Exchange-traded funds (ETFs) are among the most popular methods of investing today, with investors pouring trillions of dollars into an ever-growing pool of funds. Particularly in comparison with expensive to use hedge funds, low-fee ETFs provide a safer, more stable means of investing. One of the benefits of ETFs is that they are infinitely broad in scope and focus; investors can use ETFs to participate in markets ranging from traditional sectors like energy to alternative, newly arising sectors like the cannabis industry.
On the other hand, cryptocurrencies have witnessed an increasing interest and hype in the investment world, especially in 2017. The recently witnessed bull market of 2017, followed by the consequent bear market of 2018 have signalled opportunities for many investors. Some of the most successful cryptocurrencies have witnessed astonishing returns. However, the cryptocurrencies industry is still full of uncertainty and experience heavy volatility on a daily basis. For this reason, many investors could potentially prefer to use a vehicle like an ETF to participate in the cryptocurrency space.
Similar to mutual funds, ETFs gather investor assets and buy stocks or bonds according to a basic strategy spelled out when the ETF is formed. ETFs trade similarly to stocks where you can buy or sell anytime during the trading day. Mutual funds are bought or sold at the end of the day, at the price, or net asset value (NAV), determined by the closing prices of the stocks or bonds owned by the fund. Because they trade like stocks, ETFs can be sold short, and can provide a way to profit when the ETF price drops. Many ETFs also have related options contracts, which allow investors to control large numbers of shares with less money than if they owned the shares outright. The short-selling capability and options are not available with mutual funds. This difference makes ETFs better for day-traders betting on short-term price changes of entire market sectors. For long-term investors, these features don’t matter. Many investors like index products because they are not dependent on the talents of a fund manager who might lose his touch, retire or quit.
A Crypto ETF in theory, works like any other ETF, in the way that it tracks an index or a basket of digital assets. Similarly, they would trade like other ETFs or like common stocks on an exchange, while being subject to price changes throughout the day depending on demand and supply for the underlying instruments. For a Crypto ETF to work properly, it will need to own the underlying assets that it tracks. The ownership of these digital assets would be divided into shares, and investors in the ETF would indirectly own those assets. ETF investors would then receive their share of the profits generated by those underlying assets.
By using a Crypto-ETF, investors might take advantage of the opportunities that tokens present without having the implications of actually owning them. Understanding how to secure cryptocurrencies and digital token exchanges, and actually applying the best security practices can be a daunting task for people. Digital assets are still primarily the targets of thieves and scammers, and as such, we can understand why investors might wish to take this extra precaution, despite the fact that they are giving away the control of their digital assets to a 3rd party custodian. Another benefit of a cryptocurrency ETF is that it can be used to track multiple digital tokens at once. The cryptocurrency world is constantly evolving, and investors looking to hold a basket of, say, 20 different tokens may have to own and operate multiple wallets and accounts across various digital currency exchanges, making sure that their wallet software is up to date, while there are no guarantees that centralized exchanges will not be the target for hackers. The process of investing in these tokens and trading regularly becomes cumbersome and might not be worth the amount of administrative time and effort required. A cryptocurrency ETF could take out much of the time and hassle for investors by simply tracking those same 20 or more tokens. Investors could then buy and sell shares of the ETF to gain the same exposure to that pool of tokens without having to worry about individually managing each of them.
Up to this day, the U.S. Securities and Exchange Commission (SEC) has reported that it will not approve any cryptocurrency ETFs until the markets demonstrable stability and security. Still, that has not deterred many parties from attempting to launch digital currency ETFs.
The Chicago Board Options Exchange (CBOE), which launched bitcoin futures in December 2017, has urged the SEC to reconsider its earlier rejection of digital token funds. Cameron and Tyler Winklevoss, the founders of popular digital currency exchange Gemini, have twice petitioned the SEC to approve a bitcoin ETF, and so far, each attempt has not been successful. Coinbase, another immensely popular digital currency exchange, launched an index fund offering exposure to four of the largest digital currencies, but that again is not quite the same as an ETF.
The SEC has indicated its openness to the possibility of cryptocurrency funds in the future, and this could perhaps continue to fuel investor optimism if cryptocurrency ETFs do become a reality, in other parts of the world. Various markets in Europe and Asia, for instance, have introduced cryptocurrency ETFs thanks to differing levels of regulation. For the time being, though, U.S. investors will have to wait with only a few options at hand.
One of the options could be a related group of ETFs: blockchain funds. Blockchain technology supports the cryptocurrency space and is closely linked with digital tokens. There are a growing number of ETFs focused on blockchain-related companies and may include crypto related brands like computer processor developers and manufacturers. While bitcoin-based ETFs have been rejected by regulators owing to questions of control, those based on the underlying blockchain technology are receiving a better treatment. Two popular blockchain ETFs include the Reality Shares Nasdaq NexGen Economy (BLCN) ETF and the Amplify Transformational Data Sharing (BLOK) ETF. Such blockchain ETFs come with the inherent risk of investing funds on technology-based start-ups while the blockchain industry is still evolving, and regularly hitting regulatory roadblocks across the globe.
Simultaneously, as the entire world is waiting for the US SEC decision regarding Bitcoin ETFs, Switzerland is pioneering in the space. The country’s financial regulator, FINMA, confirmed that the exchange-traded product will arrive in Switzerland’s principal stock exchange, on November 21st. The specific ETP will track five top cryptocurrencies by market capitalization. ETPs are exchange-traded products which are being approved by Switzerland’s stock exchange called Six Swiss Exchange. The ETP is being issued by Amun AG, headquartered in Zug.
ETPs are different from ETFs and the main reason is the fact that ETPs are not subject to the CISA (Collective Investment Schemes Act). As a result, they are not supervised by FINMA. Alternatively, ETFs would be subject to the CISA, as they are funds that are traded and are normally tracking an index’s performance. On the other hand, ETPs are similar to ETFs in a way that they trade in a multi market-making segment. However, they are not funds in a legal way. Instead, they are collateralized and noninterest-earning bearer debt securities. They can replicate an underlying asset which is usually from the sector of commodities.
In their document, Six Swiss Exchange shows that ETPs will include ETNs (exchange-traded notes) as well as ETCs (exchange-traded commodities). While ETNs are a kind of debt security that can be traded on exchanges with a promise of returns linked to a market index, ETCs provide exposure to various commodities. In addition, there are also different risks involved with ETFs and ETPs. ETFs are separate asset pools which can be segregated in case of the provider’s bankruptcy, which means that there is no issuer risk involved.
While it’s far from a sure thing, many cryptocurrency enthusiasts see it as only a matter of time before the SEC approves digital currency ETFs. If and when this happens, it is expected to have a significant impact on the performance of the cryptocurrency space itself. With the increasing amount of volatility surrounding the cryptocurrency marketplace, investors are looking for new ways to operate in this unexplored area of finance. CTFs allow investors to purchase a basket of cryptocurrencies through a single investment vehicle, and by doing so investors will immediately be able to lower their inherent risk without having to pull their investment for fiat currency. This will allow investors to naturally lower their risk exposure without having to pay excessive diversification fees and will allow them to continue to operate in a deregulated market.
About the Author – George Agathangelou
George is a leading figure in the crypto-space within Cyprus, with ten years of experience in financial services and strong connections throughout the FX and Cryptocurrency industry. He specializes in FX, cryptocurrency trading, and alternative assets investments while maintaining an incredible operational track record in management positions for regulated investment firms. Primarily an economist, George believes passionately in the future of cryptocurrencies and aspires to help create the infrastructure required for vast adoption of this new financial paradigm. Simultaneously he is an advisor for Cyprus Blockchain Technologies, a non-for-profit organization with the aim to conduct edge-cutting research in the field of Blockchain and Distributed Applications and to organize transfer of knowledge sessions, round-table discussions and executive education seminars. Lastly, George is the Chief Business Development Officer for the first blockchain consultancy firm in Cyprus, Universal Crypto. As an active member of Bitcoin Club Limassol, George attends local meetups to share his enthusiasm. George also founded and maintains the Facebook community Digital Currency Group. Being a renowned public speaker, he’s been discussing recent trends and topics of the cryptocurrency space around the globe. He’s also contributed to a number of white paper preparations and audits for various companies focusing on financial services.