industries ordinarily develop at, says Coinbase senior adviser John D’Agostino.

In an Oct. 18 interview with SALT moderated by Anthony Scaramucci, D’Agostino said that new asset classes often take time to develop, as “institutional inertia is a very real thing” and “there’s a lot of switching costs associated with adding new assets” but that this hasn’t been the case with crypto:

“So for me, for someone who spent 15 years trying to get commodities to be mainstream, it’s actually moving fast. But I do understand why somebody in the heat of the moment feels it’s glacial. But for institutions I think it’s moving very, very fast.”

As for what may have slowed institutional adoption, D’Agostino said that U.S. regulators have been “complacent” to the point that it harmed “the growth of the technology.”

But interestingly, D’Agostino sees the “bifurcated regulatory regime” between the U.S. Securities Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) “as a good thing” because “nobody fights over something that is going to go away.”

“The fact that crypto is being used as a bargaining chip by the heads of regulatory agencies [and] the fact that these public announcements are being made to push a positioning around which regulatory agency will be in control is an indication that this is a vitally important piece of market structure.”

Related: Wealth managers and VCs are helping drive institutional crypto adoption — Wave Financial execs

D’Agostino was adamant that a crypto-related exchange-traded fund (ETF) will eventually be approved, despite the SEC’s ongoing rejections:

“I think that’s going to change. Despite the delay, an ETF is inevitable. I can’t tell you when it’s going to happen. But I know at some point it’s going to happen.”

Co-founder and CEO of Singaporean crypto exchange Coinhako Yusho Liu recently told Cointelegraph that he expected institutional interest to keep growing as the industry matures.

“We believe institutional flows into the market will continue to grow and serve as a crucial driver for future crypto innovation and adoption,” he said.

What is a cryptocurrency ETF and how does it work?

A cryptocurrency exchange-traded fund (ETF) tracks the price of one or multiple digital tokens and consists of numerous cryptocurrencies.

Exchange-traded funds (ETFs) have grown in popularity as a means of investing since the mid-1990s due to their intraday liquidity and low transaction costs. In general, ETFs track a specific index and are generally traded on exchanges. 

In a securities market, ETFs allow investors to trade their shares continuously throughout the trading day, unlike mutual funds, which only permit investors to purchase or redeem shares at the close of the trading day.

In the cryptocurrency market, a fund that tracks the price of one or the multiple digital tokens and consists of various cryptocurrencies is called a cryptocurrency ETF. This article will discuss how a cryptocurrency ETF works and the benefits and risks involved in cryptocurrency ETFs.

What is a cryptocurrency ETF?

A fund is treated as an exchange-traded one if it meets either of the two following criteria:

  • Cryptocurrency ETFs invest in businesses transforming business applications by creating and deploying blockchain technology.
  • Blockchain-based ETFs invest in cryptocurrency investment products provided by asset managers like Bitwise or Grayscale or futures and options, whose prices are linked to the performance of Ether (ETH), Bitcoin (BTC) and other cryptocurrencies.

In general, cryptocurrency ETFs are the extended use case of blockchain technology. For instance, Bitcoin ETFs are the first crypto ETF that try to track the price of BTC, the most valued cryptocurrency among digital assets. 

On October 18, 2021, ProShares Bitcoin Strategy ETF (BITO) started trading Bitcoin ETFs, followed by Valkyrie (BTF) and VanEck (XBTF). Although there are no ETFs tied directly to the spot price of Bitcoin (the current market price at which underlying security can be bought or sold), managers of these products watch the price of BTC via the futures markets. Also, Grayscale’s Bitcoin Investment Trust can’t be accessed by mainstream audiences, as it is not an ETF.

Along with offering indirect exposure to BTC, Bitcoin ETFs could pose risks to investors if the fund holds a sizable portion of the futures market. Therefore, investors should be cautious while investing in volatile securities like cryptocurrencies.

How does a cryptocurrency ETF work?

Crypto ETFs either own the cryptocurrency futures, options or other crypto-based securities, in contrast to traditional ETFs that directly own the underlying asset. The intention is to emulate the fundamental cryptocurrency’s price fluctuations. However, there may be periods when the ETF movements don’t precisely match those of the underlying cryptocurrency because they don’t hold any of it themselves. 

Cryptocurrency ETFs are either backed by physical crypto assets or synthetic variants such as derivatives. In the former, crypto investors indirectly own cryptocurrencies without bearing any expenses of owning them outright, and in the latter, instead of reflecting the prices of actual cryptocurrencies, the ETF share price imitates the price movements of derivatives.

So, why are crypto ETFs important? The most evident reason is portfolio diversification, as Bitcoin or Ether ETF investors can get exposure to more than one crypto asset, in particular, beyond conventional securities markets.

What are the benefits of cryptocurrency ETFs?

Although there is regulatory uncertainty around cryptocurrency ETFs, crypto investors who own exchange-traded funds may benefit from the following:

  • The primary benefit of investing in exchange-traded funds like Proshares Bitcoin Strategy ETF is the affordability element of investing in a volatile asset class.
  • The learning curve is outsourced to analysts while investing in cryptocurrency ETFs, making it an ideal investment vehicle for novice investors.
  • Owning crypto ETFs saves investors from costs like custody charges and network and transaction fees.
  • An ETF provider is responsible for the safety of the fund, offering a sense of security to investors, particularly regarding phishing attacks, cryptojacking or crypto heists.
  • There is currently no fully developed infrastructure in place for buying and selling cryptocurrencies. For instance, although certain tokens are offered on specific cryptocurrency exchanges, others are not. However, investors can diversify their portfolios with cryptocurrency ETFs without paying for individual tokens.

Related: What is cryptojacking? A beginner’s guide to crypto mining malware

Are cryptocurrency ETFs safe?

Let’s first answer these questions — are cryptocurrency ETFs regulated and are ETFs good for beginners? — before finding if crypto exchange-traded funds are safe.

All parties involved in cryptocurrency ETF investments are subject to verification, and their trades are being watched to prevent market abuse or funding illegal activities. That said, one can invest more confidently in crypto exchange-traded funds because they are issued by regulated companies and traded on well-known, regulated exchanges.

Nevertheless, the U.S. Securities and Exchange Commission has received numerous requests to legitimize crypto spot exchange-traded funds, but no Bitcoin spot ETF has existed yet. The Bitcoin futures ETF has, however, been accredited by a few businesses.

Apart from the regulation, one should be aware of the risks of cryptocurrency exchange-traded fund investments. For instance, beginners or advanced traders need to understand that there is a limited choice of funds to start exploring cryptocurrency ETFs. Also, the available funds track only a few digital currencies and are subject to cybercrime risks like hacking. 

Furthermore, given the volatility of the cryptocurrency market, there is no doubt that extensive price fluctuations can also be experienced with cryptocurrency exchange-traded fund investments, especially in the case of physical-backed funds. Therefore, the safety of any cryptocurrency investment lies in the hands of investors and depends upon their knowledge of the pros and cons of various financial instruments.

How to invest in a cryptocurrency ETF?

A cryptocurrency ETF may be an ideal choice than buying digital assets directly if you don’t want to manage your cryptocurrency investments actively but still want to diversify your portfolio. To invest in blockchain-based ETFs, follow the steps below:

  • Open an account with brokers like Fidelity investments, Robinhood, etc., by completing their onboarding process.
  • Decide what percentage of your total investment budget you want to invest in ETFs. 
  • Fund your brokerage account and look for ETFs you want to invest in. For instance, if you’re going to invest in ProShares Bitcoin Strategy ETF, type BITO (ticker symbol) into the search bar.
  • Place a market order for cryptocurrency ETFs you want to buy. Click Buy. Enter the maximum number of shares you may purchase with your current budget.
  • If you wish to continuously extend your investment portfolio, set up an automatic investment plan with your broker.

Related: A beginner’s guide to cryptocurrency trading strategies

Despite the simplicity of the above process, be aware of the expense ratio or management fee associated with ETF investments. For example, investors who hold mutual funds and exchange-traded funds are subject to an annual fee known as an expense ratio. If you want to know how do ETFs make money? Then the expense ratio is the answer. The funds’ expense ratio and transaction fees are how ETF providers primarily recoup their costs.

Additionally, one should also think about their exit plan. For example, even hodlers, or long-term investors, will probably want or need to sell some of their holdings at some point, which entails paying another trading cost when they sell.

Cryptocurrency ETFs vs. mutual funds

Brokers and asset management companies provide mutual funds, which can be either actively or passively managed. Active management means seasoned professionals actively make trades to increase returns, while in the case of passive management, fund managers replicate a specific benchmark or index to match its performance. A cryptocurrency mutual fund specializes in investing in one or more digital currencies.

As mentioned, a cryptocurrency ETF fund tracks the price of one or multiple digital tokens, making it quite similar to a mutual fund investment. Moreover, existing investment accounts can be used to buy both crypto mutual funds and ETFs, and investors incur an expense ratio. However, there are various differences between the two investment vehicles, as listed in the table below:

Cryptocurrency exchange-traded funds vs. Cryptocurrency mutual funds

Regardless of your investment vehicle choice, please note that when you invest in crypto mutual funds or exchange-traded funds, you don’t technically own any cryptocurrency. Therefore, always measure your risk-return tradeoff before investing your hard-earned money into the volatile market.

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Grayscale hires former Solicitor General to help force Bitcoin ETF approval

Ahead of the July 6 SEC decision, the investment giant has hired Don Verrilli, a former U.S. Solicitor General as a senior legal strategist to work alongside its attorneys at Davis Polk & Wardwell LLP and its in-house counsel.

Grayscale Investments has hired a former U.S. Solicitor General in preparation for a potential legal spat with the U.S. Securities and Exchange Commission (SEC), should the regulator reject its application for a spot Bitcoin (BTC) exchange-traded fund (ETF) on July 6.

The company has been waiting on a decision from the SEC to convert its flagship $19.8 billion Grayscale Bitcoin Trust (GBTC) into a spot-based ETF, since filing its application to the regulator on October 19, 2021.

The SEC has pushed back its decision on multiple occasions, once in December and again in February. A final decision on the application is expected on July 6.

Jake Chervinsky, head of policy at the crypto advocacy group Blockchain Association said adding such firepower to Grayscale’s legal team was a “strong move”, and that the SEC would have little chance of “surviving a legal challenge” if it decided to knock back approval now.

In March, Grayscale CEO Michael Sonnenshein told Bloomberg that his firm would consider a lawsuit under the Administrative Procedure Act (APA) should the application for its Bitcoin Spot ETF be denied by the financial regulator.

He has been a vocal critic of the regulator, which approved crypto futures ETF products in October 2021 but is yet to do so for a spot ETF equivalent.

Donald B. Verrilli Jr., the new hire, is a former U.S. Solicitor General who served from 2011 to 2016 under Barack Obama’s administration. He is currently a partner in Californian law firm Munger, Tolles & Olson, and founded its Washington D.C. Office in 2016.

On Twitter, Grayscale explained that the lawyer has been involved in more than 50 cases before the U.S. Supreme Court, including several that dealt directly with Administrative Procedure Act (APA) violations.

He will serve as a senior legal strategist, working alongside its attorneys at Davis Polk & Wardwell LLP and its in-house counsel, including Craig Salm, who serves as chief legal officer.

Grayscale described Verrilli as one of the nation’s most experienced attorneys with “a deep understanding of legal theory, administrative procedure, and the practical matters of working with the judiciary branch.”

“We are thrilled that he is joining our team as we work towards a positive resolution for investors and the general public.”

Meanwhile Citadel Securities, a market maker that could provide liquidity for crypto ETFs such as that proposed by Grayscale on Tuesday said it was open to supporting crypto ETFs but won’t do so without regulators’ approval.

“We will be ready if and when those products are approved, but we are taking a measured approach,” said Citadel ETF head Kelly Brennan said in an interview with Bloomberg.

Market makers are key liquidity providers in the ETF ecosystem as they ensure continuous and efficient ETF trading.

Related: Why the world needs a spot Bitcoin ETF in the US: 21Shares CEO explains

Elsewhere in the world, crypto-linked ETFs have been gaining increasing popularity, with total assets invested in crypto ETFs and exchange-traded products (ETP) globally reaching $16.28 billion by the end of Q1 2022, according to data from ETF research firm ETFGI.

In February 2021, Canada debuted its first-ever Bitcoin ETF, the Purpose Bitcoin ETF, becoming one of the first countries in the world to adopt a spot Bitcoin ETF.

On May 12, Australia launched its first spot crypto ETFs, including a Bitcoin ETF from Cosmos Asset Management, plus BTC and Ether (ETH) spot ETFs from 21Shares. Another two crypto-backed ETFs were launched on Monday, June 6.

In May, Grayscale began trading its first European ETF, called Grayscale Future of Finance UCITS ETF, which has listings on the London Stock Exchange, Borsa Italiana as well as Deutsche Börse’s electronic trading platform Xetra.

Two more spot crypto ETFs launch on Australian markets

Both of the new Australian exchange-traded funds by 3iQ Digital Asset Management will feed from its existing Bitcoin and Ethereum ETFs listed on the Toronto Stock Exchange.

A further two cryptocurrency-backed exchange-traded funds (ETF) have launched on the Cboe Australia exchange on Monday, bringing the total amount of crypto ETFs available to Australian traders to six.

The Canada-based 3iQ Digital Asset Management launched two spot ETFs, the 3iQ CoinShares Bitcoin (BTC) Feeder ETF and the 3iQ CoinShares Ether (ETH) Feeder ETF.

Both of the Australian funds feed from the firm’s Canadian ETFs listed on the Toronto Stock Exchange (TSX), the 3iQ CoinShares Bitcoin ETF, and the 3iQ CoinShares Ether ETF. The underlying assets of the Canadian ETFs are holdings of BTC and ETH held in cold storage by the Gemini crypto exchange.

3iQ’s funds join the Bitcoin- and Ether-backed funds by 21Shares and Cosmos Asset Management, the latter of which saw launch delays in April due to a still-unnamed service provider needing time to support the launch.

Three ETFs, a Bitcoin and Ether ETF by 21Shares, and a Bitcoin ETF by Cosmos eventually opened to trading in early May, becoming the first crypto ETFs in Australia. Cosmos later released an Ether-backed fund on May 31.

Much like 3iQ funds, the underlying assets for the Cosmos ETFs are direct investments into the Canadian Purpose Bitcoin and Ether ETFs, while the funds issued by 21Shares are backed by Bitcoin and Ether reserves held in cold storage by Coinbase.

A point of difference is that 3iQ boasts having the lowest expense ratio out of the six at 1.2% — 0.05% lower than the 21Shares and Cosmos ETFs, each with an expense ratio of 1.25%.

Related: Amid crypto bear market, institutional investors scoop up Bitcoin: CoinShares

The three original funds by 21Shares and Cosmos had a sluggish start to trading, only seeing $1.3 million in volume on the day of launch, far below the estimated $1 billion of expected inflows. The two 21Shares funds received a total of around $936,500 of total inflows, while Cosmos’ Bitcoin fund received just over $398,000.

According to data from Cboe at the time of writing, the two 3iQ ETFs have seen a volume of 13,592 and 9,754 shares traded of the Bitcoin and Ether ETFs, respectively, accounting for around $73,415 and $73,605, respectively, for a total of over $147,000, much smaller than its competitors.