Wannabe Bitcoin ETFs Are Mushrooming and Getting More Creative
(Bloomberg) -- With at least nine applications for Bitcoins ETFs collecting dust in the Securities and Exchange Commission’s in-box and clients baying to buy crypto funds, U.S. issuers in the $6.4 trillion industry are cobbling together a growing number of workarounds.
A slate of companies are releasing or planning “Bitcoin adjacent” products that skirt U.S. regulators’ refusal to allow the largest cryptocurrency to be put in an exchange-traded fund wrapper. Invesco became the latest on Wednesday, announcing a pair of funds packed with crypto-linked equities.
It’s the only way U.S. firms can cash in on the unrelenting clamor for digital coins, and it may stay that way for a while. The SEC has already delayed its decision to approve or deny a Bitcoin ETF once this year and is expected to punt again at its next deadline on June 17.
“There’s clearly strong demand from investors for exposure to the price of Bitcoin, and ETF issuers are simply looking to meet that demand,” said Nate Geraci, president of the ETF Store, an advisory firm. “The SEC is essentially forcing ETF issuers into the laboratory to create these Frankenstein products.”
The Frankenfunds’ creators are being rewarded for their efforts. For instance, the Bitwise Crypto Industry Innovators ETF (ticker BITQ) has already drawn about $45 million in assets less than a month after its launch. That fund holds crypto-heavy companies like MicroStrategy Inc., Coinbase Global Inc., and Galaxy Digital Holdings Ltd.
Then there’s a slate of older products finding new life amid the coin craze. The Amplify Transformational Data Sharing ETF (BLOK), an actively-managed fund with stocks like MicroStrategy and PayPal Holdings Inc., attracted more than $711 million this year already, as its price has risen 30%. A peer fund called the First Trust Indxx Innovative Transaction & Process ETF (LEGR), which invests in companies using or developing blockchain technology, is on pace for its best year of inflows yet.
“There is a high demand for a Bitcoin product that has all the features that people love about ETFs -- that they trade on an exchange, that they’re liquid,” said Ross Mayfield, investment strategy analyst at Robert W. Baird & Co.
Biggest Player Yet
Invesco is the largest fund manager yet to try the workaround tactic, with its Invesco Galaxy Blockchain Economy ETF and Invesco Galaxy Crypto Economy ETF, each holding about 85% of their assets in crypto-linked equities and the rest in trusts and funds that hold cryptocurrencies.
Two days before the Invesco filing, there was an application for the Volt Bitcoin Revolution ETF, which would include companies with Bitcoin exposure. At least 80% of its assets will be in firms that either have Bitcoin on their balance sheet or are developing or using products within the crypto ecosystem, as well as options on those firms and ETFs that have exposure to them.
More funds tracking the crypto industry -- instead of actual Bitcoin -- may debut in the coming months, as the SEC continues to voice concerns about the market. Recently, SEC Chairman Gary Gensler said the crypto sector could benefit from greater investor protection and has urged Congress to give the regulatory agency authority over trading venues.
“My optimism on Bitcoin ETF approval has waned recently,” ETF Store’s Geraci said. “It’s hard to view Gensler’s comments on the current state of the Bitcoin and crypto ecosystem and feel optimistic about the prospects of a Bitcoin ETF anytime soon.”
Even after a true Bitcoin ETF finally launches in U.S. markets, these crypto-flavored funds could still have appeal, especially in a world obsessed with all things involving blockchain and digital tokens.
“These Bitcoin-adjacent vehicles make sense for people who don’t want to deal with all the volatility of Bitcoin but want exposure,” said Amrita Nandakumar, president of Vident Investment Advisory. “It’s a solution that has popped up in response to the pent-up demand.”
©2021 Bloomberg L.P.