Green light for Bitcoin-based ETFs a game changer

The sign-off by the US market regulator is expected to lead to ASX-listed bitcoin ETFs, making the asset class accessible to traditional investors.

Australian investors hope a US-style spot bitcoin ETF will be launched this year. Picture: AFP

The US Securities and Exchange Commission this week approved the launch of the first spot bitcoin exchange-traded fund.

SEC chair Gary Gensler said the approval didn’t equate to an endorsement of bitcoin, which he said was “a speculative, volatile asset”.

Still, bitcoin believers say the new funds will bring tens of billions of dollars into digital assets, as financial advisers and other institutional investors for the first time get access to the largest crypto offering inside a familiar wrapper.

For retail investors, the new ETFs could make buying bitcoin easier, cheaper and safer – in some ways. Bitcoin at about $US46,475 is up about 12 per cent this year to date and 168 per cent in US dollars.

As the ETFs launch, here’s what investors need to know.

Approving the ETFs to come to market was a two-step process. First, the SEC authorised exchanges such as the New York Stock Exchange and Nasdaq to list the ETF shares. Soon after, the SEC approved the prospectuses submitted by each issuer. With those sign-offs in place, most if not all the funds could start trading within days.

Australian investors are hoping a US-style spot bitcoin ETF will be launched later this year. The ASX is understood to be reviewing an application for an ETF from Brisbane-based Monochrome Asset Management. Betashares, the Sydney-based ETF house, is also expected to apply to launch a fund.

With about a dozen issuers seeking to launch spot bitcoin ETFs at the same time, investors always knew the fee competition would be fierce. But the bitcoin ETF race has exceeded expectations.

The lowest fee appearing in a fund prospectus so far comes from Bitwise Asset Management, which says it will charge a 0.2 per cent annual expense ratio for its fund. A fund sponsored by ARK Invest and 21Shares will have a 0.21 per cent fee, while VanEck, BlackRock and Fidelity come in at 0.25 per cent.

In addition, some issuers including Bitwise, ARK/21Shares, and Invesco plan to waive their fees completely for six months for the first $US1bn-$US5bn in assets under management.

The most expensive fund for now appears to be the Grayscale bitcoin trust, which is already trading but plans to convert into an ETF.

Right now, the Greyscale fund, which has an expense ratio of 2 per cent, trades like a closed-end trust with a price that deviates from that of its assets. Grayscale in a filing said that when the $US27bn fund converts, it plans to charge a 1.5 per cent annual fee. For traders moving into and out of bitcoin rapidly, Grayscale’s fund might still be a good option, since its high asset level will probably make it more liquid and with tighter bid-ask spreads out of the gate.

All of the funds could change their fees before or soon after launch, and some of the issuers have already reduced their fees in filings even before their debut.

The main advantages of a bitcoin ETF over holding actual bitcoin are cost and convenience.

Small investors on many trading platforms buying bitcoin sometimes have to pay fees and spreads that exceed 1 per cent of their purchase. Since many stock platforms including Robinhood and Fidelity have zero commission trades, buying a bitcoin ETF can be much cheaper.

In addition, using an ETF is more convenient for many investors. Rather than having to open a separate account on Coinbase to specifically buy bitcoin, an investor can keep his or her bitcoin holdings in the same account as other holdings. They don’t have to worry about losing passwords or fraud that in the crypto world has often resulted in the permanent loss of investments.

The ETFs can probably be held in retirement accounts for investors worried about capital gains taxes. Of course, any capital losses in retirement accounts won’t help their tax bills either. Similarly, ETFs can be held in Australian self-managed superannuation funds.

The issues with holding bitcoin in separate accounts have been serious enough to scare away many institutional investors and financial advisers. Now the funds are betting that the creation of bitcoin ETFs will bring in billions of dollars in new capital.

Barrons