For those familiar with cryptocurrency trading, the process of buying and selling digital assets comes naturally. Unfortunately, this is not the case for many others — especially those that do not have the necessary knowledge and/or experience to deal with the security issues related to owning cryptocurrency.
Beginners would find existing cryptocurrency ETFs (exchange-traded funds) very appealing, although the heavily unregulated space these funds are operating from offer close to nothing in term of security for the investor that is just starting out. Additionally, they are not real cryptocurrency ETFs as most of them are operating out of their own volition, without support from financial institutions — but both a cryptocurrency ETF and Bitcoin ETF are on the horizon.
In this article, you will be able to learn more about these financial instruments and decide whether or not they are a good choice for you.
- What is a Bitcoin ETF?
- Crypto index fund investment opportunities
- Investing in ETFs vs buying cryptocurrencies
- Short history of Bitcoin ETFs
- Leadership thoughts on ETFs
What is a Bitcoin ETF?
Exchange traded funds (ETFs) are a type of index fund which provides a way for investors to participate in a portfolio of stocks — or, in this case, cryptocurrencies (or bitcoin specifically) — without actually going through the process of acquiring and securing these assets. Instead, they collaborate with financial entities that hold these assets for them and enable them to buy and sell as they please in exchange for a brokerage fee.
ETFs enable investors to speculate on the price movements and trade the underlying asset with delegated risks, as the entity that is providing investors with the ETF is responsible for maintaining the security of the assets — effectively alleviating the investor from this responsibility.
They can be based either on physical ownership or a futures contract, which is an agreement between two financial institutions that the assets will be bought at a future price, instead of the current one.
How does a Bitcoin ETF work?
The best way to understand the way that ETFs work is to compare it to company stocks.
ETFs are created based on the asset which the financial organization owns, and it tracks the performance of that particular asset (or asset group).
The price movement of the assets is reflected in the price of each ETF stock, making either profit or losses for investors.
Crypto Index Fund Investment Opportunities
Many of these bitcoin ETF-like options are only available to wholesale institutional investors, but there are some that are available for individual retail investors. We will cover both in this section — but, before we continue, we need to make a disclaimer.
None of these funds are true exchange-traded funds. They are either exchange-traded notes, futures, or index funds. The U.S. Securities and Exchange Commission (SEC) has not given approval to any organization to provide investors with cryptocurrency securities.
In fact, the SEC is widely recognized by the fact that it has shot down numerous attempts to legalize bitcoin ETFs (and open them up to the New York Stock Exchange) under the statement that none of the applicants have demonstrated the necessary requirements for properly protecting investors and the public.
Still, investing in a basket of digital currency assets is not impossible, although the choices are indeed limited.
The Coinbase Index Fund is open exclusively to accredited U.S. investors. The fund started their operations in March 2018. Since then, it has provided accredited investors the opportunity to expose themselves to all of the assets listed on the exchange for a minimum investment of $250,000.
This Australian cryptocurrency exchange launched the CoinJar Digital Currency Fund, which is an index fund, with two options: The Bitcoin Class, which provides investors easy entry into the bitcoin market, and the Mixed Class, which opens up a variety of the top performing cryptocurrencies — like Bitcoin (BTC), Ethereum (ETH), Ripple (XRP), and Litecoin (LTC).
The minimum investment in this index fund is $50,000 and it’s available only for institutional investors.
This investment company also serves accredited U.S. investors through their Bitcoin Investment Trust, and it owns the bitcoin directly. The company also owns different funds aimed at Ethereum and Bitcoin Cash (BCH).
Through their funds, Grayscale enables investors to trade crypto-backed shares in exchange for an annual maintenance fee.
This Swedish exchange trades ETNs (exchange-traded notes) on Nasdaq Stockholm. It began operations in 2015 and offers four investment classes to choose from.
In order to invest in these stocks, you need to have contact with a broker that is connected to the Nasdaq exchange in Stockholm.
Cryptocurrency and Bitcoin exchange Huobi released the first ever cryptocurrency ETF for retail investors, with a minimum entry of just $100. It enables investors to purchase stock from the company’s HB10 index fund, which is traded exclusively on their Huobi Pro exchange.
Although they are calling it an ETF, it cannot be held by traditional brokerage accounts and is not traded on a regulated securities exchange — a fact that disillusions potential investors.
Shortly after Huobi announced its ETF, OKEx took almost immediate action and announced its OK06ETT index fund one month later. It features extremely similar conditions with a minimal entry of $100 and the fund contains Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), Bitcoin Cash (BCH), EOS (EOS), and Global Utility Token (OKB).
Investing in ETFs vs Buying Cryptocurrencies
Any form of investment inherently bears significant risks, and there are benefits and risks associated with investing regardless of the way you look at it.
In this section, we will review what are the reasons you both should and shouldn’t invest in cryptocurrencies through the use of ETFs. By the end of this section, you should have a clear perspective on what to do with your decision to invest in cryptocurrencies.
Investing in cryptocurrencies through ETFs is simple and effective. You don’t need to learn about the process of acquiring and safely storing cryptocurrencies, just like you don’t need to buy-out a vault to store “index” gold. The investment company takes care of all logistical issues.
Creating a diversified portfolio is easier. Doing it yourself would require you to create multiple wallets and exchange accounts, increasing the level of complexity and likely at a great cost of time. ETFs enable you to invest in a portfolio of cryptocurrencies in a simple and effective way.
There is no risk of being hacked. Both exchanges and your personal wallets are a target for hackers. The risk is the same for the fund but, when investing in the ETF, it is not your responsibility to protect the actual cryptocurrency.
Finally, fees are low. Traditionally-managed funds often charge investors premium fees, making it difficult to actually make a profit on your investments, even when things are going well — and some might claim things haven’t been going well in recent years.
ETFs are limited in choice. At the moment, there are no significantly diverse baskets that ETFs support. The overwhelmingly negative SEC stance prevents any form of retail investment opportunities — but this may soon change.
Cryptocurrencies are volatile. Widely recognized as one of the most unstable assets out there, cryptocurrencies have been disregarded by well-known investors (such as Warren Buffet) as a dangerous asset class. The reasoning behind that statement comes from the fact that the value of your ETF funds can rapidly move up or down, and it’s difficult to guarantee a regular return on investment.
Traditional ETFs often include a wide range of assets and securities to prevent the sudden loss of value for the fund. This approach is not available for crypto ETFs, mainly due to the fact that the SEC is not willing to approve any crypto ETF to the traditional market. This prevents investment companies from creating a diverse form of ETF that contains both traditional stocks and bitcoin. (Or any other cryptocurrency.)
The ETF provider needs to secure the cryptocurrency. Hacking can still influence your investment, even if you don’t own the assets. In the case of your ETF provider being hacked, there is no insurance in place to protect your investment.
Of course, fees also apply. Although smaller than traditional exchange funds, annual maintenance fees and brokerage fees are applied any time you buy and sell an ETF.
Finally, if you are buying ETFs from a provider located in another country, you might be held responsible to pay your country’s foreign income tax.
A Short History of Bitcoin ETFs
The SEC has gotten a strong reputation for denying exchange-traded funds for cryptocurrency and bitcoin. The reasons are staggeringly similar. The regulator claims the market is immature and such a financial instrument would cause significant risks for investors.
So far, there have been a total of 15 different proposals for starting up a legitimate ETF, whether they be asset-backed or a derivative-based arrangement. The SEC rejected most of them, but two remain on the table. For both of these, the community has been optimistic regarding their approval, mainly because the SEC has given public claims that their concerns have been answered, specifically for the case of the VanEck/SolidX ETF Bitcoin ETF application.
- Winklevoss Twins, Bats BZX Exchange, Inc. – 2013
- VanEck Vectors Bitcoin Strategy ETF – August 2017
- VanEck Vectors Bitcoin Strategy ETF – December 2017
- Winklevoss Twins, Bats BZX Exchange, Inc. – July 2018
- Bitwise ETF – July 2018
- ProShares – August 2018
- Direxion – August 2018
- Granite Shares – August 2018
- VanEck-SolidX-CBOE ETF – August 2018 (pending)
- Coinbase-BlackRock ETF – September 2018
The SEC’s Stance on Cryptocurrency ETFs
The Securities and Exchange Commission is an organization that has been created to prevent the abuse of investors, and it is their responsibility to take care of all participants on the securities market. Securities are investment products whose performance depends on a third party.
ETFs can be influenced by the performance on the managing fund, and therefore falls under this category. Many of the proposals sent forth to the SEC by companies that want to become a registered fund are denied because of several reasons.
What we know so far is that the SEC believes that the cryptocurrency market is not mature enough to provide open doors for anybody to invest. However, it might make an exception for funds that operate on a higher financial level, as the risks for well-established investors and investment companies are mitigated through their experience and financial capabilities.
The latest pending VanEck / SolidX bitcoin application includes these two companies that have tried to get approval independently, and have been rejected. Now, they are trying to win the approval together — and things might be different. The SEC has delayed its decision and has the ability to do so until February 2019. (The decision may come earlier, but it is unlikely.)
The SEC, in its protective role, wants to avoid making a mistake that would be difficult to rectify retroactively, which is why it is declining most of the proposals sent its way. So far, at least according to VanEck/SolidX leadership, all previous concerns from the SEC have been answered.
The market has evolved, there are community-based funds, and there are regulated futures markets for cryptocurrency. These regulated support structures could potentially help establish the ETF as the primary way that individuals (eventually) get in the cryptocurrency market. This will provide a level of security and reliability that the cryptocurrency space has been lacking, in terms of legal protection.
Leadership’s Thoughts on ETFs
We reached out to Mati Greenspan, an expert market analyst from eToro — a well-known social trading platform offering ETFs ranging from gold and silver to cryptocurrencies — to pick his brain on what financial leaders think about cryptocurrency ETFs. He told BeInCrypto:
“Everybody is waiting on the SEC’s decision regarding the VanEck and SolidX ETF. They are pulling most of the attention. If the decision goes through, both wholesale and retail investors will have an extremely safe and reliable way to invest in cryptoassets.
Crypto ETFs right now are mostly tailored for the professional investors. Institutions have more resources and knowledge, so they are able to perform their own due-diligence.
In the example of VanEck, there are higher barriers for entry, and a minimal contract is worth 25 BTC. It’s a clear sign that the ETF is designed with institutional investors in mind. The entire landscape is looking forward for its approval, as it will enable these institutions to create diversified funds that also include cryptoassets alongside other assets.
The VanEck ETF also comes with 100 percent insurance, as the entire ETF is asset-backed 1-to-1 with Bitcoin. The SEC acceptance, in this case, will open up new opportunities for asset managers around the world to include cryptoassets in a safe way.
[bctt tweet=”ETFs are a multi-trillion dollar market, and at the moment none of that is participating with cryptoassets. @MatiGreenspan” username=”beincrypto”]
If the decision goes through, cryptoassets will be able to enjoy the benefits of this massive market, and this is why the industry is excited about this proposal.”
You can follow Mati Greenspan on Twitter, where he actively shares his thoughts with the general public.
What is the Future for Cryptocurrency ETFs?
Last years cryptocurrency bull run — or bubble — ended up costing a lot of unaware investors, particularly those that bought in when the Bitcoin price reached upwards of $20,000. They did not realize how quickly things can change. Buying cryptocurrency at a premium of that magnitude is a risk. The SEC is obligated to protect investors, so it is not likely to allow cryptocurrency or bitcoin ETFs to be available to individual investors.
Instead, companies themselves are trying to get a foot in the door by creating high barriers of entry — such as a minimal entry fee of $200.000 — instantly disqualifying unaccredited investors.
The SEC is paying an increasing amount of attention to the blockchain technology and cryptocurrency industries to develop an informed opinion on what to do next. It has until Feb 2019 to make a decision regarding the latest VanEck/SolidX proposal.
Most likely, the SEC is going to make a decision after this year ends. It has a significant interest in observing what happens during the end of Q4 and the start of Q1 2019. This will allow the regulator to better consider the practicality of allowing the trillion-dollar securities market to dip into cryptocurrency-based exchange funds.
The cryptocurrency ETF markets are not yet mature enough to provide a compelling and safe experience for individual investors. Institutional, accredited investors have a lot more options for investing in cryptocurrency ETFs, mainly because of their ability to perform due diligence.
In other words, institutional investors know what they are doing and do not need the protection from the SEC to participate in broader, unregulated parts of the market. This makes exchanges exempt from many of the rules that the SEC places over companies that deal with retail investors.
Participating in either Huobi’s or OKEx’s index funds would mean an easy entry to the markets — but, as they are unregulated, they cannot be easily trusted. Price manipulation and fraud are common games in the market world, which is why the authorities look like brick walls and display a limited willingness to budge and provide approval.
With the decision to potentially allow the bitcoin-based VanEck ETF coming up soon, the profit potential for this market may increase — should the SEC decide to grant the first U.S. regulated license to operate an exchange-traded fund after two years of denial.
What do you think about Bitcoin and cryptocurrency ETFs? Are they just what this market needs to pull it out of its bearish doldrums, or will more institutional exposure only hamper parabolic gains in the future? Will a Bitcoin ETF have the same impact as Bitcoin futures contracts? Let us know your thoughts in the comments below!
Disclaimer: This article is not investment advice and is for educational purposes only. BeInCrypto is not responsible for any financial gains or losses made by any readers. Always do your own research and consult with a trained financial professional before investing.