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$20 Trillion Middle Market Set to Drive Crypto ETF Niche

2 mins
Updated by Ryan James
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In Brief

  • The U.S. ETF market accounts for approximately $6.5T in assets under management
  • Eighty-one percent of financial advisers said they received questions about crypto in 2020, up from 5% in 2020 in a survey by Bitwise Asset Management and ETF Trends
  • ETF Trends CEO Tom Lydon believes that inflation is pressurizing investors to go into alternative investments
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As ProShares and Valkyrie Funds’ bitcoin futures ETFs cause major waves, Lydon believes that they could be the key to unleashing trillions of dollars in investor demand.

With the recent approval of bitcoin futures ETFs, the total inflows into ETFs totaled $1.24B. As of 26 October 2021, digital investment products saw digital asset inflows amounting to $1.47B, with the majority of inflow going into Bitcoin, followed by altcoins from Solana, Cardano, and Binance. The number of advisors who allocated crypto to their clients’ investment portfolios increased from 9.4% from 6.3%, according to the survey.

Due to trends like inflation, there is a middle-market where financial advisors manage about $20T where there exists no optimal investment in non-crypto asset classes, and is where the futures ETF might come up trumps. In a survey conducted this year, up to a quarter of advisors saw bitcoin as a hedge against inflation, up 16% from last year. 

The wealth of regulation in the futures market, combined with the ease and structure of an ETF, Simeon Hayman OF ProShares believes, will drive investment by people looking to get into bitcoin.

Crypto spot ETF vs futures ETF

The combination of the Chicago Mercantile Exchange (CME) and the Commodity Futures Trading Commission (CFTC) prevents the manipulation of a futures market. In a commodities market, it is ultimately the futures market that sets the price, not a spot market. There seems to be much greater liquidity in the futures, and the CME market trades at approximately 40% more volume than the largest U.S. spot market exchange.

The Valkyrie Bitcoin Strategy ETF is an actively managed product that holds a mix of front-month bitcoin futures, treasuries, and corporate bonds, and cash. Steven McClurg, Valkyrie Funds chief investment officer, believes a spot bitcoin ETF will not be on the cards until the middle of 2022. Van Eck’s proposal for a physical bitcoin ETF must be denied or approved by the SEC by Nov. 14, although, in the meantime, they have filed for a bitcoin futures ETF.

Regulators cautious on riskier bitcoin ETF

On 26 Oct 2021, Valkyrie filed an application with the SEC to launch the Valkyrie XBTO Leveraged BTC Futures ETF, which purports to deliver 1.25 times bitcoin’s daily returns by holding derivatives like futures and options. Direxion, another asset manager, filed on the same day to launch the Direxion Bitcoin Strategy Bear ETF, which aims to offer short exposure to Bitcoin futures contracts, meaning investors would benefit when bitcoin prices decline and lose money if bitcoin gains. According to the Wall Street Journal, which interviewed a person familiar with the matter, the SEC asked Valkyrie to withdraw its proposal for a leveraged bitcoin ETF, as the SEC wants to limit new Bitcoin futures products to un-leveraged funds. Leverage funds are designed for investors wishing to take advantage of volatility, not of long-term buy-and-hold investments, and are riskier products from which the SEC wants to protect buyers who looking for long-term value.

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David Thomas
David Thomas graduated from the University of Kwa-Zulu Natal in Durban, South Africa, with an Honors degree in electronic engineering. He worked as an engineer for eight years, developing software for industrial processes at South African automation specialist Autotronix (Pty) Ltd., mining control systems for AngloGold Ashanti, and consumer products at Inhep Digital Security, a domestic security company wholly owned by Swedish conglomerate Assa Abloy. He has experience writing software in C,...