With the new pick for the head of the Securities and Exchange Commission (SEC) – Gary Gensler – bringing a wealth of crypto knowledge to the role, the time might be right for a crypto exchange traded fund (ETF).
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Even as institutional capital and interest continues to turn toward the cryptoasset sector, the lack of traditional products and services for potential investors continues to serve as a headwind. ETFs have the potential to be a significant next step in the maturation and further development of cryptocurrencies, but what exactly is this product?
An ETF, of which there are thousands for other types of investments, represents a basket of securities that can be bought and sold throughout the day across exchanges. In addition to potentially adding some diversification, via tracking an index or tracking a basket of other investments, ETFs usually have lower fees and commissions than would otherwise be incurred if investors bought and sold financial instruments on an individual basis.
Based on that definition, it would seem that the cryptocurrency sector would benefit from the proliferation of bitcoin and other crypto ETFs. As of this writing, however, a cryptocurrency or bitcoin ETF is illegal in the United States; the SEC has previously denied several applications for such a product. One alternative that has attracted a large amount of attention and investment for U.S. investors in the interim is the idea of a trust.
One high profile example of this alternative is the Grayscale Bitcoin Trust (GBTC). Much has been written about the rapid increase in assets under management, but while this product is superficially similar to an ETF, there are some differences that illustrate a true crypto ETF is still needed.
Most pertinent for investors, however, is the substantial premium that investors have to pay to access this product. In other words, GBTC tracks the price of bitcoin (with each unit representing a fractional share of a bitcoin) but charges a premium to allow investors to purchase the product. In addition to making bitcoin investment available in an expensive and limited way, the success of this product is – in large part – tied to the fact that a crypto ETF has yet to be approved. Such practices are perfectly fine, of course, and reflective of market supply and demand, but do leave the door open for lower cost, more liquid, and more accessible products in the future. Like an ETF.
With that context in mind, what are some of the advantages that a crypto ETF could deliver to investors?
Lower compliance risk. This is not to say that an ETF product will magically reduce price volatility or other types of investment risk, but it could certainly reduce some of the record keeping and reporting issues. Specifically, and reflected in the growth and recent approval of ETFs in other jurisdictions, having an investment option that is both familiar to investors, and registered with policymakers, does reduce some of the risk. This is especially true for relative newcomers or new entrants to the crypto investing landscape.
Storage solutions. One issue that continues to cause issues in the wider cryptocurrency marketplace is the question of wallet management, or how investors would actually hold and store cryptocurrencies. The so-called Law of Private Keys (where investors only truly own crypto if the private key is directly under investor control) notwithstanding, a significant number of investors most likely do not want to have to actively manage wallets, keys, and other crypto specific information individually.
In other words, some increase in centralization and security might actually open the door for more crypto investment options.
Fractional investing potential. Some of the increase in utilization of stock trading mobile applications is derived from the fact that these apps allow fractional investing with low premiums (fees) associated with this option.
This certainly comes in handy for equity securities that are valued in the hundreds of dollars by allowing investors at all levels to gain exposure and participate in the wealth creation process. With cryptocurrencies, specifically bitcoin, trading in the tens of thousands of dollars, that in and of itself restricts the market and ability of investors to participate therein. ETFs allow investors across all economic levels to gain exposure to investments that might otherwise would be out of reach, and to do so with the backstop of regulatory support.
Merging of economies. Even with the rapid increase in trading activity, price levels, and institutional interest there is still a substantial bifurcation and gap between the crypto-economy and the rest of the economy.
This is due to any number factors, but is also linked to the simple fact that – even after the dramatic increase in price, interest, and investment, trading volumes and participation in the crypto economy is miniscule compared to the fiat based economy. Developing and approving an ETF product in the United States would be a major step forward toward the emerging of these two, until now, distinct economies by – again – allowing much broader market participation.
No single idea or product has the ability to completely change any financial market or investment sector, and crypto is no exception to this rule. Highlighted by the rapid rise in assets under management of available alternatives, and the recent approval of ETFs in other jurisdictions, ETFs do seem like an idea and product whose time has come. Increasing the accessibility and liquidity of the crypto market is something any crypto enthusiast should support, and a crypto-ETF is an important part of this conversation.
