Bitcoin ETFs
For years, investment managers have been trying to find ways to make Bitcoin and Cryptocurrencies more accessible to the average investor. While Coinbase and others have made it relatively easy to purchase Crypto, there are still lots of individuals that want to just own the product in their regular brokerage accounts at Fidelity or Vanguard. As a result, several asset management firms have attempted to bring Exchange Traded Funds (ETFs) tied to $BTC to market. The SEC has so far been unwilling to allow funds to directly invest in Bitcoin, but they have opened the door to ones that use $BTC futures.
The first serious attempt to bring a Bitcoin ETF came from the Winklevoss brothers. After their public fight with Mark Zuckerberg over the founding of Facebook, the twins were early adopters of $BTC. They have been long term holders of Crypto and have amassed serious net worth. They also launched one of the popular exchanges Gemini back in 2014. The pair applied to bring the first ETF tied to Bitcoin after four years of work. Unfortunately, in 2017 the SEC rejected the proposal. The primary reason given by the SEC at that time was that the markets where Bitcoin are currently traded are largely unregulated. The SEC argued this raised “concerns about the potential for fraudulent or manipulative acts and practices in this market.” The Winklessvoss bros reapplied and were rejected again by the SEC in 2018. By the way, the price of $BTC in 2017 was around $1,300, so way to go SEC, saved investors from risk, ha ha.
As the market for Bitcoin matured and grew more liquid, another five investment managers attempted similar applications and were also rejected. This group included Fidelity, SkyBridge, and Van Eck. Even after the change in the White House led to a new SEC commissioner in 2021, the commission’s stance on Bitcoin ETFs did not improve. This caused asset managers to look for a new solution to bring Bitcoin to the equity markets.
Back in 2017, the Chicago Board Options Exchange (CBOE) exchange was the first to list a futures contract tied to the price of $BTC. The contract saw some early trading activity, but the price of $BTC crashed and interest waned. In 2019, the CBOE discontinued listing the contract. However, when prices of Crypto rebounded, the CBOE brought back the contract. The Chicago Mercantile Exchange (CME) followed suit, launching their own contract. The contracts have solid institutional activity but are seldom used by retail investors. The good news for aspiring Bitcoin ETF managers is that there is a long history of ETFs tied to futures contracts in other commodities and financial markets.
In 2021, a large ETF manager ProShares applied for and received approval for the first ETF tied to $BTC futures, the ProShares Bitcoin Strategy ETF (Ticker: BITO). While not tied to the actual Bitcoin Cryptocurrency, the ETF tracks the futures which tracks $BTC fairly well. Retail investors have responded well, and the assets under management in BITO have risen to over $1Bn. A few other asset managers have followed, but none have passed the $100MM AUM mark yet.
To give some context, Coinbase has $278Bn in assets on their platform, so the $1Bn in the ProShares ETF is just a drop in the bucket still. However, this can become an important market for Cryptocurrencies over time. The largest ETFs are tied to the S&P 500, and they have AUM in the $300–400Bn range. You can also look at the market for ETFs tied to the price of gold, another asset that is generally hard for retail investors to hold directly. There are numerous gold ETFs, and the largest one is the SPDR Gold Trust (Ticker GLD) with AUM of $65Bn.
Once the SEC gets comfortable with ETFs tied to actual Bitcoin instead of the futures, I expect we will see several large $BTC ETFs that could grow to rival GLD. Keep an eye on this space as more headlines are likely coming in this year or next.
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