A spot bitcoin ETF aims to track the bitcoin price, exposing investors to the digital coin without having to buy the asset directly, or having to trade through a cryptocurrency exchange. While spot bitcoin ETFs exist in various international markets, including in Australia, they have not yet been approved in the US.
The US Securities and Exchange Commission’s (SEC) defiant stance on spot bitcoin ETFs may be difficult to maintain and the probability for approval is fairly high as cryptocurrencies broaden their reach among investors. The first bitcoin futures ETF – which follows the price of bitcoin futures contracts – was approved in the US in October 2021, helping send the volatile bitcoin to an all-time high of US$69,000 in November 2021.
Global X’s New York-based team has recently filed an application to list a spot bitcoin ETF product with the US SEC. If approved, the fund would grant investors exposure to bitcoin with important protections that are not always available to investors that invest directly in bitcoin. ETFs offer significant advantages over direct investment in digital currencies, especially that of convenience – investors don’t need to set up an account with a cryptocurrency exchange to invest in bitcoin or Ethereum and they don’t need a digital wallet to hold crypto. They can just buy an ETF through a mainstream exchange.
Along with Global X, several other ETF providers have also registered application to list a spot ETF on the NASDAQ, including BlackRock, VanEck, Invesco, Wisdom Tree, and Fidelity. Approval of these ETFs would mark a significant step forward for cryptocurrency mainstream support. It has been speculated too that the US regulator could approve several applications at once, which could potentially add billions in additional demand to bitcoin, as much as US$50 billion estimated by some fund managers. This trend could likely be replicated in Australia as well.
The applications to list ETFs are important milestone in themselves. They illustrate that bitcoin and Ethereum investments are becoming mainstream and that retail appetite for such investments is strong. Other asset managers may not want to miss the boat on bitcoin and Ethereum so we could see even more participants join this investment market and offer spot bitcoin and Ethereum ETFs if approval is granted to current applicants.
Already this year, bitcoin and Ethereum prices have rallied. Stockspot’s 2023 ETF Report reveals cryptocurrency ETFs have been some of the best performers on the Australian Securities Exchange, led by the Global X 21Shares Ethereum ETF (EETH) and the Global X 21Shares Bitcoin ETF (EBTC) in the first half of the year. The rebound in prices this year helps to bring these ETFs back to around their listing values after bitcoin and Ethereum were sold off in 2022, along with shares and bonds. Global financial markets are much calmer this year, so the SEC may be more inclined to approve spot ETFs and deliver greater confidence to the cryptocurrency sector.
Benefits of a diversified exposure
More generally, the cryptocurrency market has grown into a flourishing, multi-sector ecosystem since the 2009 launch of the bitcoin network. Continual innovations in blockchain infrastructure over the past decade have allowed the industry to progress at a fast pace, giving rise to new sectors and applications. Among the most prominent crypto applications today are smart contract networks, decentralised finance (DeFi), scaling and modularity infrastructure, file sharing and storage infrastructure, Web3 communities, gaming, and decentralised social media (DeSo), among many others.
As these applications expand in number, so too does the potential for investment. Digital currencies tend to exhibit low to moderate correlations and significant variance in returns. Diversification across crypto assets may help manage portfolio volatility and provide a more representative exposure to the industry’s adoption trends and growth potential.
If history is any indication, it is very likely that the crypto market will look very different in 10 years than it does today. Rather than investors making concentrated bets on what this future will look like, spreading investable capital across crypto sectors could allow a portfolio to achieve a more wholesome, well-rounded exposure to the industry’s growth trends and disruptive potential.
Moreover, allocating capital to assets within these various sectors may also help reduce the need for a portfolio manager to actively predict which specific use cases and applications will emerge as future winners. ETFs could be the ideal way to offer exposure to cryptocurrency investments to investors and offer diversification in this evolving asset class.
Evan Metcalf, CEO, Global X ETFs
