SEC throws sop to US investors with bitcoin ‘lite’ equity ETFs

Two bitcoin “lite” equity ETFs have begun trading in the US and a third has been approved by the Securities and Exchange Commission as the regulator throws out a sop to investors calling for a bona fide bitcoin ETF.

The SEC has so far refused to approve any exchange traded funds that invest in the cryptocurrency itself, even though a slew of asset managers have applied to do so and similar vehicles are already up and running in Sweden, Switzerland, Jersey, Germany and Canada.

There is mounting speculation that it will approve one or more bitcoin futures ETFs following encouraging comments from Gary Gensler, chair of the SEC. However, this is unlikely to be imminent, with the regulator having pushed back the deadlines for its decisions on a quartet of futures ETFs, proposed by Global X, Valkyrie, WisdomTree and Kryptoin, by 45 days, with the deadline for the first now on November 21.

The Grayscale Bitcoin Trust, a private trust, has grown to $35bn since launching in 2013, indicating the appetite for the cryptocurrency in the US.

Net flows into dedicated cryptocurrency funds as a whole hit a four-year high of more than $2.5bn last week, according to EPFR, a data provider.

Invesco has attempted to partially fill the ETF void by launching the Invesco Alerian Galaxy Crypto Economy ETF (SATO — in homage to Satoshi Nakamoto, the mystery computer programmer who created bitcoin) and Invesco Alerian Galaxy Blockchain Users and Decentralized Commerce ETF (BLKC), both of which began trading this week.

The funds invest at least 80 per cent of their assets in companies that are “materially” engaged in activities such as cryptocurrency mining, trading and infrastructure, as well as over-the-counter private investment trusts linked to crypto. BLKC also holds companies involved in the development of the blockchain.

By far the largest holding in both is the PowerShares Cayman Fund, followed by Bigg Digital Assets, which develops software to track, trace, and monitor cryptocurrency transactions.

The SEC gave the green light to a third crypto equity ETF this week, the Volt Crypto Industry Revolution and Tech ETF (BTCR), which will invest in “entities that hold a majority of their net assets in bitcoin or derive a majority of their earnings from bitcoin mining, lending or transacting”.

The funds follow in the footsteps of the VanEck Digital Transformation ETF (DAPP) and Bitwise Crypto Industry Innovators (BITQ), which invest in digital asset-related equities — such as MicroStrategy, a software company that says it holds $5bn of bitcoin on its balance sheet, and Coinbase, a crypto-exchange platform — and the Amplify Transformational Data Sharing ETF (BLOK), which holds a portfolio of companies involved in the development and utilisation of blockchain technologies.

Todd Rosenbluth, head of ETF and mutual fund research at CFRA Research, believes some of the new vehicles have merit.

“Over the longer term, as cryptocurrency becomes more broadly utilised, there is an ecosystem of companies that can benefit from this,” he said.

“It’s still very early days for both bitcoin and blockchain technologies. There is a future for these companies but because this is still an early stage investment it’s not clear who the winners and losers will be so a diversified ETF is a great way of getting exposure to the trend as opposed to individual stocks.”

The latest approvals come despite considerable concern within the SEC regarding the infrastructure underpinning the crypto market.

On Tuesday, Gensler described crypto finance as the “Wild West or the old world of ‘buyer beware’” that existed before securities laws were enacted.

“This asset class is rife with fraud, scams and abuse in certain applications. We can do better,” he told the House Financial Services Committee.

The comments reflected a broader SEC pushback against riskier ETFs, with Gensler warning earlier in the week that leveraged funds present a risk to the stability of financial markets, as he called for tighter rules to be applied to these complex vehicles.

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