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Will There Be A Bitcoin ETF in the U.S. Market

Will There Be A Bitcoin ETF in the U.S. Market?

For those engaged in the cryptocurrency business, the recent news in the industry would surely be disappointed. This is not only because of the price drop of many cryptocurrencies in recent months has diminished the enthusiasm of the overall market, but also the Securities and Exchange Commission (SEC) has been constantly rejecting or deferring the progress for cryptocurrency ETFs to be listed in the US market.

SEC’s Role in Cryptocurrency ETFs

In one of the most recent examples, SEC planned to make the final decision on whether to clear Valkyrie Bitcoin Fund for sale to the public by June 26, but the waiting period has now been extended to August 10 as the authority requires more time to review the application. Also, the SEC mentioned that it would seek public opinions for potentials issues like fraud and market manipulation. This is not the first time for the SEC to make such a decision, and this is due mainly to the concern about the lack of proper supervision over cryptocurrency transactions in order to protect retail investors.

Ever since Cameron and Tyler Winklevoss first filed their application back in 2017, other financial institutions followed up and filed their own applications regarding cryptocurrency ETFs with the SEC; however, they were all rejected without exception.

Understanding ETFs

The ETF is a type of security which provides investors with an easier access to a group of assets such as stocks and commodities through stock exchanges, and it is not a derivative. Therefore, ETFs are regulated by the SEC just like other listed securities, and the issue must be cleared for sale to the public. Although the U.S. authority does not completely ban cryptocurrencies like China does, its attitude towards such products remains conservative.

Cryptocurrency ETFs in Other Markets

Currently, certain cryptocurrency ETFs have already been listed in European countries, and the total number of these products is growing steadily. On February 18, 2021, The Canada Securities Administrators (CSA) cleared Purpose Bitcoin ETF (BTCC), the country’s first cryptocurrency to be listed on the Toronto Stock Exchange, and it has since been followed by a steady stream of new listings.

BTCC has been well received by the market as its trading volume exceeded $165 million on the first day, accounting for 1.6% of the total volume in the Canadian market; in addition, BTCC’s total assets under management (AUM) crossed $1 billion within three months.

U.S. vs Canada Opportunities and Challenges

Although some U.S. financial institutions were inspired by the success of BTCC and saw the possibility of launching the first cryptocurrency ETF in the native market, it will probably take a longer time for them to see the desired result. Based on Huobi Research’s report, the size of the Canadian ETF market only accounts for 2.8% of that of the United States, and the restrictions of U.S. brokers have also prevented retail investors in the United States from entering the Canadian ETF market to a certain extent. Thus, the size and complexity of the U.S. market will make it difficult for the country as a whole to follow the same route as Canada.

Financial Advisor Perspectives on Cryptocurrency ETFs

The acceptance of Cryptocurrency ETFs can be seen as a key move for the investment of cryptocurrencies being adopted by the mainstream because it eliminates the need for potential investors to directly invest in cryptocurrencies and enable the use of fiduciary accounts to place the digital assets under the management of a custodian. Also, it would largely reduce the transaction costs, thereby lowering the investment threshold.

Based on a recent Credit Suisse survey, 25% of financial advisors currently have digital assets in their clients’ investment portfolios, and 35% of financial advisors claimed that they will be adding digital assets in the future. Among them, 33% of advisors prefer to invest in digital assets through ETFs before directly investing in cryptocurrencies, while 40% of advisors prefer to invest in cryptocurrencies solely through ETFs.

Largest Bitcoin Fund on OTCQX

Grayscale Bitcoin Trust (GBTC) is currently the largest Bitcoin fund being quoted on OTCQX. Because there is a six months lock up period, such investment is very inflexible compared to ETFs, not to mention the fact that it has been quoted at a discount to its net asset value for few months. “Selling of GBTC shares exiting the six-month lockup period during June and July has emerged as an additional headwind for bitcoin.” said Nikolaos Panigirtzoglou, managing director at J.P. Morgan.

Erli Wang
Research Analyst