While the US market celebrates the launch of the ProShares and Valkyrie bitcoin ETFs, financial Europe is more reluctant to embrace cryptocurrencies and still seems to be taking a wait-and-see approach: no identified issuer, convertibility risk in the event of redemption, technical risk on the return of assets.

In this context, the initiatives of European asset managers have so far been confined to a few alternative funds that are reserved for experienced investors. So, the question remains: how to market bitcoin funds to the general public?

Melanion Capital, a French management company regulated by the Autorité des Marchés Financiers (AMF), has long been convinced of the strong potential of a bitcoin UCITS ETF (the UCITS label, the highest European standard in fund regulation, makes distribution to a broad public possible, and the ETF guarantees investors access to an envelope listed on a stock exchange with its very secure operating rules). As a result, the management company has worked extensively with the AMF to meet the challenge.

To avoid holding cryptocurrencies, US bitcoin ETFs are built on futures and forwards – the underlying of which is bitcoin – which are renewed before maturity. Some draw attention to the fact this solution could lead to higher costs and tracking difference: indeed, long-term futures are trading at a premium compared to the spot price (the specialists speak of a negative impact of several dozen percent per year compared to the direct holding of bitcoin).

Melanion Capital has created an entirely different and original model: its ETF, invested in companies in the bitcoin industry, relies on developed markets equities, with engineering work on the index methodology to track the performance of bitcoin itself as best as possible. This investment strategy is therefore more secure, transparent and potentially far less costly than that of US ETFs. Above all, this ETF also has the advantage of being a UCITS. The Melanion BTC Equities Universe UCITS ETF (BTC) was launched on Euronext in the same week as its US counterparts on 22 October. It will likely help answer questions from many investors who are reluctant to look at with regard to the economic fundamentals underlying cryptocurrency valuation and volatility.

The challenge for Melanion Capital was all the greater since this player in alternative funds had no previous experience in UCITS ETFs. Therefore, which partners to associate with for the benchmark, market making and post-trade? How to work with authorised participants? How to manage assets/liabilities to track the benchmark as closely as possible, which organisation to use with the fund administrator to produce the NAV before the opening of the market? How to produce the PCF? To do this, Melanion Capital has entrusted its project to an experienced financier, Cyril Sabbagh, and has designated Société Générale Securities Services (SGSS), an experienced ETF services player with expertise and dedicated solutions, as its depositary, transfer agent and fund administrator.

In all aspects of the set-up of this project, and in particular operational monitoring by ETF product experts, SGSS has supported Melanion Capital, with the conviction this innovative product would be successful and with the objective of supporting it in the development of its product range. Because entering the ETF market is too great an investment for a mere marketing stunt. For a new entrant, the initial investment will only be amortised if its ETFs grow rapidly in order to attract investors and if it expands its range to become a recognised market player.

On to the next challenge...!

Véronique Dang Vu is product engineer at SGSS

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