Following the Securities and Exchange Commission’s (SEC) backing of bitcoin ETFs in the US, average daily volumes for Australian crypto ETFs have expanded by some 800 per cent compared to the average daily volume over the past 12 months, with local crypto ETFs making up one-third of the total crypto ETF traded volume of 2023 in just the first two weeks of this year.
The SEC’s approval, which has seen Grayscale, VanEck, and Fidelity, alongside a number of other funds, authorised to issue securities tethered to the movements of the cryptocurrency, has widely been celebrated as an endorsement of crypto as the newest asset class.
This vote of confidence, according to Global X, has triggered inflows of millions of dollars into its crypto ETF suite alone, which has quadrupled in size over the last year.
In the Asia-Pacific region, Global X was the first provider to launch spot bitcoin and Ethereum ETFs. The Global X 21Shares Bitcoin ETF (Cboe: EBTC) and Global X 21Shares Ethereum ETF (Cboe: EETH) remain the only spot cryptocurrency ETFs in Australia.
Speaking to InvestorDaily, Global X Australia’s Marc Jocum said a major upside of the SEC’s decision is a likely increase in capital inflows from institutional investors.
“Big institutions [like] sovereign funds, wealth funds, pension funds, a lot of them don’t have an allocation to bitcoin because they didn’t really know how. A lot of them didn’t really want to go open up their own wallets with these custodians,” he said.
“They wanted an easy-to-use wrapper, such as an ETF or another fund, to be able to do it, so we could see a big institutional push into cryptocurrencies like bitcoin.”
Among these institutional investors, he noted superannuation funds could also begin to explore bitcoin ETFs as an option.
“Super funds have a duty to their members and their trustees to act in their best interest and to make sure they are growing the pool of wealth so they could definitely start exploring the space because it’s starting to emerge as a different asset class,” Mr Jocum said.
“It’s not going to come in one wave, a lot of super funds prefer, and if you look at some of the things they’re investing in, it’s things like private credit that seems to be a lot of where the super funds are driving their attention.
“But you know, it could be that they start to see this as an emerging asset class.”
Mr Jocum, however, acknowledged the presence of a prevailing sense of “nervousness” regarding crypto.
“We saw the likes of the FTX collapse, there’s been a few security risks, it’s still 13 or 14 years old technology. I think super funds will eventually get there, but it’s going to be a slow adoption.”
Investor interest high
Regarding retail investors, despite the many apparent tailwinds for bitcoin ETFs in 2024, Mr Jocum told InvestorDaily individuals should do their due diligence before taking the leap.
“Even though bitcoin is a different asset class, it still fits under the ETF structure so the principles of ETF due diligence should not be overlooked,” said Mr Jocum.
“Firstly, look at the underlying holdings. Does the bitcoin ETF hold physical spot bitcoin or is it futures based? Can you get access to the bitcoin if you need to? There are challenges involved with opening up your own crypto exchange wallet, but could you actually redeem the bitcoin if you wanted to?
“Cost is another big factor. Fees are like termites, every bit of fees eats into your returns every day, so you want to control that.”
Other factors to keep in mind are whether there’s enough liquidity in the ETF along with any tracking differences with the underlying index, he said.
“Another thing to look at is the security of the underlying bitcoin. You need to look at [whether] the ETF is holding it in cold storage, which is held off-chain or offline, which makes it less susceptible to hacking,” Mr Jocum noted.
The institutional grade of the custodian could also play a role in choosing an ETF, according to the investment executive.
“For example, our ETF uses Coinbase, a very large institution with a lot of risk measures in place so that there’s no threat of hacking,” he pointed out.
Since the SEC’s announcement, while bitcoin initially experienced a significant price boost, its value has experienced major outflows. This has raised many questions about how significant the SEC’s approval really was for the cryptocurrency. On Monday at 2pm, bitcoin was trading at AUD$62,529.82, down 4.17 per cent over the past five days, or 3.35 per cent compared to the past month, reinforcing its nature as a speculative asset.
Commenting on these price movements, Mr Jocum said: “We’ve seen a little bit of bitcoin and cryptocurrency price retreat in the last few days, and there could be a lot of reasons for that, but it’s a volatile asset class”.
“We are expecting to see these products in the best-performing ETFs, but they could easily be in the worst-performing ETFs as well. That’s why portfolio sizing is important.”
Looking to the future of bitcoin ETFs, Mr Jocum said that “it’s always hard to predict what’s going to happen”.
As such, he highlighted the importance of having a diverse mix of asset classes in an investment portfolio.
“A lot of people might be seeing [bitcoin] as a very effective way to achieve a level of outperformance in their portfolio, to potentially act as a hedge, and I’ve always thought, if you limit the position you have in cryptocurrencies like bitcoin to a small part of your portfolio, that can help you stay the course with the boring part of your portfolio,” Mr Jocum told InvestorDaily.
“FOMO isn’t a good investment strategy, but this is an emerging asset class that should be considered, and the fact that it’s now in an ETF wrapper tracking the spot price of bitcoin does have the potential for portfolio diversification as well.”