Similar vehicles are already trading elsewhere, but launching a crypto ETF on the world’s largest equity market is a milestone for crypto advocates after eight years of lobbying regulators.
For the first time, traditional investors can now hold a US-listed bitcoin-related security in their portfolios alongside traditional financial assets like stocks and bonds.
“It is the fastest ETF to reach $ 1 billion in assets. . . From an asset growth and transaction volume perspective, this is unprecedented and a sign of pent-up demand, ”said Todd Rosenbluth, head of ETF and mutual fund research at CFRA.
The well-received debut of the bitcoin ETF shows how traditional financial firms are struggling to grab a slice of the digital asset industry. It also highlights the recognition by many financial watchdogs that the industry has grown too big and is growing too fast to sweep away.
Retail investors only made up around 12-15% of net purchases in the ProShares ETF in the first two days of trading, indicating significant interest among institutions, according to data from JPMorgan. Another similar vehicle sponsored by Valkyrie Funds launched on Friday, three days after the ProShares product, in a move analysts expect to replicate several times.
Other announcements this week, including a successful fundraiser by the FTX crypto exchange backed by a handful of blue chip investors, added to the hype surrounding digital assets.
These signs of growing interest, along with an increase in the number of professional traders using crypto as the basis for sophisticated market betting, helped propel the price of bitcoin above $ 66,000 on Wednesday for the first time before. to drop back to around $ 61,000 on Friday. Shares of Coinbase, the largest publicly traded exchange, climbed more than 10% in the days leading up to the launch.
However, many analysts claim that the launch of the ProShares ETF is just the start of a much longer battle to convince the Securities and Exchange Commission than a product that offers a direct connection to largely non-crypto markets. regulated should be traded on the Wall Street stock exchanges.
For the SEC, the deciding factor in moving the ProShares ETF forward was that the vehicle held futures contracts traded on the Chicago Mercantile Exchange, a fully regulated venue, rather than outright digital coins. . Cryptocurrencies are typically bought and sold on a wide variety of sites in a market that committee chairman Gary Gensler has called “the Wild West.”
“What you have here is a product that has been overseen for four years by [the Commodity Futures Trading Commission] and it’s wrapped up within something that is within our jurisdiction. . . we have some ability to build it into investor protection, ”Gensler said in an interview with CNBC.
Interactive Brokers, the retail broker, unveiled crypto trading for financial advisers on Monday, but Thomas Peterffy, its chairman, was more wary of the value to investors of owning the ProShares fund or similar funds.
Peterffy, who helped bring computing to Wall Street in the 1970s when he used machines to calculate the value of securities and options, said the sole utility of crypto was a fallback when the monetary or banking system encountered problems.
“I think when such issues arise, these ETFs will get an incredible discount off the value of the coins. So I don’t think it helps. Until people think about it, the price will move with the price of bitcoin. “
Others have pointed out that an ETF that relies on futures contracts may become detached from the asset it is supposed to track. USO, the $ 2.9 billion oil ETF, has often diverged significantly from the price of US crude oil over the past decade.
One of the factors is the “roll cost” – when the fund manager regularly switches to a new futures contract when the previous one expires. It could be more expensive if the market expects the price of bitcoin to rise in the future. A situation in which the futures price is higher than the spot price could mean that the ETF is underestimating the returns that would be provided by owning bitcoin by around 7% per year, said Andy Kapyrin, co-director of investments at RegentAtlantic, a registered investment advisory group.
This makes the product more expensive for investors looking to hold a long-term position, Kapyrin added. “This will keep it relegated to short-term trading portfolios, rather than long-term holders,” he said. This is “a ban for advisers” who recommend holding long-term positions, but admit that it is “a good product for trading”.
This is why several asset managers are already pushing to get the go-ahead from the SEC to launch funds directly linked to crypto prices. Some ETF sponsors have also withdrawn from their own futures products.
Invesco has said it will focus on approving an ETF holding digital tokens. Just before Wall Street opens on Tuesday, digital asset manager Grayscale Investments announced plans to convert its $ 40 billion Bitcoin Trust, the world’s largest crypto investment fund, into an exchange-traded fund. who will hold the digital tokens.
“There is a bit of euphoria in the industry that we now have an ETF, but this is the first step,” said Dave LaValle, Global Head of ETFs at Grayscale. “Ultimately, the goal is for investors to have a choice between ETFs based on futures and physical bitcoin. “
It may be a dream years from now. Brett Harrison, president of the U.S. branch of the FTX crypto derivatives exchange, said the SEC’s decision this week not to hamper the ProShares fund likely wouldn’t be the first in a series of regulatory dominoes to drop.
“I think the SEC wants crypto cash exchanges to fall under a regulatory envelope before they agree to this,” he said.
SEC Chairman Gensler has called on U.S. lawmakers for powers to oversee crypto trading platforms, and he wants companies to register with the agency.
The SEC is also in the midst of a heated legal debate over whether digital coins should even be registered as securities. Many major crypto players dispute this point of view.
“It will be very unlikely that a direct bitcoin or any other type of crypto asset fund will be approved in the near term,” said Amy Lynch, founder and president of FrontLine Compliance, a regulatory consultancy. “Right now, the question is exactly what type of format of these assets is going to be considered a security.”
Click here to visit the ETF hub