Bitcoin ETPs are propelling Bitcoin into the fold of mainstream; regulated financial markets
Ever since cryptocurrency appeared on the financial scene, industry insiders have been trying desperately to make it simple, easy and quick for investors to buy it.
And it’s not financial institutions that are trying to push Bitcoin or Ethereum onto investors.
Brokers and asset managers are under serious pressure from their own clients to offer easily-tradable forms of these products.
The first thing any investor will do is look at the fastest growth industries and want a portion of it for his or her portfolio. Being told: ‘No, you can’t invest in that,’ is a concept entirely alien to most.
In the mainstream financial world, the accepted practice for easy-access investments is to bundle up tradable equities into Exchange Traded Funds, or ETFs. The benefits are that it spreads risk and diversifies investments across a number of companies, countries or sectors all at the same time. And of course, ease of use is a major factor.
Instead of spending hundreds of hours researching the 30 best Indian telecoms companies, or the finest South Korean electronics companies, or the leading South American cobalt miners, investors can instead buy a single ETF which tracks the performance of that market as a whole.
They own none of the underlying equities and so are not left exposed to volatile swings in the value of their portfolio — so, say, if one cobalt miner or telecoms company goes bankrupt — and at the same time are gaining healthy exposure to a wide number of market participants. It’s a win-win.
ETFs have become insanely popular in the last three decades. The first ever released for public investment was the SPDR in 1993, an ETF that tracked the performance of the US S&P 500.
It would take more than 21 years for the UK, one of the world’s largest financial centres, to follow suit and list an ETF domiciled in that country. This gives us an idea of just how far ahead of the curve the Americans were at the time.
And an entire passive investing movement has grown up around devoted worship of the MSCI World Index ETF, a fund that tracks the performance of the largest equities across 23 developed markets, including the US, UK, Japan, Australia, Canada and most of Western Europe. Microsoft, Apple, Alphabet (Google’s parent company), Amazon and Facebook, by dint of their size and financial strength, make up the largest holdings in this ETF.
ETFs have three other huge advantages over individual equities. Fees are usually much lower per purchase than for stocks and shares. There is strong liquidity: they are easy to buy and sell.
So for example when a mutual fund investor wants her money back, the fund has to sell equities to make this happen. But if she wants to sell her holdings in an ETF, she can easily just sell it on to another investor, as she would with any other company stock or share.
The start of 2020 saw global assets under management by ETFs and ETPs surpass a record $6.35 trillion, with no sign of slowing down.
Money managers have wanted to do the same thing for Bitcoin and the cryptoasset market since it first appeared at the end of the last decade.
It’s now patently obvious that investors of both retail and institutional stripes want access to crypto exposure for their portfolios. And while in 2012 or 2013 a Bitcoin ETF would have been only for the most tech-focused and sophisticated investors out there, as we reach the end of 2020, a clamour has grown up to build and release these same investment products for cryptoassets.
Individual commodities like gold, silver, coffee or iron ore are sold not as exchange-traded funds, but as Exchange Traded Products or ETPs.
ETPs differ from ETFs in that they are always, without exception, 100% physically backed by the products and commodities they track. And the developed world is now leaning towards treating cryptoassets as investable commodities rather than individual currencies. So Bitcoin ETPs are making their mark. Just not in the US.
Innovation is now coming not from the global ETF pioneer — the US — but from smaller national stock exchanges.
The first regulated Bitcoin ETP debuted on Switzlerland’s national stock exchange, SIX, on 21 November 2018. The Amun Crypto Basket (ticker name $HODL) is modelled on a gold ETP commodity setup. This was a deliberate act by Amun’s founder Hany Rashwan.
“The arguments we used to get regulators comfortable were to parallel crypto with commodities, especially gold,” Rashwan explained to Forbes.
And the Vienna Stock Exchange (Wiener Borse) is the latest to invite investors into this exclusive club, by listing a Bitcoin and Ethereum ETP by 21Shares.
“The performance of the two cryptocurrencies is replicated 1:1,” said the Wiener Borse, adding that “experienced investors can thus participate in the developments of the crypto markets via their national stock exchange, a regulated marketplace, by using their regular brokers account. A digital wallet, in which cryptocurrencies are stored for direct investments, is not required.”
In this way the Wiener Borse has done precisely what ETFs and ETPs should do: smooth over any regulatory and custody headaches and remove barriers to investment.
These two crypto ETPs pioneers are one and the same company, by the way. Amun completed its rebrand to 21Shares back in March of 2020.
24 September saw tech-focused exchange NASDAQ take its Bitcoin ETF to Bermuda for listing. Again, US investors are specifically excluded from taking part.
Without a national cryptoasset framework to fall back on, the SEC has been ever-so nervous about approving Bitcoin ETFs for US investors.
Crypto enthusiasts will know precisely how many times the regulator has denied, delayed and deferred decisions on potentially explosive Bitcoin ETF products from major providers like Wiltshire Phoenix and Van Eck.
That framework could now be coming in the shape of the Digital Commodity Exchange Act 2020. It’s at least two years overdue for US investors. But with the Presidential, House and Senate elections taking place later today, we’ll soon have an idea of what the political composition of these lawmaking bodies will be.
But hope springs eternal. The vast firepower of the US investing system is ready and waiting. To quote a popular meme, investors are, like Philip J Fry, begging asset managers to “Shut up and take my money.”