Faced with the rumor that regulatory bodies will soon accept a pure Bitcoin (BTC) -backed exchange-traded fund, it is important to understand the journey of some of the first cryptocurrency-based ETFs that have recently been approved by government bodies.
The United States Securities Commission approved an ETF adjacent to Bitcoin, giving investors the opportunity to gain exposure to Bitcoin through the equity markets, and the most recent acceptance was that of the ProShares Bitcoin Strategy ETF, which began to to be listed on NYSE Arca on October 19.
It is important to note that the aforementioned exchange funds are not pure cryptocurrency ETFs and are limited to following shares of companies related to cryptocurrencies or futures contracts.
The SEC has yet to approve a pure cryptocurrency ETF, unlike Canada, where regulators approved three Ether (ETH) -based ETFs from three different companies: Purpose Investments, Evolve ETFs, and CI Global Asset Management.
Despite the good news that regulators are starting to accept crypto ETFs, many questions remain as to why there have been so many difficulties for their listing. This fall, there has been a lot of anticipation and speculation surrounding what exactly ETFs are and how they can boost – or hinder – the cryptocurrency market as a whole. Here are the issues, challenges, and the possible future of cryptocurrency-backed exchange-traded funds.
Regulatory mismatch
Exchange-traded funds, in general, are mutual funds that track a basket of assets on the stock market and can be traded in the same way as regular stocks.
Although ETFs exist for almost any asset, the problem with cryptocurrencies is that regulators still don’t know how to define Bitcoin and other cryptocurrencies, and how to protect consumers against exposure to risk. These issues could pose a challenge when pure crypto ETFs start to appear on the equity markets, as the lack of regulatory clarity could cause problems with regulation in various national bodies and around the world.
The various financial regulators in the United States, for example, all have different, sometimes contradictory views on what cryptocurrencies are, especially when it comes to taxation and trading.
In 2020, France’s main financial regulator, the Autorité des Marches Financiers (AMF), responded to guidance from the European Commission on so-called “crypto assets”, stating that it is still too early to define them explicitly. A spokesperson told Cointelegraph at the time:
“The AMF considers that giving a precise classification applied to crypto assets could be premature at this stage. Only after solid feedback will we be able to judge the relevance of a precise classification (eg ‘utility tokens’, ‘security tokens’, “payment tokens”, “stablecoins”, etc.) “.
French fund manager Melanion recently approved its Bitcoin-adjacent ETF, hoping that its shares will follow the price of Bitcoin, first in the French market and soon in many other markets in Europe.
Cointelegraph contacted Jad Comair, founder and chief information officer of Melanion, who mentioned that because it is not possible in the European market to directly expose investors to Bitcoin through the framework of Collective Investment Entities in Transferable Securities (UCITS), which is “a format used by 99% of ETFs listed in Europe”, the firm had to get smart and create “a unique index construction methodology in the world that measures companies’ exposure to Bitcoin . “
This means that the ETF tracks the stocks of companies that invest in Bitcoin, mine Bitcoin, or are otherwise involved in the cryptocurrency market, but it does not contain Bitcoin itself. “The index selects the companies most exposed to Bitcoin, and weights them based on their historical correlation (beta) with the performance of Bitcoin,” Comair said.
Fears in the face of risks?
Highly volatile assets such as cryptocurrencies can carry risks, especially in the case of a futures-backed Bitcoin ETF.
Bitcoin futures ETFs track a basket of futures contracts rather than Bitcoin itself. Since the price of Bitcoin futures may differ from the spot price, there is a possibility that the ETF will not accurately track the price of Bitcoin, exposing the ETF holder to some risk.
The term “contango” refers to when the futures price is higher than the spot price, while “backwardation” is when the futures price is lower than the spot price.
Furthermore, this high volatility means that regulators could move to implement more investor protection, especially after seeing the jumps the cryptocurrency market has experienced in the past six months. This raises the question:
Could an exchange-traded fund help mitigate the risks posed by volatility?
With the new acceptance and implementation of cryptocurrency futures ETFs, the most recent model already listed on the New York Stock Exchange, this could “open the doors for ‘real’ money to enter, since, for the moment, the Existing Bitcoin products are suitable for small investment exchanges, and Bitcoin itself is very difficult to place in a normal portfolio, “Comair said. More serious exposure to the markets, even through companies that invest in Bitcoin, could lead to the market exploding and / or stability.
Changes in the cryptocurrency market may drive greater acceptance of ETFs as the stock market learns to interact with the cryptocurrency market, and vice versa. With ETFs tracking companies investing in crypto and the start of crypto futures-based ETFs, could this lead to more widespread adoption of crypto investing as a whole?