Bitcoin no longer belongs among the outliers of our financial system. The pioneer cryptocurrency is now well over a one trillion-dollar asset and has entered the mainstream consciousness, riding a wave of corporate and retail interest.
As Bitcoin’s market capitalization rose rapidly through late 2020 and early 2021, it’s now more valuable than even Facebook and Tesla. Yet the dominating narrative of its growth has been the increase in institutional demand.
The goal of establishing a Bitcoin exchange-traded fund (ETF) has since 2013 been a hot topic in the cryptocurrency and investment space, but with the rise in both the Bitcoin market size and the accompanying institutional interest, the desire to launch a Bitcoin ETF in the United States is now reaching fever pitch.
While some argue that Bitcoin ETFs are not really necessary because investors can simply buy Bitcoin to gain exposure to its price action, the reality is that there is a more conservative and often less tech-savvy demographic of investors who are chomping at the bit to gain exposure to Bitcoin and the highly volatile cryptocurrency markets, but have difficulty taking the plunge alone and directly.
A Bitcoin ETF would provide retail and institutional investors a chance to invest in crypto while wrapped in the comfort and safety of a fully regulated financial product. An ETF could also save institutions and other investors from having to deal with such hassles as Bitcoin wallets, public versus private keys, or navigating the murky waters of know-your-customer (KYC) and anti-money laundering (AML) compliance all on their own.
Eight applications for Bitcoin ETFs in the U.S.
There are now eight applications for Bitcoin ETFs in the U.S., with the latest filing coming from publicly traded asset manager WisdomTree, which filed with the CBOE Bats Global Market (BZX) Exchange.
WisdomTree is now the second active application under review by the U.S. Securities and Exchange Commission. The first application came from mutual fund manager VanEck in December 2020, which has been under review with the regulator for weeks, with its initial comment period closing last week.
Asset manager Kryptcoin Investment Advisors has also filed a registration form for a Bitcoin ETF. Rounding out the eight companies vying to launch Bitcoin investment vehicles in the U.S. are: Fidelity-linked Wise Origin Bitcoin Trust; Bitcoin subsidiary of Stone Ridge Asset Management NYDIG; Valkyrie, the operator of the Valkyrie Bitcoin Trust (BTCV); Anthony Scaramucci’s SkyBridge Capital; and New York-based Simplify.
Bitcoin too big an asset class to ignore
Although the SEC has rejected all attempts to launch a Bitcoin ETF to date, many now believe Bitcoin is too big to ignore and expect that an ETF will likely be approved in 2021.
But some major players remain unconvinced. At the ETF Trends Big Ideas event in January, Ark Investment Management CEO Cathie Wood was doubtful the U.S. regulator would greenlight a Bitcoin ETF fund before the original cryptocurrency’s market cap hits US$2 trillion.
Woods said: “The flood of demand has to be satisfied, so it’s going to have to get well over a trillion dollars — US$2 trillion, I think — before the [U.S. SEC] will feel comfortable about” such an ETF.
As well, the SEC may be swayed by recent reports such as the Bank of America’s, published March 17 and titled “Bitcoin’s dirty little secrets.” In the report, Bank of America argues that there is no good reason to own Bitcoin unless you see prices going up.
Per the report, “the main portfolio argument for holding Bitcoin is not diversification, stable returns, or inflation protection, but rather sheer price appreciation.”
The Bank of America report also sees Bitcoin’s inequality as a major barrier to mainstream adoption. Some 95% of Bitcoin is held by just 2.4% addresses. The report reads: “In our view, the fact that such a small percentage of Bitcoin accounts hold most of the BTC in circulation makes this instrument impractical as a payments mechanism or even as an investment vehicle. It can also create social and governance issues.”
The report also cites Bitcoin’s volatility as a major concern, arguing that it “makes crypto-assets impractical as a payments or store of wealth mechanism.”
Despite its scathing analysis of Bitcoin, the report concedes that institutional demand for the cryptocurrency is very real and is the reason why Bitcoin’s prices are rising to new highs.
The SEC is expected to come to an initial decision on VanEck’s Bitcoin ETF application by April 29, so investors will soon have a clearer idea of how the regulator views such an investment vehicle launching in the U.S.
It’s not yet clear if such a product will appear in the U.S. market, but Bitcoin ETFs have already been launched in Canada and Brazil to great success.
In an interview with Forkast.News, Alex Tapscott, managing director of Digital Asset Group at Ninepoint Partners, said the U.S. regulatory climate toward Bitcoin ETFs could be changing with a crypto expert now in charge of the SEC.
“Yesterday, Gary Gensler, who was Biden’s nominee for chairperson of the SEC, was confirmed by the Senate,” Tapscott said. “He has a pretty full plate of different kinds of priorities, I’m not sure how highly a Bitcoin ETF approval ranks on his list of priorities, but he is someone who knows the technology.”
”Frankly, an ETF approval in the U.S. is an inevitability,” Tapscott said. “It’s not a question of if, it’s a question of when.”
“I’m just cautious that it’s going to happen as soon as people think, it’s very likely that some of the initial submissions that have been put through here could be extended for an additional period of review,” Tapscott added. “I think that the end of 2021 is probably a reasonable target for something like that to occur.”
Institutional Bitcoin investment in Asia
Institutional Bitcoin investment vehicles are also being established in Asia. In late February, the BCMG Genesis Bitcoin Fund-I, which is now available to accredited Asian investors, was launched. It claims to be the one of the first insured Bitcoin funds in Southeast Asia and aims to meet the growing institutional demand in the region.
But how real is the institutional appetite for Bitcoin in Asia?
“We launched the fund in February with a target of raising 5,000 BTC as a total AUM (assets under management) and we’ve already raised and gotten commitments for more than 50%, so that gives you a sense of demand,” said Prakash Somosundram, head of investor relations at BCMG, in an interview with Forkast.News. “There is definitely a need for such solutions in the market. It’s one of the gaps in the market that we’re trying to fill and there is clearly evidence that there is sufficient liquidity. I think the validation has come from the traction that we have achieved in two short months.”
The BGBF-I is a Bitcoin-denominated fund with a minimum investment of around 2 BTC. The fund is regulated in Labuan, located close to Kuala Lumpur in Malaysia, where IBH Investment Bank serves as the fund’s main advisor. Professional financial services provider, Hong Kong-based Alpha Calibration, provides regulatory compliance services, and the auditor is HLB Hodgson Impey Cheng.
While Bitcoin ETFs in the U.S. have so far been rejected by regulators, the Labuan regulators have been “very forward-looking on crypto,” according to Somosundram.
“Coming up with anything new is never easy and we were fortunate to have chosen the Labuan jurisdiction, but it wasn’t a walk in the park,” he said. “We were quite fortunate that our insurance partners have been working with us since 2018, so we were able to work together to figure out solutions. And they are also based in Labuan, which gives the regulators more comfort.”
Successful as BCMG’s fund has been, Somosundram thinks there is still a need for a lot more education and outreach in the Asian market.
“There’s a whole lot of innovation that is happening in this space. We’re quite confident that Bitcoin is definitely becoming an asset class that institutional investors are definitely looking at and we believe that even sovereign funds will start getting into the space,” Somosundram said. “And I think that’s kind of our aspiration, we’ve had to find ways to create institutionalized regulated products so that we could serve the needs of larger entities because there’s a market for this available.”
Appetite for DeFi and NFTs grows
While the Bank of America report was highly critical and dismissive of Bitcoin’s ability to seriously disrupt the global financial system, its authors acknowledge the potential impact of decentralized finance (DeFi), noting that “DeFi is, we think, the most fundamental challenge to modern finance that we’ve encountered.”
BCMG is in the process of creating an infrastructure to enable Asian institutional investors to enter the DeFi space. Somosundram said the institutions are not going “to stake their coins in one of the popular protocols, they need to do it with someone who’s regulated and can do all that technical work for them.”
Somosundram continued: “I think we are just in phase two of that journey. Phase one was kind of us getting the infrastructure, the exchange up and going. And now we’re starting to layer that with new products and services.”
BCMG sees a much larger opportunity presented in non-fungible tokens (NFTs), Somosundram said.
“I think the NFT craze is going to be a lot bigger than DeFi and we believe there will be some overlap. The main reason is because DeFi is still very, very technical and it really represents a small percentage of the crypto market, while there is a much wider audience with NFTs and there’s going to be a lot of new entrants into the space,” Somosundram said. “Of course, there is a bubble right now, it’s quite hyped up. But we do need to go through these hype cycles so that we can get to mass adoption.”