Bitcoin ETFs Are So Passe: Bitwise Asset Management Wants the SEC to Approve a Cryptocurrency Index ETF

On Tuesday (24 July 2018), San Francisco-based Bitwise Asset Management, a pioneer in the area of cryptoasset index funds, filed an application with the U.S. Securities and Exchange Commission (SEC) for approval of an Exchange-Traded Fund (ETF) that would track a basket of ten cryptocurrencies.

The cryptoasset management firm, which was founded in 2017, currently has a "HOLD 10 Private Index Fund" (with an inception date of 22 November 2017), which the company says was the world's first cryptocurrency index fund. According to its Fact Sheet, the fund tracks the Bitwise HOLD 10 Index, "which selects the 10 largest cryptoassets based on criteria, including 5-year diluted market capitalization, trade volume minimums, concentration limits, and compliance." The portfolio is rebalanced monthly. As of 30 June 2018, the components of the index were Bitcoin (55.0%), Ethereum (20.0%), XRP (9.4%), Bitcoin Cash (6.4%), Dash (1.3%), Litecoin (2.6%), Stellar Lumens (2.3%), Monero (1.1%), Zcash (1.0%), and Ethereum Classic (1.0%).

The "HOLD 10 Private Index Fund" did not need to get SEC approval because it is only marketed to U.S. Accredited Investors.

Even though the SEC has not yet even approved a Bitcoin ETF, Bitwise must be feeling confident that the U.S. financial regulator's approval of the first Bitcoin ETF is not far away since, earier today, the company filed the registration statement for a new fund, the first publicly-offered cryptocurrency index ETF.

Matt Hougan, the company's Global Head of Research, who is a former CEO of ETF.com, told CNBC:

“We’re joining the queue... The market is professionalizing in a direction that the SEC would allow a crytpo ETF onto the market.”

The new ETF will be called the "Bitwise HOLD 10 Cryptocurrency Index Fund", and, like the existing cryptocurrency index fund, it aims "to track the returns of Bitwise's HOLD 10 Index."

John Hyland, Global Head of Exchange Traded Products at Bitwise, stated:

"We are aware that other investment firms have filed for cryptocurrency ETFs under the Securities Act of 1933, and that there continues to be interest in filing under the Investment Company Act of 1940. As best we know, all of these funds plan to offer exposure to a single coin such as bitcoin or ether. That is fine, but our proposed offering is obviously different... We know that the current crypto ETF filings have generated a great deal of discussion and analysis within the SEC about this emerging asset class, and the SEC and its staff, to their credit, have asked for public comment on a wide range of issues relating to these products. We expect the staff of the SEC has had ongoing discussions with the investment firms making the crypto filings to date, and we look forward to having our own discussions with the SEC about the nature of our proposed offering."

And Bitwise's Global Head of Research, Matt Hougan further added:

"Our research shows that an index-tracking basket of multiple cryptocurrencies behaves differently than a single coin. As such, we think both sorts of exposure need to be looked at by investors when considering the growing cryptocurrency space. Our view is that this new area has many similarities to the introduction 10 to 15 years ago of commodity ETFs. At that time, we saw the launch of single-commodity ETFs tracking gold, silver, crude oil, and other commodities, as well as ETFs tracking diversified commodity index baskets. We see a lot of similarities here."

The SEC has been reluctant to approve any Bitcoin ETFs due to various concerns, such as price volatility, lack of adequate custodial solutions, and price manipulation, but many traders/investors seem to be very hopeful of a positive decision, judging by the current Bitcoin rally, which saw Bitcoin break the $8,000 barrier (for the first time since mid May 2018) earlier today (with Bitcoin trading, at press time, around $8,242, up 6.47% in the past 24 hour period).

 

Featured Image Credit: Photo by "Andre Francois" on Unsplash.com

How Bakkt Can Bring the Crypto Space an Institutional Investor Influx

Cryptocurrency enthusiasts have for years been waiting for institutional investors to enter the space. While the introduction of bitcoin futures contracts on regulated exchanges in late 2017 didn’t gain a lot of traction, but Bakkt may.

Bakkt is a long-awaited bitcoin futures exchange and on-boarding platform from the Intercontinental Exchange (ICE) - the parent company of the New York Stock Exchange – and it’s set to launch this year. Bakkt itself has remained tight-lipped over the precise launch date after delaying its launch last year, with ICE CEO Jeff Sprecher in February simply saying “later this year.”

It’s possible that this quarter may see the launch or at least more news about when the exchange is finally coming. At the end of March, Bakkt CEO Kelly Loeffler explained:

While we’re not yet able to provide a launch date, we’re making solid progress in bringing the first physical delivery price discovery contracts for bitcoin to the U.S.

Bakkt’s launch could be a major milestone for the cryptoasset industry. A venture backed by Microsoft and Starbucks, its institutional pedigree alone will switch many cautious investors on. Specifically, the firm is set to help consumers pay for goods and services with cryptocurrencies, with Starbucks being the flagship retailer in its arsenal.

Bakkt’s Bitcoin futures contracts will be the first physically-settled derivatives on a regulated trading platform. This means investors will receive the contract’s underlying asset, bitcoin, when it expires.

Currently the Chicago Mercantile Exchange (CME) offers cash-settled bitcoin futures contracts, meaning investors get the equivalent of BTC’s value in fiat when the contracts expire. This is seen by some as a major development in the cryptocurrency space, as it shows traditional finance is willing to interact with the nascent cryptoasset industry.

It’s worth noting that earlier this year the ICE’s CEO called Bakkt a “bit of a moonshot bet,”  as it was organized in a way “very different than the way ICE typically does business.” The firm has its own offices and management team, and could undergo more rounds of financing in the future.

Bakkt And a Potential Bitcoin ETF

What’s significant about Bakkt’s launch beyond this, is that it may bolster the chances of a Bitcoin Exchange-Traded fund (ETF) being approved. Such a product would make it easier for institutional investors to gain exposure to cryptocurrencies.

In August, the US Securities and Exchange Commission (SEC) rejected nine other ETF applications, in particular highlighting how those applying hadn’t provided evidence that “bitcoin futures markets are of significant size’” for an ETF to be launched.

Once Bakkt is launched its trading volumes may very well help quell the SEC’s concerns over the bitcoin futures markets’ small size as institutions and other investors may feel comfortable entering it. Larger futures contracts trading volume, increased liquidity and a well-established company involved may prove enough to convince the SEC that the time is right for a Bitcoin ETF.

Bakkt therefore represents a very significant milestone for a maturing cryptoasset industry and may well herald the “institutional influx” that many have been anticipating since 2017. Despite the markets remaining relatively flat throughout 2019 these looming decisions in the U.S. have the power to move the entire industry forward, for better or worse.