What Are Crypto ETFs
Adapted from:
Knowledge, Ideas & Perspective (KIP)
from CVW Financial, LLC
"A Just Get to the Point Newsletter"
A number of spot Bitcoin exchange-traded funds (ETFs) were recently listed, with trading already underway. You may have questions about this, so I thought I would reach out with an overview of the situation and what it means for Americans. If you aren't interested, I understand that, too, and you're welcome to delete!
Before we get underway, I want to stress that I generally do not use currency in portfolio construction, as currency fluctuations and trajectories are very difficult to predict, while basic market trends for companies, in general, tend to rise over time. Therefore, I want to be very clear that this informational email is strictly informational.
The Definitions
First, I want to define a few terms that are key to understanding what’s going on:
Exchange-Traded Fund (ETF): An ETF is a pool of investments (such as bonds or stocks) that are owned by the fund provider. An investor owns a portion of the ETF (not the underlying bonds or stocks), which rises or falls in price based on the overall performance of the pooled assets. This performance is tracked on an index, with ETFs trading on traditional stock exchanges. These are very common in portfolio construction throughout the financial industry.
Cryptocurrency: Cryptocurrency is an intangible digital asset that exists on what is known as a blockchain. Think of a blockchain as a transparent digital ledger that allows all users to view all activity occurring within it, akin to a fully transparent accounting record of ownership and irreversible transactions. Transparency, irreversibility, limited supply, and speed of transactions are common characteristics across most digital currencies that create a part of what backers of crypto consider to be the currency's intrinsic value.
Bitcoin: Bitcoin is one of the most well-known cryptocurrencies and the largest by market capitalization. With a current market capitalization of almost $1 trillion, Bitcoin increasing by approximately 154% in 2023.
Spot Bitcoin ETF: An ETF in which the fund provider has a pool of Bitcoin, with the ETF investor owning a portion of the ETF (not Bitcoin). The goal of the spot Bitcoin ETFs is for their shares to rise and fall in real time based on the fluctuations of spot (cash) Bitcoin prices.
The Backstory
The Securities and Exchange Commission (SEC) must approve an ETF’s registration statement before it can be listed and traded. For much of the last decade, Bitcoin enthusiasts have tried and failed to launch a Bitcoin ETF, with the first application submitted to the SEC in 2013.
That is, until January 10, 2024 — when the SEC approved a rule change to allow for Bitcoin ETFs and then subsequently approved the registration statements for 11 spot Bitcoin ETFs.
This change in tune comes after an August 2023 court ruling that called the SEC’s refusal of Grayscale’s proposed Bitcoin ETF “arbitrary” and denounced its decision to allow Bitcoin-tracking futures funds but not ETFs that track the spot price of Bitcoin.
The SEC’s Rhetoric
While the SEC is now allowing such ETFs, that does not mean its leadership is endorsing it as an investment. In fact, SEC Chair Gary Gensler ended his announcement with the following: “Though we’re merit neutral, I’d note that the underlying assets in the metals ETPs have consumer and industrial uses, while in contrast bitcoin is primarily a speculative, volatile asset that’s also used for illicit activity including ransomware,[4] money laundering,[5] sanction evasion, [6] and terrorist financing.[7]”
While we approved the listing and trading of certain spot bitcoin ETP shares today, we did not approve or endorse bitcoin. Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto.”
Clearly not an endorsement.
The Future Impacts
In the months ahead of this decision, as expectations for SEC approval mounted, several more mainstream players introduced paperwork to start Bitcoin ETFs, with industry giants like BlackRock and Fidelity among the first 11 companies whose ETFs received approval.
This move by the SEC – and the seeming embrace of crypto by some more mainstream firms (echos of banks embracing mortgage backed securities in the early/mid 2000s?) – may add a layer of credibility to cryptocurrencies and Bitcoin specifically within the general populace. More practically, the ETF allows for easier access to Bitcoin as an investment tool, without the complexity associated with direct purchasing of Bitcoin.
Perhaps most importantly for the average American, Bitcoin ETFs can now be purchased in some investment funds and some employer-sponsored 401(k) plans.
With that overview noted, do keep in mind that I am sending this as a helpful overview, not as a recommendation of any course of action. But if you have any further questions about cryptocurrency, Bitcoin, or your portfolio, do not hesitate to respond to this email or give me a call. I am always here as a resource for you.
Fine Print:
CVW Financial, LLC is a registered investment adviser. Information presented is for educational
purposes only and does not intend to make an offer or solicitation for the sale or purchase of
any specific securities, investments, or investment strategies. Investments involve risk and,
unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial
adviser and/or tax professional before implementing any strategy discussed herein. Past
performance is not indicative of future performance.
