Point of no return? Crypto investment products could be key to mass adoption

Cryptocurrency investment products could be a missing piece of the puzzle towards mass adoption, and are now becoming increasingly more common.

The first Bitcoin (BTC) futures exchange-traded fund (ETF) was launched in the United States back on October 19, 2021. Since then, a number of other cryptocurrency investment products have been launched in various markets.

That first ETF, the ProShares Bitcoin Strategy ETF, quickly became one of the top ETFs of all time by trading volume on its debut, and soon after, several other Bitcoin futures ETFs were launched in the United States, providing investors with different investment options.

To Martha Reyes, head of research at cryptocurrency trading platform Bequant, these options are important. Speaking to Cointelegraph, Reyes pointed out that in traditional finance, ETFs have “proved to be incredibly popular in recent years, with ETF assets expected to reach $14 trillion by 2024.”

Reyes said that investors who have been on the sidelines of the market may now choose to invest in cryptocurrencies if they prefer the “low cost, flexibility and convenience [of ETFs], especially as they then do not have to custody the crypto themselves.”

Custodying crypto assets, Reyes said, can prove a “technical barrier to some non-crypto natives.” The launch of crypto ETFs may offer investors the type of diversification they want in their portfolios through crypto, although some may want to access the market “via baskets reflecting different trends in this rapidly evolving market.” She added:

“Others prefer to be more hands on or have a combination of strategies. The important thing is that investors have options.”

Several options have, in fact, been launched over the last few weeks. United States-based firm WisdomTree has listed its cryptocurrency exchange-traded product (ETP), Crypto Mega cap Equal Weight ETP, on Euronext exchanges in Paris and Amsterdam.

Trading under the ticker symbol MEGA, the product is backed by physical cryptocurrencies including Bitcoin and Ether (ETH) and is rebalanced quarterly. WisdomTree also launched its WisdomTree Crypto Market (BLOC) and WisdomTree Crypto Altcoin (WALT) ETPs in Europe.

Similarly, in December, Bitcoin Capital AG released two ETPs on the SIX Swiss Exchange, offering investors exposure to Bitcoin and Ether. These products are actively managed by FICAS AG and are available to institutional, professional and private investors.

These products have so far been successful and more options are being launched on a regular basis, effectively boosting investors’ options in the market. To some experts, these products are part of the next step cryptocurrencies need to take to be widely adopted.

Investment products and adoption

To Reyes, participation in these investment products is so far “primarily institutional,” especially in countries like the United States in which only futures products are trading. She said that retail investors “are cognizant of the added rollover costs of a future versus a spot ETF, meaning underperformance versus the underlying.”

Reyes added that for “wide retail participation, we would probably need to see a spot product.”

Speaking to Cointelegraph Sui Chung, CEO of FCA-regulated crypto indices provider CF Benchmarks, said that cryptocurrency investment products are “significant drivers of mass adoption,” and while the firm would “like to see a wider choice of avenues” the impact of these products could still be significant:

“We shouldn’t underestimate the impact these products have in bringing new investors and capital to crypto assets and how this can accelerate long-term adoption.”

Karan Sood, CEO and managing director at Cboe Vest, an asset management partner of Cboe Global Markets, told Cointelegraph that increased participation from a diverse set of investors is “good for the market,” as it “increases liquidity and helps build out the market infrastructure.”

Sood said that before investing, investors should review their possibilities carefully as some products were initially launched to provide investors access to the cryptocurrency market, while others “try to provide a solution to Bitcoin’s extreme volatility problem.”

According to Sood, volatility is “endemic to the crypto asset space,” and sell-offs in which Bitcoin and other crypto assets lose over half of their value are fairly common, so much so that drops of over 20% are to be expected. He added:

“However, what is new is the availability of funds that allows investors to access Bitcoin exposure with strategies designed to reduce the impact of severe sustained declines.”

These funds, he said, take the “managed volatility set of investment strategies extensively used in conventional asset classes” and apply them to Bitcoin futures to protect investors against the cryptocurrency’s volatility.

This volatility is believed to be keeping some institutional investors on the sidelines and stopped regulators like the U.S. Securities and Exchange Commission (SEC) from finding ways to properly protect investors and accommodate for the innovation in the space.

To Chung, the cryptocurrency market has matured to the point there are now “core” exchanges like Coinbase and Kraken that ensure fair and manipulation-free trading, so market manipulation should not be a problem. Regulated products are, nevertheless, preferable for institutions and more conservative investors.

Considering the lack of a spot Bitcoin ETF in the U.S. and the disadvantages of futures-based products mentioned by Reyes above, retail investors are left either gaining exposure from other markets or buying crypto directly. These options are, nevertheless, not optimal for some.

Early stages for crypto investment products

Buying cryptocurrencies on the spot market has been the go-to strategy for most crypto investors over the last few years, but more conservative investors who may want to diversify their portfolios may be uncomfortable with the lack of regulation in the market.

As Cboe Vest’s Sood put it, when compared to the “trading and custody infrastructure that exists for conventional assets such as stocks, bonds and funds, there is little in the form of regulation.” This lack of regulation, he said, has been “exemplified by the persistent news about the loss of keys, hacking of systems and fraud in trading in crypto assets.”

Bitcoin futures investment products operate under the Commodity Futures Trading Commissions’ regulations, while mutual funds with exposure to Bitcoin are actively managed by regulated entities with a rich history of providing strong investor protections.

Taking into account these differences, Sood pointed out that “unless there is a change in the regulation of spot Bitcoin, there is a sound basis for BTC futures-based investments but not for spot-based investments.”

Notably, spot Bitcoin ETFs are available in various jurisdictions. In December, Fidelity Canada launched one such product called the Fidelity Advantage Bitcoin ETF. It trades on the Toronto Stock Exchange and is denominated both in Canadian and United States dollars.

Sood said that regulations in the U.S. may be a burden for investment product manufacturers but have “delivered substantial value and protections to U.S. investors over the years.” These protections, he said, have “stood the test of time over decades” and, as such, investors should opt for products regulated in the country if possible. 

While futures-based investment products may not be optimal for retail investors, Sood argued that some sophisticated products have been launched to offer investors the cryptocurrency exposure they may be looking for. He concluded:

“Investing in funds overseas may expose U.S. investors to undue unique risks and tax burdens.“

Bequant’s Reyes pointed out that cryptocurrency ETFs have less than $20 billion in assets under management across 50 products, which means we are “still in the early stages of the adoption” of these products.

Nevertheless, she sees the approval of a futures ETF and rejection of a spot ETF as “inconsistent,” as in other jurisdictions, spot ETFs are already being traded. Making matters worse, a futures product “primarily benefits institutional investors as it is too expensive for individual investors.

Grayscale Investments has notably fired back at the SEC for rejecting VanEck’s spot Bitcoin ETF application, issuing a letter arguing the SEC is wrong to reject such products after approving several Bitcoin futures ETFs.

CF Benchmarks CEO Sui Chung said that while futures products are regulated instruments with oversight from the CFTC, it “isn’t so clear cut for spot Bitcoin,” and the SEC has a challenge in balancing its enforcement mandate with what U.S. investors want.

However, Chung noted that Bitcoin futures ETFs have already “sparked an irreversible change” as they are available “to every single member of the investing public in the world’s deepest capital market.”

Markets, he said, haven’t experienced significant disruptions and “the sky hasn’t fallen in,” meaning that we “have passed the point of no return.” To Chung, firms who can offer investors ETFs that can help diversify and grow their portfolios “will be the winners.”

Making crypto more accessible

A Bitcoin spot ETF could make cryptocurrencies more accessible but to the above experts, the crypto ETF is about more than a product with physical exposure — it’s about making cryptocurrency exposure more accessible.

To Reyes, futures ETFs trading in the U.S. are a “trial run in eventually approving a spot ETF.” Such an ETF, she concluded, would be greatly beneficial:

“A spot Bitcoin ETF would fuel mainstream retail adoption of Bitcoin further. Some investors prefer the ease of accessing the market this way rather than through dedicated crypto exchanges.”

Reyes welcomed regulation, noting that the more regulated fiat-to-crypto on-ramps there are the better, as these platforms can help signal regulatory concerns are easing, further driving up demand for cryptocurrencies.

Chung said that cryptocurrency investment products can lead to mass adoption by ensuring that investors deal with less friction when entering the market, as it may be easier to buy an ETP via an existing brokerage account than to open an account at a cryptocurrency trading platform:

“We don’t want to be dogmatic about how people invest and learn about crypto and its possibilities, our job is simply to open up as many avenues as possible and drive adoption.”

While it isn’t clear when the SEC will approve a Bitcoin spot ETF or whether existing solutions are enough for more conservative investors to make a move, new investment products are making it easier for investors to gain exposure to the space.

Over time, the trend should continue and new products will launch, allowing cryptocurrencies to fully develop in the market as a new asset class that could help hedge against inflation or economic downturns.

WisdomTree amends Bitcoin ETF application, naming US Bank as custodian

U.S. Bank launched crypto custody services for institutional investors in October as part of a partnership with New York Digital Investment Group.

New York-based asset manager WisdomTree has amended its filing for a Bitcoin exchange-traded fund with the Securities and Exchange Commission to name U.S. Bank as its custodian. 

In a Wednesday filing, WisdomTree listed U.S. Bank National Association as the custodian for shares of its Bitcoin (BTC) trust. The filing is an amendment to its March 11 registration for a spot Bitcoin exchange-traded fund, or ETF, submitted to the SEC prior to U.S. Bank offering crypto custody services for institutional investors.

On Dec. 2, the SEC rejected a proposed rule change from the Cboe BZX Exchange to list and trade shares of WisdomTree’s Bitcoin Trust. It’s unclear if the recent amendment is aimed at resetting the clock on a new spot Bitcoin ETF application, given WisdomTree waited 265 days between its initial filing and the SEC rejection. A separate ETF application for WisdomTree’s Ethereum Trust submitted to the SEC in May is still under review.

Related: US is ‘unquestionably’ behind the curve on crypto ETFs, says Brian Brooks

With more than $76 billion in assets under management, WisdomTree has also launched four cryptocurrency indices in the United States and Europe to provide diversified portfolio exposure to investors. In addition, the company already has an exchange-traded product with exposure to a basket of cryptocurrencies on Euronext exchanges in Paris and Amsterdam.

Regulators in the United States have yet to approve a cryptocurrency exchange-traded fund. However, the SEC gave the green light to products linked to crypto futures, including BTC futures ETFs from investment managers ProShares and Valkyrie. Other U.S. firms including Fidelity have successfully applied with Canadian regulators for ETFs with direct exposure to crypto.

US is ‘unquestionably’ behind the curve on crypto ETFs, says Brian Brooks

Brian Brooks proposed regulators treat crypto in much the same way as traditional financial institutions rather than creating an entirely new body to create a single framework for digital assets.

Bitfury CEO and former Acting Comptroller of the Currency Brian Brooks has hinted the regulatory environment in the United States could drive many crypto firms outside the country, and has already stymied companies attempting to offer a variety of financial products.

Speaking at a Wednesday hearing on Digital Assets and the Future of Finance with the House Committee on Financial Services, congressperson Ted Budd said he feared the current policy of regulation by enforcement in the U.S. could “force the next generation of financial tech to be created outside of our country.” Speaking on behalf of Bitfury, Brooks said:

“There are some products that are legal in other countries and are just not legal here,” said Brooks. “One of the things that makes crypto risky is that consumers may not understand the difference between one token and another token, so they may want to diversify […] we don’t allow that in the United States — we do allow it in Canada, we allow it in Germany, Singapore, Portugal and a number of other places.” He added:

“If you’re a developer of [exchange-traded funds], there’s no fuzzy line, it’s super clear: You cannot do that here, so you have to go abroad.”

Bitfury CEO Brian Brooks addressing the House Committee on Financial Services on Wednesday

Brooks placed the lack of exchange-traded funds, or ETFs, in the U.S. on the Securities and Exchange Commission. Though the regulator has recently approved ETFs with exposure to Bitcoin (BTC) futures from investment managers ProShares and Valkyrie, it has yet to give the green light for BTC or other crypto ETFs. In contrast, many U.S. companies with operations in Canada have successfully applied with local regulators for ETFs with direct exposure to crypto. 

Related: More than 40 digital currency ETFs await US regulatory approval

However, the former OCC head suggested the lack of approval of crypto investment products was more of a result of the United States’ “fragmented approach to regulation,” given the number of bodies overseeing banks, finance and now digital assets. Brooks proposed a solution in which traditional financial institutions would be treated in much the same way as crypto.

“When I hear people talk about the idea that we need one regulator for crypto, I would say we should first have one regulator for banks, but we have three of them,” said Brooks. “The last thing we need to do is add another regulator to a system that’s already got dozens of regulators.

“If I’m a crypto lending platform, I should probably be regulated by the FDIC. If I’m a crypto trading platform, I should probably be regulated by the CFTC and SEC, but somehow we treat crypto, because it’s new, as different than everything else. I’m gonna argue that crypto is just a step function improvement in the system.”

CEOs from Circle, FTX, Bitfury, Paxos, Stellar Development Foundation and Coinbase Inc. are currently fielding questions from U.S. lawmakers on the state of digital assets in the country. Cointelegraph reported earlier on Wednesday that House representatives have expressed concerns over token projects exerting centralized control over many users’ assets. 

Bitcoin ETF Issuer 3iQ to Provide Rich Purchasers White-Glove Financial commitment Accounts

Electronic asset supervisor 3iQ, exchange and custodian Gemini, and platform service provider BITRIA have teamed up to provide substantial-web-well worth consumers in the U.S. white-glove crypto financial commitment accounts.

The individually managed accounts, or SMAs, have a $100,000 bare minimum. They’ll be managed by 3iQ advisors on behalf of clientele. Gemini will custody the belongings and BITRIA delivers the platform that enables consumers and advisors to obtain the accounts.

This marks the 1st time 3iQ, a Toronto-based mostly expense manager with $3.3 billion belongings beneath administration, will start a merchandise with its U.S. subsidiary, 3iQ Digital Assets. 

The Canadian mother or father company, which introduced in 2012, is accountable for the Bitcoin and Ethereum location ETFs, The Bitcoin Fund (QBTC) and The Ether Fund (QETH.UN), which debuted on the Toronto Stock Exchange in 2020.

3iQ options to give design portfolios with Bitcoin, Ethereum, and an index that tracks the top rated 10 crypto assets, such as tokens that are indigenous to DeFi, a subset of crypto property that are used for non-custodial trading and lending. But the accounts will not assistance meme coins or belongings that have not nonetheless been approved by Gemini, these as Solana’s indigenous SOL cryptocurrency.

“We as a system, BITRIA, give a subset of the belongings that are offered on Gemini,” Dan Eyre, BITRIA CEO and cofounder, instructed Decrypt. “For illustration, like a Dogecoin or Shiba Inu–you know, the meme form of coins–we’re not truly hunting to construct out assist for those for the reason that they’re not typically ideal in this section anyway.”

Eventually, it is a far better in shape for shoppers that property go by a rigorous owing diligence course of action right before turning into readily available, stated Chris Matta, president of 3iQ’s U.S. subsidiary.

“Gemini has a extremely sturdy process and pipeline for incorporating property,” he told Decrypt. “So as the house proceeds to mature and as supplemental property get extra, those people will turn out to be accessible to our traders.”

Mainly because clientele will personal the property in their account, they’ll be able to use tax reduction harvesting. For example, Bitcoin is currently down 20% around the very last 30 days. An advisor would sell that asset, exchange it with related investments and offset potential gains with the Bitcoin losses. 

That’s a feature that isn’t ordinarily obtainable to ETF or private fund traders, whilst it is not unheard of. VanEck’s a short while ago released Bitcoin futures ETF, VanEck Bitcoin System ETF (XBTF), has been set up as a C-Corp. to make it possible for traders to carry their losses forward and cut down taxes compensated on potential gains.

“We’ve witnessed other asset managers in the crypto room either do just one-off SMAs for folks or we have noticed some scaled-down startups do SMAs,” Matta explained. “But this is the first time a large crypto asset supervisor of the size and scale of 3iQ has launched a item like this.”

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