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The cryptocurrency ETFs that investors have long desired has finally come, but it could be a little different from what you expected.
The first cryptographic ETF, the Amun Crypto Basket Index ETF (HODL) it was launched in Switzerland at the start of this week and traded on the six Swiss exchanges. Try to keep a basket of the five largest cryptocurrencies classified and weighted by market capitalization, which currently includes Bitcoin (BTC-USD), Ripple (XRP-USD), Ethereum (ETH-USD), Bitcoin Cash (BCH-USD) and Litecoin (LTC-USD). The portfolio will rebalance on a monthly basis.
So far here in the United States, the SEC has hesitated at the idea of a cryptocurrency ETF. Well over a dozen documents for a bitcoin-related ETF have been rejected by ProShares and Direxion, but the most important refusal is the original ETF bitcoin file, the Winklevoss Bitcoin ETF (COIN). The reason for the refusal was largely the same in all cases. The SEC is not comfortable with the unregulated nature of the market, the potential for fraud and the lack of liquidity in the bitcoin futures market (for ETFs that propose to use futures rather than physical bitcoins). There is still a proposal of ETC bitcoins from the SEC, the ETF VanXck SolidX Bitcoin (XBTC). He is trying to tackle some of the SEC's major concerns, initially evaluating it primarily for institutional investors and offering fraud insurance. A decision is sometimes expected at the beginning of 2019.
Amun, however, found freer regulatory requirements abroad. According to this article, Amun took into consideration nearly two dozen markets around the world for launch before settling in Switzerland. The country has long been considered a freer regulatory environment and Amun hopes that the launch of its crypto ETF will lead to greater acceptance of digital currencies worldwide.
What does HODL look like?
As mentioned above, HODL is weighted by market capitalization with the prices for each cryptocurrency determined by the quotes on the data aggregator website, CryptoCompare.com. Not all crypts, however, qualify for inclusion as Amun tries to exclude currencies that:
- They are linked to a fiat currency (ex: Tether (USDT-USD))
- They are designed to be anonymous (ex: Monero (XMR-USD), zCash (ZEC-USD))
- Lack of sufficient liquidity
- Exchange non-reputable exchanges
- They have been exchanged for less than 6 months
Bitcoin is the largest participation of HODL which includes almost half of the portfolio.
One of the big problems that emerge from cryptographic ETFs is the custody of resources. As for bitcoin ETFs, I have always preferred a physically supported ETF compared to one that uses futures contracts, all the same, because futures can be quite expensive over time. The fact that HODL will use cryptographic physical resources held under multiple levels of security should not only help to alleviate fraud, but also be more cost efficient for shareholders.
According to Amun, the platform will use different levels of cryptographic security to protect resources, including multiple private keys, whitelisting, audit trails and dedicated portfolios.
The other main factor to consider with HODL is not cryptographic security, but the tariff. HODL charges an annual commission of 2.5%, which places it in the extremely expensive category. By way of comparison, the gray-scale Bitcoin Investment Trust (OTCQX: GBTC), the only other exchange-traded product holding bitcoin as the main resource, applies a 2% commission. In other words, it will be expensive in both cases if you want to keep cryptocurrencies in a market-traded product.
Speaking of GBTC …
How do you compare with GBTC?
Apart from the obvious fact that GBTC only holds bitcoins while HODL is a basket of cryptocurrencies, the main difference is the investment structure. GBTC is organized as a grantor of trust, while HODL is an ETF. While HODL will operate on a stock exchange, the shares of the GBTC will be traded over-the-counter where the trading activity is a little less restrictive.
The other big difference is that the GBTC generally exchanges the underlying bitcoin value at a great premium. This does not mean that HODL can not trade at a premium, but open-end ETFs generally trade at, or near their NAV, due to the integrated creation and destruction mechanism of the shares. Since the GBTC is practically the only way to access bitcoins through an exchange, investors have been willing to declare what they are willing to pay. Currently, the GBTC is trading at a premium of 28%, but it was closer to 50% of the recent decline in encryption prices. If a bitcoin or cryptocurrency ETF is approved in the United States, I expect the GBTC premium to decline rapidly, leading to potential large losses.
Does HODL's approval lead to approval in the United States?
It depends on who you ask. SEC Commissioner Hester Peirce said that a bitcoin ETF is "definitely possible" and has argued in the past that such a product would be a good thing for the market by adding liquidity and accessibility. SEC president Jay Clayton, on the other hand, said he wants to see improvements in market surveillance and the risk of manipulation before giving the go-ahead to a bitcoin ETF.
I thought that an encrypted ETF in Switzerland would essentially give the SEC a clear vision of how such a product would work in practice without being involved alone in the event that negative events occur. At present, I have not seen any evidence that the SEC is willing to maintain its current position. I thought that after the bitcoins, futures made it known that a bitcoin ETF was a real possibility within six months of launching. This obviously did not happen. Now, I think it is more unlikely to see an ETF approved before the end of 2019.
Conclusion
The obvious obstacle for US investors here is the search for a place to buy a listed ETF in Switzerland. Fidelity offers access to publicly traded Swiss stock, but it does not appear that they are offering HODL for sale at the moment. The same for Vanguard, where I did not find any mention of the fund on their brokerage site.
For a typical investor who wants a bit of exposure to cryptocurrencies, a fund like HODL is a good option, even if expensive. It seems that Amun has taken reasonable steps to ensure the safety of the resources held and the product has been well thought out. I do not expect HODL's approval to necessarily make regulators here in the US feel more comfortable approving their cryptographic ETF, but I think it's an important step in the right direction!
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