Impact of tokenised ETFs on the cryptocurrency market: New Horizons

Tokenised exchange-traded funds (ETFs) and their impact on the cryptocurrency market

You may have heard that spot bitcoin ETFs have shaken up the market. Their approval in the U.S. earlier this year changed bitcoin’s cyclicality (!). It started to rise without waiting for a halving in April, which would have been natural according to established market cycles.

Cryptocurrency ETFs have served as a bridge between stable traditional financial instruments and the volatile world of cryptocurrencies. They combine the flexibility and potential of digital assets with the liquidity and familiarity of traditional equities. That’s why they have been in such high demand, and new investors unfamiliar with the digital asset market have rushed in en masse to join the ranks of cryptocurrency enthusiasts.

Let’s understand what cryptocurrency ETFs are in detail.

What are Cryptocurrency ETFs?

A cryptocurrency ETF (exchange-traded fund) is a type of mutual fund that tracks the value of one or more digital assets. Its shares are traded on traditional stock exchanges and are available to a wide range of investors. Anyone can buy or sell shares of a tokenized ETF. In this way, an investor invests in a cryptocurrency without becoming its direct owner. Such investment funds can track multiple tokens (bitcoin, ethereum and others) or specialize in one cryptocurrency. The value of shares in such funds changes depending on the changes in the value of the underlying digital asset. This allows investors to make a profit.

Cryptocurrency ETFs offer a way to earn money on a digital asset without having to store it. An investor does not need to understand the nuances of private keys, cryptocurrencies and secure storage. They simply buy a familiar product in the form of shares on a traditional exchange-traded platform. Moreover, unlike cryptocurrencies, the purchase of shares in such investment funds is regulated by law. Investors are attracted by the fact that they can make their investments in compliance with all legal requirements by simply buying shares in a cryptocurrency fund. Thus, such cryptocurrency funds offer new investment opportunities: it is possible to invest in digital assets without all the risks associated with direct ownership.

The cryptocurrency is purchased by the fund, which remains its direct owner. The Fund may hold securities, commodities and precious metals. The U.S. Securities and Exchange Commission has recognized BTC as a commodity (the issue of ETH and other cryptocurrencies is still under discussion), accordingly, Bitcoin ETFs track the value of the commodity that is the collateral of such funds.

Advantages of ETFs

Easier access to cryptocurrencies. New investors attracted to ETFs want to invest in cryptocurrencies but don’t know how. This financial tool allows them to benefit from digital assets without the need for specialized knowledge of market forecasts or the need to comply with the custody and administration requirements of individual cryptocurrencies.

Ease of management. Investors buy shares that are managed by fund professionals.

Portfolio diversification. ETFs are integrated into the traditional financial systеm, and investors have the opportunity to diversify their equity portfolio through familiar stock exchange platforms or with the help of a professional manager.

Asset liquidity. ETFs are traded on major traditional exchanges, ensuring that they can be bought and sold at any time. Stable supply and demand is also maintained by liquidity providers (market makers).

Regulatory compliance. ETFs are fully compliant with the regulatory framework governing financial activities.

Reduced market volatility. ETFs offset the volatility inherent in the cryptocurrency market with the stability of traditional investment vehicles.

Security. Digital assets are held securely by fund professionals.

Risks of Cryptocurrency ETFs

High fees. Investment returns may be significantly reduced due to high fund management fees.

Volatility. Despite the fact that a more stable investment strategy model is implemented, the value of the shares will still fluctuate in line with the market, albeit in a smoothed form.

Regulatory risks in individual countries. Not all countries have legal regulations that ensure the availability and profitability of this type of investment. Specialized advice should be sought in each jurisdiction.

Counterparty risk. Despite the fact that the structure of cryptocurrency funds of this type essentially guarantees protection against the bankruptcy of suppliers, there remains a small degree of counterparty risk. These could inсlude operational disruptions, management changes or liquidation risks that could potentially alter the investment strategy or performance of the fund.

Lack of practicality. When investing in an ETF, the investor does not actually own the digital asset. This means that they cannot take advantage of the full potential of the coin, except for its profitability.

What is the difference between traditional and cryptocurrency ETFs?

It is insignificant, as cryptocurrency ETFs were launched similarly to traditional stock funds. Both traditional and cryptocurrency funds track the prices of the underlying assets. As cryptocurrencies are beginning to be equated with a commodity by the SEC, cryptocurrency ETFs track them as a commodity.

Both ETFs are traded on exchanges. In both cases, the investor does not own the asset directly.

The main differences can be seen as follows:

Digital assets, being more volatile, are more difficult to manage and the fund has a greater burden in risk management.

The legal framework for cryptocurrency funds is still evolving and needs to be finalized.

The storage of cryptocurrencies must meet certain technical requirements that must be observed. To protect against hacking and hacker attacks, special cold storage facilities are used or funds use the services of third parties.

Historical and Geographical Context

The first application for a bitcoin ETF was received by the US Securities and Exchange Commission (SEC) in 2013. It was filed by the Winklevoss twin brothers, athletes and entrepreneurs who became famous in the crypto world after buying about 1% of the total supply of BTC for $11 million that same year.

Over the next decade, the SEC rejected dozens of applications, citing the market’s volatility, questionable liquidity and high risk of manipulation.

The first US bitcoin ETF was approved on the evening of January 10. At that time, all 11 applications under review by the SEC were approved. Trading was scheduled for the following morning, January 11th.

In Europe, the first spot bitcoin ETP was approved on August 15, 2023. This is not exactly a standard ETF, but rather products based on bitcoin and bonds backed by ETNs listed on European exchanges.

Canada was the first country in the world to launch a Bitcoin ETF. Purpose The Bitcoin ETF was launched on February 21, 2021 following approval by the Ontario Securities Commission. Subsequently, other bitcoin funds (Evolve Bitcoin ETF and CI Galaxy Bitcoin ETF) were also registered.

The second was Brazil — the first bitcoin ETF in Latin America was approved in April 2021 and launched on the Brazilian Securities Exchange. Interestingly, Brazil has long had ETFs based on altcoins: in 2022, the country launched an ETF based on DeFi token indices.

Various ETF derivatives are also available in different countries around the world. One of the most famous is ProShares’ Bitcoin Strategy ETF (BITO), which was listed on the New York Stock Exchange in 2021.

The Future of Finance Fund (GFOF), managed by Grayscale, is listed on European exchanges. The ETF includes stocks of public companies specializing in blockchain technologies, cryptocurrencies and asset tokenization.

Commissions. What are the costs to the investor?

Some issuers, in an effort to attract as many clients as possible, offer zero commissions for a period of time. These are most likely funds that are trying to reach a certain level of assets.

In general, commissions vary in the range of 0.5-1.5% per annum. This is a management fee that is usually charged on the total amount of assets under management.

For short-term traders, these costs are usually not important. They are more concerned with the availability of technical trading tools that are provided to them. The situation is different for long-term investors. For them, the size of the commission can be a factor in deciding on a particular ETF. After all, these management costs can have a very significant impact on overall returns over the long term.

One of the most expensive is the Grayscale Bitcoin Trust (GBTC), which is not even thinking of lowering the bar for the amount of commissions. Its fee is 1.5% per year. For comparison, BlackRock’s iShares Bitcoin Trust (IBIT) charges 0.12% for the first $5 billion of crypto assets during the first year, then 0.25%.

In the context of this issue, it is also interesting that ETF managers, professionals working in the field of TradFi, are now interested in living and developing cryptocurrencies. Receiving large commissions from the growing bitcoin, they are definitely revising their attitude to the world of decentralized finance. That is, they no longer see cryptocurrencies in opposition to the traditional financial systеm, but on the contrary, in symbiosis and cooperation.

Cryptocurrency ETF Client Structure

After the triumphant approval of 11 spot bitcoin ETFs by the SEC in January this year, the market held its breath waiting for a massive influx of funds from institutional investors. However, this did not happen. Nine months later, analytical data shows that their participation has been minimal. The amount of accumulated BTCs in the funds’ balances has not changed significantly: it was 850,000, now it is 1,050,000. The difference is only 200,000 BTC.

According to analysts, 85% of investors in the ETF segment are not institutional investors. The vast majority are small retail investors making transactions in the modest range of $11,000 to $16,000.

Retail interest has also been fueled by active promotion of ETFs in the U.S. media. Outlook

Given the high level of investor interest and the interest in cryptocurrency ETF funds themselves, there is no reason to believe that the segment has no future. Their widespread acceptance, the continuation of the Bitcoin ETF and Ethereum ETF campaigns show a positive trend. Now the market expects the approval of Solana ETF and then other altcoins.

Investors are ready to diversify their portfolios with new products, enter a new market with minimal risks and make a profit. If cryptocurrencies are recognized as an asset class, this will further stimulate and activate the process. As the regulatory environment evolves, cryptocurrency ETFs will be able to present themselves as a standard investment product.

So their prospects are promising.

Thank you for reading our article. Invest safely and profitably!

AnyExchange is an international cryptocurrency exchanger that has been successfully operating in the financial market for over five years. On our platform you can exchange the most popular cryptocurrencies at the most favorable exchange rate. We conduct transactions with both electronic and cash money. The site offers money transfers all over the world.