Despite regulatory concerns, a few firms are vying to capture investor interest with their versions of crypto ETFs in both the EU and the US. For investors, these crypto ETFs could provide exposure to the future of digital currencies for a fraction of the cost of bitcoin, although it could come with some volatility.
Europe’s crypto ETFs
In Europe, Melanion Capital has unveiled plans for an EU-Regulated Bitcoin-Stocks ETF. The fund will track the Melanion Bitcoin Exposure Index, which tracks a basket of 30 stocks with a high correlation to the price of bitcoin. Constituents include blockchain technology, crypto banking and crypto asset management companies. Exposure to each constituent is capped at 10%, with weights in place to reduce the impact of single day trading.
“Bitcoin’s main concerns for institutional investors are hack, theft, loss, storage, security and crime. By investing in equities replicating the bitcoin performance, investors can achieve diversified asset allocation” - Cyril Sabbagh, head of ETF at Melanion Capital
"Bitcoin’s main concerns for institutional investors are hack, theft, loss, storage, security and crime,” said Cyril Sabbagh, head of ETF at Melanion Capital. “By investing in equities replicating the bitcoin performance, investors can achieve diversified asset allocation.”
In May, VanEck offered the first crypto ETF - a thematic fund that gives exposure to companies involved in cryptocurrency and developing blockchain technology. The VanEck Vectors Digital Assets Equity UCITS ETF [DAPP] tracks the MVIS Global Digital Assets Equity index and is listed in both London and Frankfurt. Companies on this index must derive 50% of their income from digital assets or have the potential to do so.
“For investors who cannot or do not want to invest directly in individual cryptocurrencies, DAPP provides a good opportunity to invest in digital asset companies in both a targeted and diversified manner and to benefit from the positive development of the sector,” said Gabor Gurbacs, director of digital assets strategy at VanEck as quoted in ETF Stream.
“For investors who cannot or do not want to invest directly in individual cryptocurrencies, DAPP provides a good opportunity to invest in digital asset companies in both a targeted and diversified manner and to benefit from the positive development of the sector” - Gabor Gurbacs
Since launching mid-April, DAPP is down over 12% as of Tuesday 10 August’s close. It hit a low on 19 July. Since then ETF has accelerated just over 38%, mirroring bitcoin’s own 48% gain in the same time period.
Grayscale looks to convert $25bn trust into crypto ETF
Over in the US, New-york based Grayscale has hired an ETF chief to convert their Bitcoin trust. David LaValle, formally CEO of Alerian, has been given the task of converting the $25bn Grayscale Bitcoin Trust [GBTC] - the world’s largest cryptocurrency fund - into an ETF.
LaVelle faces a tough challenge. Several crypto-linked funds have launched this year in the US, yet there aren’t any ETFs investing directly in cryptocurrencies. And it’s not for want of trying - according to Bloomberg 10 funds have failed to do just this since 2020. Bloomberg also reports that Grayscale is looking to fill 10 more crypto roles.
How regulator oversight affects crypto ETFs
The launch of new crypto ETFs comes at a time when regulators in the US and Europe are looking to have greater oversight on cryptocurrencies.
This scrutiny is being felt on the price of the currencies themselves, with bitcoin having sunk over 19% since the 2 May (as of 10 August) going from around $56,600 to around $45,600.
The nadir came on 20 July when bitcoin hit $29,807 after the European Commission proposed tightened checks on crypto transfers to crackdown on money laundering. Earlier in the month, France called for the European Securities and Market Authority (ESMA) to be given a greater role in supervising cryptocurrencies, instead of national regulators.
“While I’m neutral on the technology, even intrigued—I spent three years teaching it, leaning into it—I’m not neutral about investor protection. If somebody wants to speculate, that’s their choice, but we have a role as a nation to protect those investors against fraud” - SEC chairman Gary Gensler
In something of a double blow, the previous day Treasury secretary Janet Yellen had called for a framework for so-called stable coins a type of digital currency that is pegged to currencies. While in August, SEC chairman Gary Gensler called on Congress to give the Commission more power to regulate crypto, including monitoring exchanges, describing it as a ‘wild west’ rife with fraud.
“While I’m neutral on the technology, even intrigued—I spent three years teaching it, leaning into it—I’m not neutral about investor protection,” Gensler told Bloomberg in an interview. “If somebody wants to speculate, that’s their choice, but we have a role as a nation to protect those investors against fraud.”
For investors a crypto ETF could be a cost efficient way of getting exposure to the future of digital currencies - DAPP’s closing price of $28.42 on Tuesday is a fraction of the cost of bitcoin. Yet with mounting regulatory pressure being reflected in both crypto ETFs and the price of bitcoin, investors can expect to see some volatility.