These days we hear a lot about Bitcoin, ETF and digital assets. In this article we explain what Bitcoin ETFs are and why they are blocked.
What is a Bitcoin ETF?
Bitcoin is the flagship cryptocurrency. It has a market capitalization of several hundred billion dollars, and its price fluctuates all the time. But one of the only ways to own it is to buy it directly or to work with a broker who’ll handle things on your behalf.
That’s because BTC doesn’t trade on a stock exchange, but on bespoke crypto exchanges: platforms that only allow you to trade cryptos for other cryptos. Therefore, you’ll have to keep your crypto portfolio separate from your stocks and shares portfolio.
There are, however, a few ways to trade Bitcoin directly on the stock market. The most promising is called the Exchange Traded Fund, or ETF, which is a fund that tracks the price of BTC. You can trade it just like any other fund.
However, financial regulators have routinely blocked Bitcoin ETFs, and none are operational as of November 2020. The US Securities and Exchange Commission (SEC), which is one of the most influential regulators for crypto products—has blocked proposals for Bitcoin ETFs several times, and most of the products on the market today are patchwork solutions.
What’s an ETF?
An Exchange Traded Fund or ETF is a publicly-traded fund that tracks some underlying asset. It’s a tidy financial product that lets investors trade, say, the price of gold or tech companies or the coffee industry, all at once. Instead of buying individual shares in Apple or Microsoft or Amazon, an ETF might sell shares in a fund that tracks tech stocks, giving investors exposure to the whole industry.
ETFs became popular in the 90s, mostly because they’re quite cheap to run and don’t need a whole lot of management. They’re convenient, too, because you don’t need to watch the market or foot the bill for a small army of mutual fund managers.
The premise of a Bitcoin ETF is the same. The price of a share of one would roughly track the price of Bitcoin, providing you with exposure to Bitcoin without any need to buy crypto directly, understand how it works, or work out how to store it. More than that, you can trade it on publicly-traded stock markets, alongside shares in the companies that run companies such as Applebees or Pizza Hut.
Available Bitcoin ETFs
There are no operational Bitcoin ETFs as securities commissions have blocked proposals for them.
Most of the drama happens in the USA, where the US Securities and Exchange Commission acts as a gatekeeper over the industry. The edicts of the SEC have rippled out across the world.
Cameron and Tyler Winklevoss, the twin Bitcoin billionaires who alleged that Mark Zuckerberg stole the idea for Facebook from them, first filed a proposal for a Bitcoin ETF with the SEC in 2013.
The SEC blocked the proposal and said the Bitcoin market is easily manipulated and its cryptocurrency exchanges unregulated. (The twins had tried to argue the opposite. “The arguments submitted in support of this claim are incomplete and inconsistent, and are unsupported or contradicted by data,” retorted the SEC in its judgment).
Even a Bitcoin ETF which only tracked prices from regulated and reputable crypto exchanges wouldn’t work, it said, since unregulated trading on other exchanges could flip the price of Bitcoin.
The SEC has rejected over several proposals for Bitcoin ETFs since then.
The closest the world has come to a crypto ETF product is the Bitcoin ETF that’s listed on the Bermuda Stock Exchange. It’s a joint venture with Brazilian crypto fund manager Hashdex and Nasdaq, the US stock exchange.
But as of November 2020, it’s not trading, and it’s unclear which cryptos the ETF represents. Many think that this crypto ETF may encourage regulators in other jurisdictions to sanction crypto ETFs on their own turf, but we should wait and see.
What options remain?
The good news is that similar products to Bitcoin ETFs are now available on the market. The most popular are closed-end funds. One of these, 3iQ’s “The Bitcoin Fund,” is listed on the Toronto Stock Exchange.
The Bitcoin Fund came about like this: A group of people gave 3iQ a lot of money to purchase Bitcoin. Then 3iQ bought that Bitcoin from crypto exchanges and OTC desks and listed the fund on the Toronto Stock Exchange. Private investors in the fund sold their shares on the Toronto Stock Exchanges (the ticker’s QBTC.U), and the price of the share roughly tracks the price of Bitcoin.
(Coincidentally, the custodian for the Bitcoin in The Bitcoin Fund is a crypto company called Gemini, which is run by the Winklevoss twins—who had their own proposal for a Bitcoin ETF rejected by the SEC in 2013).
The main difference between The Bitcoin Fund and a Bitcoin ETF is that the Bitcoin Fund represents shares in a pool of money that actively invests in Bitcoin, whereas a Bitcoin ETF would represent Bitcoin owned by the ETF.
There are some practical differences, too. Since Bitcoin ETFs are comparatively passive, they would, theoretically, would charge lower fees. The management fee of The Bitcoin Fund is 1.95%—quite high, and typical for an actively managed fund.
Second, Bitcoin ETFs are algorithmically programmed to track the price of BTC. Since The Bitcoin Fund represents shares in an actively managed fund, it can trade at a significant discount or premium to the price of Bitcoin.
The most important of these types of funds is the Grayscale Bitcoin Trust, a US-based financial vehicle that sells publicly-traded shares that represent the $7.2 billion lodged in its Bitcoin investment fund.
Some more options:
There are other ways to get exposure to Bitcoin on the stock market.
One way to get indirect exposure to cryptocurrency is to invest in blockchain companies.
Another is to invest in ETFs that represent shares in crypto companies. In the absence of direct investment in a Bitcoin ETF, it’s a way to remain exposed to the cryptocurrency market.
Theoretical Advantages of a Bitcoin ETF
A Bitcoin ETF may be tax-efficient
Most pension funds or tax shelters don’t allow for direct purchases of BTC. This, in part, is because the cryptocurrency market is unregulated. However, a Bitcoin ETF would be regulated, and likely eligible for tax-sheltered investments.
A Bitcoin ETF is convenient
An investor in a Bitcoin ETF doesn’t have to understand how Bitcoin works or consider how to store that Bitcoin. Opening a Bitcoin wallet and buying cryptocurrencies directly from an exchange is still a technical process.
A Bitcoin ETF could be combined with other investments on the stock market
Imagine a Bitcoin ETF, listed right there on the Toronto Stock Exchange. Take a step back in your mind’s eye, and further imagine another ETF that comprised various stocks, like a Bitcoin ETF, shares in Galaxy Digital, Microsoft, and Visa.
This basket of assets would provide you with additional exposure to the crypto market in a way that would be inconvenient to replicate if you split up your crypto investments and your regular stock.
Theoretical Disadvantages of a Bitcoin ETF
It’d probably be cheaper to buy Bitcoin itself
A Bitcoin ETF would charge management fees. Even though these may be cheaper than those charged by publicly-traded Bitcoin trusts or closed-end funds, over time they may rack up and take a notable chunk out of your investment.
Moreover, a Bitcoin ETF may incorrectly track the price of Bitcoin. More accurate and cheaper may be to invest in Bitcoin itself. If you did it yourself, you wouldn’t need to pay anyone a management fee and would be in charge of your funds.
You can trade Bitcoin for other cryptocurrencies
Bitcoin is one of thousands of cryptos, each with distinct characteristics, communities and markets. It can be traded for each of these on cryptocurrency exchanges such as Binance and Coinbase.
Since most of these cryptocurrencies are unregulated and highly volatile, most won’t make it to regular stock markets.
Owning Bitcoin can be useful
Bitcoin’s a hedge against central banks and private firms. Nobody but the investor owns custody over that Bitcoin, and the Bitcoin network isn’t reliant on central banks. The treasury can’t control the supply of Bitcoin, nor can it shut the network down or block your access to your wallet.
Second, the Bitcoin blockchain is private. Though all transactions are publicly recorded on the blockchain technology, you don’t need to tell anyone the address to your Bitcoin wallet. This, obviously, is different to a Bitcoin ETF listed on a highly-regulated stock exchange; it’s not hard for the government to find out who’s invested in the fund.
A Bitcoin ETF doesn’t exist, currently
The main disadvantage of a Bitcoin ETF is that it doesn’t exist! Until it does—if it ever does—you’ll need to find another way to invest in Bitcoin.