The future of crypto ETFs

November 30, 2021

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At a glance

The launch of the first bitcoin futures ETF in 2021 was a long-awaited milestone for the crypto industry, but for many the larger goal is getting regulatory approval for an ETF that gets exposure to BTC itself, rather than just futures contracts.

Key takeaways

  • While the industry is still in a holding pattern as it waits for a greenlight from the SEC for a fund tied directly to bitcoin, the momentum for crypto ETFs is nonetheless picking up.
  • Regardless of the ETF strategy, it’s critical to investors that the management team brings a wealth of crypto-native experience to what will be a first-generation product.

Written by

  • Brett Tejpaul, Head of Coinbase Institutional

Introduction

The launch of the first bitcoin futures exchange-traded fund (ETF) in 2021 was a long-awaited milestone for the crypto industry, and its explosive growth shows the appetite investors have for digital asset funds. 

For many in the crypto market, however, the Proshares Bitcoin Strategy ETF is seen as just a first step toward the bigger goal: Getting regulatory approval for an ETF that gets exposure to bitcoin itself, rather than just futures contracts. But regardless of whether a fund is getting its exposure to bitcoin futures or to the cryptocurrency itself, it’s critical to investors that the management team brings a wealth of crypto-native experience to what will be a first-generation product. 

As one of the largest digital asset custodians with dedicated on-chain addresses protected by a secure cold storage solution, Coinbase Custody currently supports over 150 assets across 15 different blockchains, with $139 billion in assets on platform (AOP). With this experience, we know that a bitcoin ETF will bring unique opportunities for investors, but will also present unique challenges on the investment management side.

A maturing market

The historical evidence shows that getting regulatory approval for an ETF has always been a marathon and not a sprint. This was even true of the first ETF to gain approval in the U.S. back in 1993, a fund that offered investors S&P exposure with a market-cap weighted index. And even though we now consider it to be one of the most plain, vanilla ETFs in the world, it nonetheless went through a long period of intense regulatory scrutiny. 

We then saw the expansion into international equities and the expansion into currencies, commodities, fixed income, and the various sub-sectors of fixed income. Regulatory approval of these funds went through the same rigorous process as the first ETF. 

In other words, the same questions that are being asked right now about a bitcoin ETF were also asked about all those other asset classes or exposures that investors have been able to take advantage of with what is now a battled-tested ETF wrapper. And those questions largely and simply come down to investor protection.

Opportunity knocks

When looking back at SPDRs — which was the first ETF that came to market in the U.S. back in 1993 — what made it so important was the fact that it was an institutional investment thesis in nature;  but by putting it into an ETF wrapper, it offered all investors access to an institutional strategy. 

In other words, it was a strategy that could benefit everyone, from self-directed investors going through a brokerage all the way up to institutional investors, who are some of the most sophisticated investors in the world.

A crypto ETF will similarly provide opportunities across all levels of investors, further helping to democratize investing and finance. From the perspective of institutional investors, especially those who might be entering the crypto space for the first time, putting bitcoin in an ETF wrapper will give it a framework with credibility, allowing them to invest in a vehicle with which they’re already familiar. 

Gaining momentum

The backlog of applications seeking regulatory approval for a bitcoin spot ETF is a clear sign that the crypto industry is interested in more than just a fund tied to futures contracts. However, while the industry is still in a holding pattern as it waits for a greenlight from the Securities and Exchange Commission for a fund tied directly to bitcoin, the momentum for crypto ETFs is nonetheless picking up. 

After the Proshares fund was released last years, two more bitcoin-based futures ETFs were launched in short order. It does not seem far-fetched to think there will be additional crypto ETFs launched this year. 

The appetite for a bitcoin ETF is growing among investors with good reason: While putting bitcoin in an ETF wrapper can give confidence to institutional investors by putting crypto in a vehicle that they’re familiar with, just as important will be how it can give all investors a seamless entry point into cryptocurrency.

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