The digital assets industry has reached a significant milestone today, with an exchange-traded fund (ETF) tied to Bitcoin futures set to begin trading on the New York Stock Exchange following approval from the SEC.
Q3 2021 hedge fund letters, conferences and more
After years of campaigning from crypto enthusiasts and industry leaders, ProShares will be the first ETF provider to offer investors exposure to Bitcoin through an ordinary brokerage account, without having to hold the cryptocurrency directly. The SEC is now considering additional proposals made by Valkyrie Investments and Vaneck – who are also expected to receive the green light to sell Bitcoin ETFs to investors in the coming months.
Gates Capital Management's ECF Value Funds have a fantastic track record. The funds (full-name Excess Cash Flow Value Funds), which invest in an event-driven equity and credit strategy Read More
ETF Is Important For Bitcoin Adoption
Sebastian Markowsky, Chief Strategy Officer at Coinsource, America’s leading provider of Bitcoin ATMs, said: “Of course, ETF is important for Bitcoin adoption, since there are so many institutional capital pools that are not allowed to invest directly into Bitcoin or other cryptocurrencies but need regulator-approved structures by agencies such as the SEC. There is a huge pile of capital waiting to gain Bitcoin exposure by means of those products. This is capital that previously did not have the means to access Bitcoin. The importance of this access for the growth of Bitcoin can probably not be overstated. We would anticipate the price of Bitcoin to be driven by this institutional capital from people who buy ETFs and the enhanced credence given by the increased institutional adoption.
“Futures is more of a speculative tool so you are betting on short to medium term price development of Bitcoin so it is more of a speculative approach than holding onto Bitcoin as you usually would do. It is more trading, rather than a value-driven approach. It gives more emphasis on influencing and pricing in the short term. Bitcoin ETFs are not new – they have already been approved in Europe. We should expect other jurisdictions to launch ETFs in the near future, as this is a big opportunity. Overall, we see this as very positive news.”
Bitcoin Futures ETF Approval
Brad Yasar, Founder and CEO of EQIFI, the decentralized finance platform for lending, borrowing, and investing ETH, stablecoins, and select fiat currencies, said: “I suspect that regulators were willing to approve Bitcoin futures ETFs because there is a lot of institutional pressure to gain access to this alternative investment opportunity. A lot of new interest is building for BTC, but because these entities are not allowed to invest in just anything, they need exposure to BTC in a form that they can invest in. BTC futures ETFs are one of those approved formats.
“I expect there will be positive price action if and when more long term holders acquire Bitcoin either directly or through ETFs. It will also reduce volatility because ETFs are not going to trade Bitcoin directly, instead the trading will shift to the ETF products on the traditional markets. It will be a gradual but long term effect. Overall, I think this is good news for advancing adoption. Bitcoin ETFs are very important because they allow arms-length exposure to Bitcoin without actually having to buy and hold Bitcoin in a wallet. The easier Bitcoin investing becomes, the more institutional adoption it will see, and the more growth we will experience across crypto.”
BTC Hits Over $62K
Seamus Donoghue, VP of Strategic Alliances at METACO, a digital asset infrastructure provider to financial institutions including Standard Chartered, said: “The news that a bitcoin futures exchange-traded fund (ETF) will start trading on the New York Stock Exchange today is a significant development for the crypto industry. As expected, the markets have reacted positively to the news, with BTC over $62K in light of the announcement.
“Bitcoin has been rallying strongly in anticipation of an ETF approval with Bitcoin up over 40% since the start of the month. This could be a case of “buy the rumour and sell the news” and we risk a pullback on an actual ETF announcement. That said, with recent confirmation from both the Fed’s Powell and SEC’s Gensler that although regulations are coming, there is no China-style clampdown envisioned, this will provide comfort to the broader institutional market that it is here to stay and they need to get involved to meet their client demand. We look for more Q4 headlines on institutional adoption, similar to the US$300bn Canadian pension fund manager Caisse de Dépôt et Placement du Québec (CDPQ) investment in Celsius, to drive the market to new highs into year-end.
“It is a strong indicator of the bullish market that markets did not react significantly to Jamie Dimon’s comments on Bitcoin last week. Jamie Dimon has his own opinion on Bitcoin but as he has said his clients are adults and can come to their own conclusions. Meanwhile, JP Morgan is increasingly broadening the accessibility for their clients to crypto markets and services. It is a personal view, not a firm view, and is increasingly out of step with the reality of the market.
“The China crackdown on digital currencies knocked the country’s share of mining production to zero. As recently as August 2020 China was responsible for 66.86% of the Bitcoin mining hashrate; now, North America accounts for the largest global share of mining production, with close to 50% of all Bitcoin mining production. Although the initial reaction to the China ban was negative this is a great long term outcome for the industry. With the stroke of a pen, the ban has eliminated the biggest offenders of dirty coal-based mining and the systemic exposure to China. We are already seeing a much more positive ESG narrative around crypto.”
Any Tier 3 Institutional Player Can Invest In Bitcoin
Amber Ghaddar, Co-Founder of AllianceBlock, the chain-agnostic protocol building compliant and data-driven financial products to bridge the gap between traditional and decentralized finance, said: “ETFs trade like equities in terms of settlement. They fall under Equity in terms of Asset Allocation. So technically, now, any retail investor with a standard brokerage account and any tier 3 institutional player can invest in Bitcoin without having to set up digital custodianship, update its infrastructure and/or amend its asset allocation requirements.
“A US ETF, whether futures or spot, is a welcome development in the US and should pave the way for increased adoption. A survey published by NORC, a research group at the University of Chicago shows that already 13% of Americans bought or traded cryptocurrency in the past 12 months. By comparison, 24% of Americans invested in stocks over the same time period. A Fidelity Digital Assets Survey published in the summer showed that over 70% of institutional investors plan on buying or investing in digital assets in the near future, and an ETF should simplify access and tax treatment for them.
“However, looking at the prospectus, the ProShares ETF invests in the front month with what it includes of basis and roll risk which can account in a worst-case scenario for an annualized discount of 38% per annum. It is potentially a better option than investing in MicroStrategy stock which trades as a proxy bitcoin investment but potentially not better than the Grayscale Trust – invested in physical bitcoins - which has been traded at a discount since late February and reached a new low of 20.5% discount on Monday. Ironically, the fact that Grayscale has been trading at a discount for so long can be an indicator that those clients interested in Bitcoin exposure have filled their need with either direct exposure or through other instruments and could indicate a lower than expected demand for the ProShares ETF.”
“Since the announcement of a potential approval, BTC prices continued to edge higher last week from a low of $54,370 to a high of $62,503. We have seen Long-term Holders (LTH) realising profits as the market rallied above $60k, but we have also seen call options buying en masse, with preferred strike prices above $100k up to December 2021. This shows the market is expecting US Retail and Institutional flows to buy in and take over driving prices higher at the end of the year. As always in crypto, on Monday, the day of the announcement, the market rallied a bit before dipping from ATH. It seems the “buy the rumour, sell the news” motto still works and Bitcoin is currently trading in a range.
“In the futures markets, CME open interest (OI) shot up to almost twice the average for the month, representing almost 28% of total OI (including perpetuals) from an average of 13.5% of total OI in the last week of September. While the annualized rolling 1 month basis on CME Futures increased from almost flat to circa 14% this morning. In the coming weeks what we need to watch out for is the NAV and flows of the ETF – is there a real demand from investors - and what type of investors are showing interest. Is it those left on the sidelines buying or hedge funds shorting the ETF and buying spot to monetize the basis? In both cases, and ceteris paribus - this should be positive for spot. However if the ETF demand is lacklustre we will see a retraction in prices.”
“The main issue the SEC has is that Bitcoin trades 24/7, on multiple exchanges, across jurisdictions and has no official closing price. As the ETF is supposed to track the asset 1 to 1, the SEC can be worried about tracking errors that due to volatility and the unconventional structure of the market of this brand new asset class, can be consequential, and this is fully understandable. Add to this potentially perceived market manipulation – a report by Bitwise presented to the SEC in 2019 showed that 95% of volumes of Spot Bitcoin on centralized exchanges are fake or wash traded – and one can understand the SEC concerns with regards to manipulation. On the other hand, the CME is registered with the CFTC – where the current chairman of the SEC, Gary Gensler, was Chairman from 2009 to 2014 and reformed Derivative markets post the GFC of 2008 – and the CME bitcoin futures have an open and closing price and trades within terms that are understood by the traditional industry. In my opinion, a Physical Bitcoin ETF is much safer and more representative of the spirit of what an ETF is supposed to accomplish than a Futures ETF. However, the “old guard” of finance are more at ease with what they know – applying old rules and requirements to a completely new asset class, instead of creating new calculation rules and requirements to adapt to digital assets.”