This month, U.S. digital asset investment products saw net inflows, suggesting that some U.S. investors are using the sell-off in Bitcoin prices as an opportunity to buy.(1) Many investors are choosing to access Bitcoin through traditional ETF wrappers due to their relative simplicity and familiarity. But the Bitcoin ETF industry is still very new and evolving, with several game changing headlines this past month. Last week on June 21, the ProShares Short Bitcoin Strategy ETF (BITI) launched as the first inverse Bitcoin ETF in the U.S. (using an inverse futures strategy). And on June 29, the SEC rejected Grayscale's application for converting its Grayscale Bitcoin Trust (GBTC) into a spot Bitcoin ETF. Given this current environment, this note reiterates some of the key differences between crypto-related ETFs including index-based ETFs of crypto equities, futures-based Bitcoin ETFs, and spot-based Bitcoin ETFs.
Index-based crypto equity ETFs – high correlation to Bitcoin in addition to long-term themes
In a survey by Bitwise and ETF Trends (now a part of VettaFi) advisors were asked if they would rather invest in assets, equities, or both. The majority of advisors preferred a combination of both (47%), and more actually preferred crypto equities (28%) to crypto assets (24%).(2) Accordingly, most crypto-related ETFs track an index of common stock equities, which provide an indirect (yet still strong) exposure to the price of Bitcoin. These companies include crypto miners, crypto exchanges, crypto banks, crypto buyers, and other players in the crypto ecosystem (see this note for more details). While individual correlations vary, most crypto-related equities have earnings that are ultimately driven by Bitcoin prices and/or volumes. The Alerian Galaxy Global Cryptocurrency-Focused Blockchain Equity, Trusts and ETPs Index (CRYPTO) and the Alerian Galaxy Global Blockchain Equity, Trusts and ETPs Index (BCHAIN), for example, have 30-day rolling correlations close to 0.75 with Bitcoin prices.
Even though these indexes have high correlations with Bitcoin, the purpose of these indexes is not to track the price of Bitcoin. Instead, these indexes aim to provide sector and/or thematic exposure to digital asset and blockchain companies, which support long-term megatrends like digital transformation and innovation. Most of these companies are high growth, small cap technology stocks, so ETFs linked to these indexes can be included as a portion of a broader technology allocation. The chart below shows index-based crypto ETFs along with their stated index strategy. It is worth mentioning that none of these indexes (or associated products) use “Bitcoin” within their names, but instead use phrases like blockchain, digital assets, crypto economy, and crypto innovators to convey a broader investment purpose than just tracking the price of Bitcoin. The majority of these hold only common stock equities, except for CRYPTO and BCHAIN, which are the only indexes in this peer group that include a 15% allocation to the Grayscale Bitcoin Trust (GBTC).
Futures-based ETFs – track Bitcoin prices, but not quite the real thing.
Futures-based Bitcoin ETFs track Bitcoin futures rather than an underlying index of equities. While futures exposure provides a close comparison to spot exposure, many argue that using futures may lead to lower returns and higher fees due to the rolling forward of future contracts. But so far, the SEC has been more willing to approve a futures-based ETF because Bitcoin futures are already overseen by the Commodity Futures Trading Commission (CFTC).(3) While most advisors and investors have cited a preference toward spot-based ETFs, futures-based ETFs are still highly popular. The first U.S. futures-based ETF (ProShares Bitcoin Strategy ETF [BITO]) was launched on October 19, 2021 and received a great deal of investor interest. BITO was the second-most heavily traded ETF in history on its launch date and currently has the highest AUM out of all Bitcoin and digital asset ETFs in North America (U.S. and Canada).(4)
Spot ETFs – directly hold Bitcoin, but regulatory approval has so far kept these out of the U.S.
Approval of futures-based Bitcoin ETFs increased optimism that a spot-based Bitcoin ETF would soon be approved, but the SEC has continued to reject spot Bitcoin ETF applications citing a lack of investor protection and market uncertainty. Recent application rejections include those from ETF giants like Ark 21Shares, WisdomTree, GlobalX, Fidelity, First Trust, and VanEck among several others. Most recently on June 29, the SEC rejected Grayscale's application to convert GBTC to a spot Bitcoin ETF stating that Grayscale did not answer questions around market manipulation. Grayscale is now suing the SEC its decision, referencing a failure to apply consistent treatment to similar investment vehicles that were recently approved (e.g., futures-based Bitcoin ETFs, short Bitcoin ETFs). Grayscale claims that converting its trust to an ETF could help unlock investor value and decrease the discount between its share price and NAV. Grayscale had received widespread support including over 11,000 comment letters in support of GBTC’s conversion to a spot Bitcoin ETF.(5)
What do spot Bitcoin ETFs mean for the Bitcoin ETF industry?
Spot Bitcoin ETFs already exist in other geographies including Europe, Canada, Australia, and Brazil. In Canada, for example, the most popular ETFs by AUM are all spot-based, while futures-based options have significantly less assets under management—Canadian spot-based Purpose Bitcoin ETF (BTCC) currently has around CAD 570 million in assets, while futures-based Betapro Bitcoin ETF (HBIT) currently has CAD 2.5 million in assets. Given this dynamic, spot Bitcoin ETFs in the U.S. could take market share from futures Bitcoin ETFs—but not necessarily as much share from index-based crypto ETFs, which investors use as a long-term thematic strategy. Regardless of if a spot Bitcoin ETF is eventually approved, a larger market of futures-based and crypto-related ETFs could help increase overall accessibility to investors, while also contributing to a greater volume of institutional research and advisor education.
Depending on investor needs, there are different ways to invest in Bitcoin. Investors who value direct ownership of Bitcoin may prefer to own Bitcoin in a private wallet or a crypto exchange. Those who want to track the price of Bitcoin in a more familiar structure may use a futures-based ETF (with some price divergence) or a spot-based ETF (when one is eventually approved within the U.S.). And those who want some exposure to Bitcoin prices in addition to long-term themes of digital transformation and/or digital asset equity sector exposure may prefer an ETF which tracks an index of crypto and blockchain equities.
The Alerian Galaxy Global Cryptocurrency-Focused Blockchain Equity, Trusts and ETPs Index (CRYPTO) is the underlying index for the Invesco Alerian Galaxy Crypto Economy ETF (SATO).
The Alerian Galaxy Global Blockchain Equity, Trusts and ETPs Index (BCHAIN) is the underlying index for the Invesco Alerian Galaxy Blockchain Users and Decentralized Commerce ETF (BLKC).
(1) CoinShares Weekly Digital Asset Fund Flows Report; data MTD through June 24, 2022
(4) Using data from Bloomberg L.P. as of June 28, 2022