The first bitcoin futures ETF recently debuted, representing a long-awaited moment for crypto investors who want this type of access to digital assets. This news, combined with the SEC’s recent approval of Volt Equity’s exchange traded fund (ETF), which is composed of stocks with significant exposure to bitcoin, represents the latest in the march toward an ETF holding “physical” bitcoin. While these developments are welcome, they ultimately could limit investors.
The time has come for the SEC to approve a true crypto ETF. In earlier days, approval delays were largely based on concerns around liquidity of the bitcoin markets, the potential for fraud or manipulation and the maturity of an asset class that lacked a historical track record.
But times have changed, and bitcoin markets have matured. Despite these early concerns, today the cryptocurrency market is valued at more than a trillion dollars and delaying the approval of a spot bitcoin ETF means many investors could be missing out on a secure, reliable, transparent way to invest.
Bitcoin is the best performing asset over one-, three-, five- and 10-year periods compared to other assets widely available to investors. The number of regulated crypto custodians subject to robust oversight has also increased at a steady rate, providing safety and security for investors.
Half-measures limit benefits
We have reached a stage in the development of crypto markets where investors deserve to be able to hold bitcoin in a wrapper that represents the true price of the underlying asset if they don’t wish to hold that bitcoin directly. A proper, regulated ETF under the oversight of the SEC can do exactly that.
Over the last few years, the only available bitcoin investment product in U.S. markets has been a fund-like structure that acts like a closed-end fund. Closed-end funds, as well as a bitcoin futures ETF, represent the only near-term options for investors looking to invest in crypto through an ETF structure.
While all of these options are welcome, they each have notable limitations that investors should be aware of.
Closed-end funds
For the last several years, the only available bitcoin investment product in U.S. markets has been a fund-like structure that acts as a closed-end fund. In these cases, the product does not have the creation and redemption mechanism of proven ETF vehicles, which keeps the price of the fund consistent with the value of the underlying assets.
This has led to a difficult reality for investors and caused investor harm. According to Bloomberg, the Grayscale Bitcoin Trust (GBTC) has underperformed its net asset value (NAV) by 280% over a three-year period. This means that while GBTC has provided 317% returns since August 2018, the underlying bitcoin holdings have actually returned 597% over the same period. This is not a problem with the underlying asset. It’s a problem with the structure of the fund, something that has been known in the markets for many years, with ETFs being a proven fix to the discount and premium issues that have plagued closed-end funds for years.
Bitcoin futures ETF
While the availability of a bitcoin futures ETF is a positive development, futures are complicated derivatives products, which is why many investors who don’t meet certain thresholds are generally prohibited from trading them. Futures pricing includes components of rates and costs of rolling, which can cause them to be traded at premiums and discounts to the products they track. It’s a well known fact in the ETF industry that futures-based funds do not provide returns that directly track the underlying asset.
In the spirit of disclosure, Gemini Fund Solutions provides a highly regulated custody solution for fund issuers.
As evidenced by bitcoin ETFs in other jurisdictions, the model provides investors with a wrapped solution for bitcoin that works like other traditional investment products and provides returns that are completely in sync with the underlying assets.
It’s time U.S. ETF issuers are given the same opportunity afforded to some of their international counterparts to provide a safe, reliable, transparent and cost-efficient bitcoin-based alternative, all under the oversight of the SEC, to the structured products currently in the market. This is the best way to protect investors.
