Original Title: Bitcoin Spot ETF Approaches, What is the Status of Compliant Cryptocurrency Products?

Original Source: DigiFT RESEARCH

ETF Expectations: The Awakening of the Crypto Market

As cryptocurrencies have gradually entered the mainstream over the past decade, starting with Grayscale's GBTC, the inflow of traditional market funds into the cryptocurrency market has garnered increasing attention. The recent market recovery is closely related to traditional institutions: according to CoinShares' data on cryptocurrency asset flows, since the beginning of October, there has been a continuous net inflow for more than ten weeks, except for a small sell-off in one week in December. The price of Bitcoin has also risen from around $25,000 to over $45,000.

The market generally believes that this reflects investors' expectations that the U.S. SEC will approve multiple Bitcoin spot ETFs from traditional asset management giants in January. Based on past ETF approval processes, the SEC's maximum time for final approval is 240 days. Hashdex and Ark & 21Shares, as the earliest institutions to submit Bitcoin spot ETF applications, have a deadline for SEC approval of January 10, 2024. If this Bitcoin spot ETF is approved, it is highly likely that subsequent applications from firms like BlackRock and Fidelity will also be approved.

Before the approval of Bitcoin spot ETFs in the U.S., the capital markets already had compliant channels to gain exposure to crypto assets. As early as 2013, Grayscale's GBTC was launched, allowing investors to purchase shares of the GBTC trust through traditional brokerage channels, thereby indirectly holding Bitcoin.

In recent years, Europe has seen the launch of hundreds of ETPs related to crypto assets in traditional trading markets, allowing investors in relevant regions to purchase crypto assets through traditional channels. Major asset management giants have also issued Bitcoin spot ETF products in non-U.S. capital markets, such as Fidelity's Bitcoin spot ETF FBTC, which was launched and traded on the Toronto Stock Exchange (TSX) in 2021.

There is no shortage of channels to purchase crypto assets in the market, so why is there such a focus on the U.S. Bitcoin spot ETF? What are the differences between these products and the existing compliant channels for purchasing crypto assets?

Current Status of Compliant Cryptocurrency Investment Channels

According to weekly statistics from digital asset issuer CoinShares on the capital flows of compliant cryptocurrency products in various regions around the world, the data includes products issued by major institutions that invest in crypto assets and are traded through traditional financial channels, including various ETPs (Exchange Traded Products) and trust products. This data reflects the inflow and outflow of traditional financial funds, especially institutional investor funds, into crypto assets, with the latest data as of December 31, 2023. The asset management scale by region is as follows:

The main assets invested through these channels are:

The main asset providers are:

The top five issuers by asset management scale and their product structures are as follows:

Grayscale Investments LLC

• Introduction: Grayscale Investments is a leading global cryptocurrency asset management firm headquartered in the U.S. Founded in 2013, Grayscale is a subsidiary of Digital Currency Group and launched the Bitcoin trust product GBTC in 2013.
• Main Product: Grayscale Bitcoin Trust (GBTC)
• Legal Structure: Trust (physically backed)
• Fees: 2% management fee
• Trading Platform: OTCQX
• Issuance Date: 2013.09.25 (inception date)
• Investor Requirements: Only for accredited investors and institutional investors
• Total Asset Management Scale of Issuer: 33,370 (in millions of USD, as of 2023.12.31)

CoinShares XBT

• Introduction: CoinShares is a leader in the cryptocurrency ETP industry, providing investors with convenient and reliable access to a diverse range of digital asset exchange-traded products (ETPs). CoinShares' XBTProvider was the first entity in Europe to offer compliant products that allow investors easy access to Bitcoin and Ethereum.
• Main Product: Bitcoin Tracker One (COINXBT SS)
• Legal Structure: Tracker Certificate (synthetically backed)
• Fees: 2.5% management fee
• Trading Platform: Nasdaq Stockholm
• Issuance Date: 2015.05.18
• Investor Requirements: Nordic retail investors
• Total Asset Management Scale of Issuer: 2,374 (in millions of USD, as of 2023.12.31)

21 Shares AG

• Introduction: 21Shares is the largest issuer of cryptocurrency exchange-traded products (ETPs) globally, founded in 2018 and headquartered in Zurich, Switzerland. Its products include the first physically backed Bitcoin and Ethereum exchange-traded products (ETPs).
• Main Product: 21Shares Bitcoin ETP (ABTC)
• Legal Structure: Debt-backed (physically backed)
• Fees: 1.49% management fee
• Trading Platform: Swiss Stock Exchange
• Issuance Date: 2019.2.25
• Investor Requirements: Nordic retail investors
• Total Asset Management Scale of Issuer: 2,336 (in millions of USD, as of 2023.12.31)

ProShares ETFs

• Introduction: ProShares is one of the largest ETF issuers globally, with an asset management scale exceeding $65 billion.
• Main Product: Bitcoin Strategy ETF (BITO)
• Legal Structure: Futures ETF (synthetically backed)
• Fees: 0.95%
• Trading Platform: NYSE Arca
• Issuance Date: 2021.10.18
• Investor Requirements: U.S. retail investors
• Total Asset Management Scale of Issuer: 1,846 (in millions of USD, as of 2023.12.31)

Purpose Investments Inc ETFs

• Introduction: Purpose Investments is an asset management company managing over $18 billion in assets. Purpose Investments is committed to customer-centric innovation and offers a range of managed and quantitative investment products. Purpose Investments is led by renowned entrepreneur Som Seif and is a division of the independent technology-driven financial services company Purpose Financial.
• Main Product: Purpose Bitcoin ETF (BTCC)
• Legal Structure: Spot ETF (physically backed)
• Fees: 1.00%
• Trading Platform: Toronto Stock Exchange (TSX)
• Issuance Date: 2021.2.25
• Target Investors: North American retail investors
• Total Asset Management Scale of Issuer: 1,764 (in millions of USD, as of 2023.12.31)

What are the Differences Between These Products and Spot ETFs?

Based on the legal structure of the products, compliant cryptocurrency products in the market can currently be divided into ETPs (Exchange Traded Products) and trusts. Among them, ETPs can be further divided into ETNs (exchange traded notes), ETFs (Exchange Traded Funds), and ETCs (exchange traded commodities), with crypto asset-related products primarily being ETFs and ETNs.

ETFs can provide investors with better accessibility, allowing investment in multiple assets, lower fees, and suitability for long-term investment. However, ETFs are prone to tracking errors, where the asset value within the ETF may differ from the benchmark value it is supposed to track, potentially leading to lower-than-expected returns. Additionally, ETFs have higher complexity regarding taxation, subscription and redemption processes, and liquidity.

ETNs are a type of debt structure, generally issued by financial institutions as unsecured debt instruments, where investors purchase the issuer's debt, which typically carries higher risk due to credit issues. Compared to ETF structures, ETNs generally have worse liquidity. However, the advantage of ETNs is that they can offer a more diverse range of asset types, do not have tracking error issues, and can be more flexible in terms of taxation. Among the products mentioned, the 21Shares Bitcoin ETP is a typical ETN product.

The trust structure is relatively complex and generally can only be traded in the OTC market; for example, Grayscale's GBTC trades only on OTCQX, where liquidity is lower and the number of investors is smaller, with the entire OTCQX platform achieving only $1.3 billion in daily trading volume (as of 2024.01.02). Furthermore, Grayscale GBTC, issued through a trust structure, can only be subscribed in one direction and cannot be redeemed; investors can only obtain the issued shares for trading in the secondary market after six months of subscription. This nature leads to GBTC trading at a premium during bull markets and at a discount during bearish conditions.

Furthermore, if the above products are classified based on underlying assets, they can be divided into two categories: physically backed and synthetically backed.

Physically Backed ETPs: These purchase and hold the underlying physical assets, allowing the product's share price to track the price of the underlying assets. The performance of physically backed products is directly related to the performance of the relevant assets. For example, Purpose Investment's BTCC is a spot ETF launched on the Toronto Stock Exchange, where each ETF corresponds to a certain amount of Bitcoin directly held by the ETF manager, typically held by professional custodians, such as Gemini Trust Company and Coinbase Trust Company for BTCC.

Synthetically Backed ETPs: These use swap agreements with counterparties (usually banks) to provide returns on the underlying assets. To ensure daily delivery of returns, swap counterparties typically need to deposit collateral held by independent custodians (usually government bonds or blue-chip stocks) with the issuer. The required collateral amount fluctuates with the value of the tracked assets. For example, ProShares BITO is a Bitcoin futures ETF on the New York Stock Exchange, with the fund investing in Bitcoin futures on the CME.

What Market Impact Will SEC Approval of Bitcoin Spot ETFs Have?

The various cryptocurrency financial products traded through traditional financial channels provide investors with a one-stop channel to gain exposure to crypto assets, bypassing various technical and compliance barriers that hinder direct access to cryptocurrencies like Bitcoin and Ethereum, such as private key management, taxation, and fiat currency inflows and outflows, thus attracting trillions of dollars into the cryptocurrency market.

Compared to the various products currently available in the financial market, why is the approval of Bitcoin spot ETFs by the U.S. SEC so important? There are two main reasons:

Access to Larger Capital:

• More investors. The U.S. is one of the largest financial markets, and Bitcoin spot ETFs listed on mainstream exchanges can reach accredited investors, institutional investors, and retail investors simultaneously. In contrast, trust-structured products like GBTC can only be traded in the OTC market for accredited investors, and similar Bitcoin spot ETF products traded in Europe and Canada have lower liquidity and smaller capital volumes compared to the U.S. market.
• Broader investment channels. Traditional asset management departments, such as various fund managers and financial advisors, find it difficult to incorporate crypto assets into their portfolios without Bitcoin spot ETFs.

Better Acceptance:

• Bitcoin spot ETF products issued by institutions like BlackRock and Fidelity are more likely to be accepted by mainstream capital due to the brand endorsement of these institutions.
• They address the compliance issues of crypto assets; such products will have higher compliance clarity, attracting more investment and related ecosystem development.

As the largest capital market, if Bitcoin spot ETFs are approved, it will have a significant impact on the cryptocurrency market. These impacts will not only involve broader capital inflows but will also relate to the compliance of various participants in the Bitcoin network globally and changes in Bitcoin network activities. We will continue to observe the impact of asset compliance on cryptocurrencies and look forward to crypto assets shaping a new generation of capital markets.