The Market Wakes Up

As cryptocurrencies have gradually entered the mainstream spotlight over the past decade, the influx of funds from traditional markets, starting with Grayscale's GBTC, has increasingly garnered attention in the cryptocurrency market. The recent market resurgence is closely tied to traditional institutions. According to CoinShares' weekly data on cryptocurrency asset flows (Data of crypto asset ETPs on various traditional trading venues), there has been a continuous net inflow for over ten weeks since early October 2023, with only a small amount of outflow in one week in December 2023. Bitcoin's price has also surged from around $25,000 to over $45,000.

The market widely believes that this reflects investors' anticipation of the U.S. SEC approving application for offering Bitcoin spot ETFs from several traditional asset management giants in January 2024. Based on the historical ETF approval process, the SEC's maximum timeframe for final approval is 240 days. As Hashdex and Ark&21 Shares were among the first institutions to submit ETF applications to the SEC, the expected deadline for approval is January 10, 2024. The market believes that if the application for offering Bitcoin spot ETF is approved, there is a high probability that subsequent ETFs from other institutions like BlackRock, Fidelity, etc., will also likely receive approval.

Before the application of offering Bitcoin spot ETFs in the United States, the capital market has long had compliant channels for exposure to cryptocurrency assets. As early as 2013, Grayscale's GBTC was launched, allowing investors to purchase shares of the GBTC trust through traditional brokerage channels, indirectly holding Bitcoin and other cryptocurrency assets.

Over the past few years, Europe has seen the launch of over a hundred ETPs related to cryptocurrency assets on traditional trading venues, enabling investors in the region to acquire cryptocurrency assets through conventional channels.

Asset management giants also launched and traded their own Bitcoin Spot ETFs on exchanges outside US. For example, Fidelity’s Bitcoin spot ETF, ticker FBTC, is listed and traded on the Toronto Stock Exchange (TSX) in Canada.

Why is there such a focus on the U.S. Bitcoin spot ETF? How does it differ from existing compliant channels for purchasing cryptocurrency assets?

The Current status of regulatory-compliant cryptocurrency asset investment channels

We analyzed the products issued by major institutions, as compiled by CoinShares, a digital asset provider. CoinShares provides weekly data on the global flow of funds into compliant cryptocurrency products across various regions. These products are based on cryptocurrency assets and are traded through traditional financial channels, including various types of ETPs and trust products. The following data, as of December 31 2023, reflects the flow of funds from traditional finance, particularly institutional investor funds, into cryptocurrency assets.

The assets primarily invested through these channels include:

The main asset providers are：

Among them, the background and product structure of the top five asset management issuers are as follows:

Grayscale Investments LLC

• Intro: Grayscale Investments is an American digital currency asset management company and subsidiary of Digital Currency Group founded in 2013 and based in Stamford, Connecticut. Grayscale launched its Bitcoin Trust GBTC in 2013.
• Major Product: Grayscale Bitcoin Trust （GBTC）
• Product legal structure: trust (physically backed)
• Fee: 2% management fee
• Trading platform: OTCQX
• Inception date: 2013.09.25 （inception date）
• Investor requirement: qualified investors and institutional investors
• Crypto asset product AUM：33,370 million USD (data as of 2023.12.31)

CoinShares XBT

• Intro: XBT Provider by CoinShares is Europe’s first entity to offer investors easy exposure to Bitcoin and Ethereum without the burden and risks of self-custody. CoinShares is a leader in the cryptocurrency Exchange Traded Products (ETP) industry, offering innovative, reliable products to investors seeking a convenient and trustable way to access a diverse range of digital assets.
• Major product: Bitcoin Tracker One (COINXBT SS)
• Product legal structure: Tracker certificates (Synthetic backed)
• Fee: 2.5% management fee
• Trading platform: Nasdaq Stockholm
• Inception date: 2015.05.18
• Investor requirement: Nordic retails
• Crypto asset product AUM: 2,374 million USD (data as of 2023.12.31)

21 Shares AG

• Intro: 21Shares is the world's largest issuer of crypto exchange-traded products (ETPs), established in 2018. 21Shares AG is based in Zurich, Switzerland. Its products include the first physically backed Bitcoin and Ethereum ETP.
• Major product: 21Shares Bitcoin ETP(ABTC)
• Product legal structure: Debt security (physically backed)
• Fee: 1.49% management fee
• Trading platform: SIX Swiss exchange
• Inception date: 2019.2.25
• Investor requirement: Nordic retails
• Crypto asset product AUM: 2,336 million USD (data as of 2023.12.31)

ProShares ETFs

• Intro: ProShares has been at the forefront of the ETF revolution since 2006. ProShares now offers one of the largest lineups of ETFs, with more than $64 billion in assets. The company is the leader in strategies such as dividend growth, interest rate hedged bond and geared (leveraged and inverse) ETF investing.
• Major product: Bitcoin Strategy ETF(BITO)
• Product legal structure: future ETF (Synthetic backed)
• Fee: 0.95% management fee
• Trading platform: NYSE Arca
• Inception date: 2021.10.18
• Investor requirement: US retails
• Crypto asset product AUM: 1,846 million USD (data as of 2023.12.31)

Purpose Investments Inc ETFs

• Intro: Purpose Investments is an asset management company with more than $18 billion under management. Purpose Investments has an unrelenting focus on client-centric innovation and offers a range of managed and quantitative investment products.
• Major product: Purpose Bitcoin ETF (BTCC)
• Product legal structure: Spot ETF (Physically backed)
• Fee: 1.00% management fee
• Trading platform: TSX
• Inception date: 2021.2.25
• Investor requirement: North American retails
• Crypto asset product AUM: 1,764 million USD (data as of 2023.12.31)    

ETF, ETP, Trust, what’s the difference?

According to the legal structure of products, compliant cryptocurrency products in the market can currently be classified into Exchanged Traded Products (ETPs) and Trusts. Meanwhile, ETP can be classified into Exchange Traded Notes (ETNs), Exchange Traded Funds (ETFs), and Exchange Traded Commodities (ETCs). In cryptocurrency assets related ETPs, most are ETNs and ETFs.

Among them, ETFs can provide better accessibility for investors, allowing simultaneous investment in multiple assets, with lower fees and suitability for long-term investments. However, ETFs may experience tracking errors, where the value of assets in the ETF differs from the benchmark it is supposed to track, ultimately leading to returns lower than expected. Some other drawbacks of ETFs are their liquidity concerns, complicated creation and redemption process, tax issues, etc.

ETNs are a debt structure, typically unsecured debt instruments issued by financial institutions. Investors purchase the issuer's debt, which poses higher risks due to credit concerns. Compared to ETF structures, ETNs generally have poorer liquidity. However, the advantage of ETNs lies in providing more diversified asset types without the tracking error issue, and they offer more flexibility in terms of taxation. Among the mentioned products, 21Shares Bitcoin ETP is a typical example of an ETN product.

The trust structure is relatively complex and generally can only be traded in the OTC market. For example, Grayscale's GBTC trades exclusively on OTCQX, a platform with lower liquidity and fewer investors. The total daily trading volume on the platform only reached $1.3 billion (as of January 2, 2024). Additionally, Grayscale GBTC, issued through a trust structure, allows only one-way subscriptions and cannot be redeemed. Investors can acquire the issued shares six months after subscribing and then trade them on the secondary market. This nature contributes to GBTC experiencing positive premiums in bull markets and negative premiums in bear markets.

Furthermore, the above-mentioned products, based on the classification of underlying assets, can be divided into two categories: physically backed and synthetically backed.

Physical ETPs physically buy and hold the underlying assets they are designed to track, such as stocks, cryptocurrency, or commodities. The performance of a physical ETP is therefore directly linked to the performance of the underlying asset(s). For example, Purpose Investment’s BTCC, is a BTC spot ETF traded on TSX. Each share of the ETF has a certain amount of Bitcoin managed by the fund manager. Usually there will be a custodian for holding the Bitcoin. Here the custodians of BTCC are Gemini Trust Company and Coinbase Trust Company

Synthetic ETPs use swap agreements with a counterparty, typically a bank, to provide the return of the underlying assets. To ensure the return is delivered each day, the swap counterparty is often required to deposit liquid and diversified collateral (usually in the form of treasuries or blue-chip equities) with the issuer, held by an independent custodian. The amount of collateral required fluctuates with the value of the asset the ETP is designed to track. For example, ProShares’ BITO is a bitcoin future ETF listed on NYSE. The ETF invests in bitcoin future contracts on CME.

The impact of SEC’s approval on Bitcoin Spot ETF

The various types of cryptocurrency financial products traded through traditional financial channels mentioned above provide investors with a one-stop channel to gain exposure to cryptocurrency assets. This bypasses the technical and compliance barriers that investors face when directly acquiring cryptocurrencies such as Bitcoin and Ethereum, including issues like private key management, taxation, fiat on-ramp/off-ramp, etc. These products have the potential to attract trillions of dollars into the cryptocurrency market.Compared to various existing products in the current financial market, why is the approval of a Bitcoin spot ETF by the U.S. SEC so crucial? There are two main reasons:

Access to a Larger Capital Base:

• Wide access to investors: A Bitcoin spot ETF can be listed on mainstream exchanges, reaching qualified investors, institutional investors, and retail investors at the same time. In contrast, trust structures like GBTC can only be traded on the OTC market and are limited to qualified investors. Moreover, US market is the largest market with best liquidity and greatest amount of capital in the world. Listing Bitcoin spot ETF in such huge market will attract more volume than any other market.
• Broader investment channels: traditional asset management sector, including fund managers and financial advisors, find it challenging to incorporate crypto assets into their portfolio without spot ETF.

Greater Acceptance:

• Bitcoin spot ETF products issued by institutions such as BlackRock and Fidelity are believed by many, more likely to be accepted by mainstream funds and investors due to the endorsement of these institutions' brands.
• Addresses compliance issues related to cryptocurrency assets; these products provide better clarity from compliance perspective, attracting more investment and contributing to the development of the related ecosystem.

As the largest capital market, the approval of a Bitcoin spot ETF in the United States would have a significant impact on the cryptocurrency market. These effects extend beyond increased inflow of funds to encompass the compliance of various participants in the global Bitcoin network and changes in Bitcoin network activities. We will continue to monitor the impact of these compliance measures on cryptocurrency assets and anticipate the shaping of a new generation of capital markets using public blockchain technologies.

Disclaimer:

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