Stocks

ETFs Could Do For Bitcoin What They Did For Gold

Bitcoin and other cryptocurrencies have taken the investment world by storm, but for the average investor wanting a piece of the action without the risk of owning them outright, options are limited. Some stocks do offer indirect exposure to cryptocurrencies, but they are hardly pure-play options. As a result, some investors are looking at cryptocurrency funds, but those who are serious will find very few options. Multiple attempts to bring bitcoin ETFs onto the market have failed.

JPMorgan analysts Kenneth Worthington and Jenny Ni said in a recent note that the main reason asset managers are not participating much in cryptocurrency funds is lack of credibility. Officials with the Securities and Exchange Commission have been warning investors away from bitcoin and other digital currencies, not only because of the extreme volatility in their prices but also because of the many scams that aim to take advantage of the crypto craze.

bitcoin etfs
MichaelWuensch / Pixabay

Worthington and Ni point out that there’s just a “handful” of cryptocurrency funds available to investors, and most of them are from outside the country. They also say that asset managers generally have only a “tiny presence” in cryptocurrencies and call cryptocurrency ETFs a “holy grail for owners and investors.”

While multiple asset managers have attempted to launch bitcoin ETFs in the U.S., none have managed to get regulatory approval for their products. However, the JPMorgan team sees several advantages when it comes to bitcoin ETFs (or other cryptocurrencies).

For example, they said bitcoin ETFs would offer easier access to investors because investors must have a digital wallet to trade the digital currency at all, which makes access difficult. However, exchange-traded funds are traded often, and they describe ETFs as “highly accessible via investors’ brokerage accounts.” Further, they note that ETFs are “highly transparent,” as “derivatives, such as futures, readily track underlying assets and are regularly used by ETFs to support access to the underlying investments.”

Additionally, they point out that ETFs are traded through brokerage accounts which are insured by the Securities Investor Protection Corporation. However, cryptocurrency exchanges are not insured, which means they open up investors to the possibility of theft and fraud.

Worthington and Ni say that bitcoin ETFs would be “a significant leap forward,” drawing comparisons with what the gold ETF did for investors interested in trading the precious metal. They believe that the SPDR Gold Shares ETF, which was the first gold ETF, transformed the gold market by giving investors easy access to the precious metal.

They point out that the ETF enabled more investors to invest in gold, making it “a portfolio diversifier” and “a foundational asset.” Additionally, the increased access boosted gold prices from $443 in November 2014 to above $1,000 still today after the peak in 2011. They also point out that the gold fund is one of the largest ETFs on the market with more than $35 billion in assets under management.

bitcoin etfs

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  • Sierra_Intrepid

    “They believe that the SPDR Gold Shares ETF…”

    I’m not a fan of this specific example. Paper gold GLD claims to be fully backed by physical gold bullion but yet it refuses to give retail investors the right to redeem for any of these ‘claimed’ gold bullion. This fact alone would mean GLD shares are nothing more than paper at the end of the day.

    Furthermore, GLD’s prospectus is chalk full of weasel clauses and legal loopholes that allows the fund to get away without the full physical gold backing. One good example of this is the clause that states GLD has no right to audit subcustodial gold holdings. To this day, I have not heard of a single good reason for the existence of this audit loophole. I remember there was a well documented visit by CNBC’s Bob Pisani to GLD’s gold vault. This visit was organized by GLD’s management to prove the existence of GLD’s gold but the gold bar held up by Mr. Pisani had the serial number ZJ6752 which did not appear on the most recent bar list at that time. It was later discovered that this “GLD” bar was actually owned by ETF Securities.

  • Sierra_Intrepid

    Very interesting piece.