Traditionally, the US asset market is responsive to innovation. Complex financial instruments spread widely from the US; the bitcoin futures, the first mainstream financial instrument to trade bitcoin originated in the States. When it comes to crypto exchange-traded products (ETPs), the US has an almost obstinate resistance to adopt.
Yet the underlying themes of cryptocurrencies could not be more appropriate for the times. But how you take part in this trade depends greatly on what side of the world you are on.
In Europe, ETP issuers are rushing to market to satisfy demand. The rise of ETPs on the crypto market and the innovating moves from the industry to allow bitcoin listings show beyond the shadow of a doubt that crypto assets are gaining credibility.
Meanwhile, the industry worldwide is responding with enviable creativity to every regulatory hoop it encounters. FINMA, the Swiss regulator made the move to allow all crypto ETP listings, while the FCA in the UK banned the sale of crypto ETNs. Kraken becomes the first cryptocurrency firm in the US to obtain a banking licence, which gives it a regulatory “free pass” to overcoming a path of patchy compliance in every state, but Irish crypto firms have to seek banking services abroad as the market for cryptocurrencies in Ireland remains unregulated. Elsewhere, Singapore’s largest bank, DBS, announces intentions to launch a cryptocurrency exchange.
And while the US market is lagging on accepting crypto ETPs, the appetite is there, as signs show:
In 2017, CME group announced bitcoin futures launch with a great adoption by market users. By Jan 2019, they expand with options on bitcoin futures as well as announcing Ether futures coming up in Feb 2021.
In May 2020, Paul Tudor Jones puts roughly 2% of his fund’s portfolio into bitcoin futures and likens it to “owning the fastest winning horse”.
In July 2020, the US Office of the Comptroller of Currency announced nationwide custody service for the safeguarding of “tens of millions of Americans” cryptocurrency assets.
In May 2020, JP Morgan opened accounts for bitcoin exchanges – a complete turnaround from its historical stance against crypto.
Fintech players like Square and PayPal open up to cryptocurrency. Square invests 1% of its assets in bitcoin, while PayPal launches a revolutionary service that allows people to buy, hold and sell cryptocurrency.
And last week, Tesla announced an investment of $1.5bn in bitcoin.
Perception
In every aspect of the market, cryptocurrency is gaining acceptance. Traditionally opposed players are opening up to the idea, conventional investors are placing money on it, fintech innovators are driving the lead, anticipating demand and making it as accessible as possible to the public.
The only ones with a reactive approach remain financial regulators that are currently making fragmented allowances, on a need-to basis. But there may be hope on the horizon, even with the compartmentalised approach that the US is currently choosing.
Demand is pushing adoption
As of yet, a cryptocurrency or bitcoin ETP is illegal in the United States. The Securities and Exchange Commission (SEC) has denied several applications for such a product.
There is an alternative, however, in the form of the Grayscale Bitcoin Trust (GBTC). The issue with it is that while it acts like an ETF, it does not have the redeeming qualities of an ETF. It tracks the price of bitcoin but it charges investors a premium to access it, therefore limiting the demand for it.
A Bloomberg analysis shows it performed similarly to European-listed bitcoin ETPs, but, across time it underperforms compared to the true ETPs that can execute creations and redemptions daily.
Overall, it is more expensive, less accessible and slower than the average ETP, although fees are in line with other Bitcoin ETPs. But drawing a parallel with the introduction of gold ETPs in 2004, the fees decreased with every new fund introduced over the years. There is no reason to believe the same cannot apply to cryptocurrency ETPs.
As the US has more retail investors than Europe, the GBTC does not seem as anything but a temporary alternative, until the real thing arrives.
By sheer size though, Grayscale remains the largest cryptocurrency asset manager, hitting $20bn assets under management (AUM) on the last day of 2020.
Conclusion
In the meantime, Europe is making smaller but steadier advances with crypto ETPs surpassing €3bn AUM in 2020. Far less than in the US, but showing more confidence in long-term solutions, with a total of 19 crypto exchange-traded products.
The strong demand has driven European market participants to push through regulatory hurdles to make crypto ETPs available and the market is rejoicing, as proven with the latest reports from Deutsche Borse for 2020 with bitcoin among the most traded products in the ETP segment.
Stefan Kaba-Ferreiro is head of trading at GHCO
