The basics of an ETF

An exchange-traded fund (ETF) is an investment fund that can be purchased or sold on a stock exchange, similar to individual stocks. ETFs are designed to track the performance of a specific index, sector, commodity, and/or other assets.  ETFs can contain a collection of investments, including stocks, commodities, bonds, and other securities in one fund, which gives investors the opportunity to diversify their portfolio in different assets without having to directly own those assets. The first exchange-traded funds was the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 Index, it remains one of the most actively traded ETF.

In crypto, the concept of exchange-traded funds is quite similar; a crypto ETF is an investment pool consisting of one or many crypto assets. Crypto ETFs provide crypto exposure to investors without the risk that comes with actually owning an actual cryptocurrency, an example is the Bitcoin ETF. There are primarily two types of crypto ETFs; these include physical-backed ETFs – these ETFs  hold actual crypto assets in their pools and track the performance of one cryptocurrency or a collection of cryptocurrencies – and futures-based ETFs – which use future contracts.  

Generally, before a Bitcoin ETF gets listed, it needs to be approved by a regulatory body like the United States Securities and Exchange Commission (SEC), this used to be one of the toughest stages to getting a Bitcoin ETF listed because the SEC considered Bitcoin ETFs to be a scheme to manipulate market prices and reinforce fraudulent activities.

Past Bitcoin ETF proposal

Despite having a Bitcoin ETF on Bermuda Stock Exchange which was the "Hashdex NASDAQ Crypto Index ETF” – a joint venture with Hashdex (a Brazil-based fund manager) and NASDAQ (an American stock exchange), many funds were struggling to get a Bitcoin ETF listed in the U.S. market.

The first Bitcoin ETF proposal was made by the Winklevoss twins – Cameron and Tyler Winklevoss, in July 1, 2013. Cameron and Tyler have been early advocates of Bitcoin and even co-founded the crypto exchange – Gemini in 2014. The name of their proposed ETF was “Winklevoss Bitcoin Trust” and was to be listed on BZX Exchange. However, the SEC rejected their first proposal in March 10, 2017. A second proposal was made which was rejected again in June 2018.

In January 28, 2019, Bitwise Asset Management filed its first proposal for a Bitcoin ETF – known as the Bitwise Bitcoin ETF Trust but was rejected by the SEC in October that same year. Another firm, Kryptoin – a company that specializes in developing blockchain-based financial products decided to test its luck by making its first Bitcoin ETF proposal in October 2019, with the proposed Kryptoin Bitcoin ETF Trust to be listed on NYSE Arca. A revised proposal was submitted in April 2021, but this time the ETF was to be listed on BZX Exchange.

This proposal was kept “under review” and faced subsequent delays from the SEC.  In June 9, the SEC made an announcement, stating that it is necessary to designate a longer period within which to take action on the proposal. The SEC finally rejected Kryptoin proposal on December that same year.

In March 2021, Fidelity Investments – an American multinational financial service corporation filed a proposal with the SEC to create its own Bitcoin ETF – “Fidelity’s Wise Origin Bitcoin Trust”. According to the proposal, Fidelity Service Company Inc. would serve as the administrator and Fidelity Digital Assets holds custody of the Bitcoin underlying the ETF. Chicago Board Options Exchange (Cboe) filed a proposal with the SEC to list Wise Origin Bitcoin Trust on May 2021, also stating that the SEC’s concerns about market manipulations have been “sufficiently mitigated”. Like most proposals filed in 2021, Fidelity’s proposal faced subsequent delay before getting rejected in January 2022.

In the same month Fidelity Investments filed their proposal for a Bitcoin ETF; another fund – Skybridge Capital submitted its proposal for a Bitcoin ETF but faced the same fate as Fidelity's.

One River Asset Management filed its proposal for a carbon-neutral Bitcoin ETF in May 2021, this proposal was created due to Bitcoin’s consensus mechanism that required large energy consumption and increased carbon footprint. One River planned to mitigate this with Moss Earth by purchasing and retiring carbon credits necessary to account for the estimated carbon emissions associated with the Bitcoins held by the Trust – the proposal was looking good. In May 2022, the SEC rejected One River proposal.

The year 2021 experienced a rush in the need to launch a Bitcoin ETF in the United States, but many proposals that were filed with the SEC were either delayed indefinitely or were rejected.

Light at the end of the tunnel

In October 2021, the first U.S listed Bitcoin Futures ETF proposal was approved, which was a leading factor for $BTC to hit an all-time high (ATH) of $69,000 in November that same year. ProShare’s Bitcoin Strategy ETF began trading on the New York Stock Exchange under the ticker BITO after receiving approval from the United States Securities and Exchange Commission. At launch, over $200 million worth of shares were traded in the first 20 minutes.

Recently the SEC accepted BlackRock’s application for a spot Bitcoin ETF which gave Bitcoin enthusiast the hope that the SEC was ready to explore Bitcoin ETFs (and also giving the crypto community a bull-run fever). An article from a Bloomberg analyst predicted that the BlackRock Bitcoin ETF could unlock $30 trillion worth of capital into the Bitcoin market. This calculation was based on the estimated amount of assets controlled by financial advisors in the United States who would want to get exposure to Bitcoin without the risk of owning an actual Bitcoin. BlackRock’s proposal prompted other firms like Fidelity, ARK Investment and Valkyrie to file theirs, among which, Valkyrie’s proposal is under review. On July 14, the SEC announced that it is also in the process of reviewing applications of various funds, these included – Wise Origin Bitcoin Trust, WisdomTree, VanEck and Invesco Galaxy.

Seeing many big firms competing to launch a Bitcoin ETF in the United States signals a progressive development for the crypto community. And with more filings to be submitted the crypto community is optimistic about the outcome in the future.