A decade ago, the term ‘cryptocurrency’ was virtually unheard of. Since then, it has gained immense popularity and recognition. The massive appreciation in cryptocurrency valuations has drawn the attention of investors across the globe. Bitcoin, the pioneering cryptocurrency, remains the most popular but is now part of a continuously expanding list of cryptocurrencies. Although universal acceptance remains a challenge, it was only a matter a time until mainstream investors sought to participate in this new asset class.
Access to Crypto
On the back of rising investor demand, 2021 has witnessed the emergence of exchange-traded funds in the cryptocurrency space. Before getting to know the ETF product offerings, it is important to note that all ‘crypto-ETFs’ are not made equal. The mere mention of crypto in the nomenclature does not provide a clear-cut understanding of the underlying investment.
For now, there are no ETFs tracking actual cryptocurrency prices. There are currently two ways in which investors can take on crypto-related exposure via ETFs:
- An ETF that is linked to the futures contract of the underlying as a proxy for the physical price of the asset;
- An ETF holding the equity of listed companies in the cryptocurrency space
In Australia, BetaShares recently launched BetaShares Crypto Innovators ETF (CRYP). This product would belong to the second type from the above list. CRYP tracks the Bitwise Crypto Innovators Index, which comprises equity exposure of listed companies operating in the cryptocurrency ecosystem; the index has 32 constituents as of 31 Oct 2021. Among the largest holding, Galaxy Digital, is a merchant bank that provides financial solutions across a spectrum of digital assets. Marathon Digital is a leading Bitcoin mining company, while Coinbase is one of the largest cryptocurrency exchanges in the United States. The key takeaway for an inquisitive investor is that the ETF does not provide ‘true’ cryptocurrency exposure.
The price movements in cryptocurrencies are not directly translated into the share price movement of the underlying companies and could often move in opposite directions. Plain and simple, the ETF is a thematic equity investment in the digital-asset environment.
Why a Crypto ETF?
One of the key reasons for the slowness in acceptance of cryptocurrency has been the intricacies involved in setting up a ‘crypto wallet’ to store the assets. A crypto wallet is a software or device that allows the storage and transfer of cryptocurrency. Establishing the prerequisite conditions requires considerable technical know-how and is not everyone’s cup of tea. Also, the secure maintenance of such a complex arrangement could be a matter of concern for the uninitiated.
The ETF route is far more widely accepted and understood by investors. The familiarity and convenience of ETF investing provides access to larger pool of investors.
The regulatory landscape
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The US Securities and Exchange Commission is handling the cryptocurrency situation with caution. Although the launch of exchange-traded products linked to the price of Bitcoin futures contracts has been approved, the SEC’s current stance has been to not allow trading of products directly linked to cryptocurrency prices. The primary concern seems to be the lack of regulatory oversight over the exchanges, which could lead to price manipulation amongst other things.
Up until recently, the Australian Securities and Investments Commission had an unclear stance around the regulatory requirements for undertaking cryptocurrency transactions. However, after having updated new mandates regarding suitability of crypto assets, prevention of misrepresentation, and transparent pricing mechanisms, ASIC has given a green light to the inception of new ETPs linked to the crypto space. ASIC, at this point, has provided guidance regarding the holding of crypto assets in managed investment schemes but is yet to approve any product. Hence, currently the BetaShares ETF is the closest that many investors can get to crypto exposure.
A great deal of discussion is bubbling around the driving factors for the asset growth in cryptocurrency investments, and one will find opinion pieces across the spectrum. For a person holding cryptocurrency unwaveringly over the past few years, the holding returns in the popular cryptocurrencies have been almost too good to be true. However, the intermittent volatility is not for the faint-hearted. The lofty peaks and dire lows within a short span of time can skew one’s portfolio sharply, and even the most hardened investors will find it difficult to keep their asset-allocation decisions in check during the capricious phases. Thus, it should be noted that one must be starkly aware of the risk that accompanies these investments.