May 5, 2021 · 5 min read
ETH shoots past $3000 | Crypto ETFs
Ethereum is setting new all time highs with the ETH price shooting past $3000, now heading towards $3500. As the price of Ethereum increases and crypto gains popularity, more and more investors will look into crypto to benefit from its growth potential and search for a simple and secure way to have exposure.
This week, we are going to look at Crypto Exchange Traded Vehicles.
There are some investors who want to have exposure to cryptocurrencies but don’t want to face technical challenges from setting up a crypto wallet to securely storing private keys. And what about the horror of dealing with unknown market participants and ‘exotic’ digital asset infrastructure!
Exchange traded products let investors to participate in the crypto markets in a cost/time effective and regulated manner. Investing in these products is as easy as buying AAPL shares. The providers of these products will make sure that the investors’ funds are dealt with high quality service providers, trading platforms and auditors. The funds will be stored safe with established custodians such as Fidelity Digital Assets, BitGo Trust Company, Gemini Trust Company and Coinbase Custody.
In the past few years there have been numerous attempts to offer Crypto ETFs. The list below summarizes recent SEC filings.
NYDIG, Stone Ridge Asset Management’s bitcoin spin-off firm, has filed for a bitcoin ETF in February
WisdomTree has filed to launch a bitcoin ETF on CBOE’s BZX Exchange
Fidelity has filed to launch a bitcoin ETF, registered as Wise Origin Bitcoin Trust
Galaxy Digital, a sub-advisor to Canada’s CI Galaxy Bitcoin ETF, has filed with the SEC for a bitcoin ETF in April
First Trust Advisors and SkyBridge Capital have filed to offer a bitcoin ETF in March
However, in the US they have all been rejected. Good news, ETFs not globally shut off. They are available in Canada and Bermuda. There are currently four Canadian Bitcoin and Ethereum ETFs each from CI Galaxy, 3iQ, Evolve and Purpose. Hashdex Nasdaq Cryoto Index ETF is also available on Bermuda Stock Exchange. The fund size is $450.9 million and uses Nasdaq Crypto Index as a benchmark index.
Okay, so, what is an ETF?
An exchange traded fund is a publicly traded investment vehicle that tracks an index, sector, commodity or other assets, including cryptocurrencies. It serves as a way for investors to get exposure to its underlying asset in a traditional setting. Meaning - no need to worry about setting up a wallet, crypto exchanges being hacked, managing private keys or filing taxes for capital gains. ETFs also give investors tax benefits.
The ETF value rises when the underlying asset price increases and falls when it decreases. ETFs trades close to their NAV, however, when the ETF unit price deviates from the underlying asset price, arbitrage opportunities will exist.
Unlike closed-ended trusts (e.g. Grayscale Bitcoin Trust), ETFs provide daily liquidity and so the NAV will closely track the underlying asset. For example, Grayscale’s Bitcoin Trust is currently trading at a 13.51% discount. Because of the ETF structure’s various advantages compared to closed-end trusts - no lock-up period, liquidity, no active fund management needed meaning lower fees, no minimum investment - many investment product providers are looking to convert their Trusts into ETFs. Grayscale wants to turn its giant $37.8 billion GBTC into an ETF. Ninepoint’s Bitcoin Trust is expected to convert into an ETF on May 6th.
Exchange Traded Notes - ETNs
An ETN is a debt instrument traded on an exchange. It is structured in a way that an issuing firm promises to pay the return on an index and at maturity. Given it is a debt obligation, investors are exposed to credit risk. Global investment manager VanEck offers ETNs on Bitcoin and Ethereum.
Below we map out various investment products for Ethereum.
In terms of countries, Canada is leading the ETF scene. Despite its whopping 2.5% annual management fee, Ethereum Trust by Grayscale holds an unparalleled position with its $10 billion AUM. We also see European products rise such as Germany’s ETHetc Physical Ethereum (ZETH) and Sweden’s Ether Tracker One. CI Galaxy and Evolve offer no-management fee for a limited time for their Ethereum ETFs.
Valkyrie Digital Assets, which currently offers Bitcoin Trust and Polkadot Trust, filed to offer Valkyrie Innovative Balance Sheet ETF, an ETF that will invest the majority of its capital into companies that have bitcoin on their balance sheets (e.g. Tesla, Microstrategy).
Goldman Sachs has also filed an application to offer an investment product that will track the ARK innovation ETF that invested in Grayscale.
Although BTC and ETH overwhelmingly dominate the crypto space, altcoins should never be overlooked. Valkyrie and Osprey launched Polkadot funds before industry giant Grayscale. They are charging 2% and 2.5% management fees respectively.
Grayscale added five altcoin trusts this March - Basic Attention Token (BAT), Chainlink (LINK), Decentraland (MANA), Livepeer (LPT), and Filecoin (FIL).