Cryptocurrency ETFs have attracted so little investment there are doubts about their viability

Six months after a much-hyped launch, Australia’s listed cryptocurrency funds have attracted so little money that senior figures in the sector are openly questioning their viability.

Earlier this year, the market regulators finally allowed three separate funds – all of them Exchange Traded Funds – to float locally, offering direct crypto assets. They were the Cosmos Purpose Bitcoin Access ETF along with two funds from ETF Securities – the 21 Shares Bitcoin fund and the 21 Shares Ethereum fund.

Crypto enthusiasm had reached fever pitch when Bitcoin hit more than $US45,000 in April last year, triggering claims the new crypto ETF sector would quickly be worth $1 billion. (Bitcoin is currently worth about $US22,400).

Today, the combined market capitalisation of all three funds is less than $10m. The Cosmos fund which hit the headlines as an early winner in the race to list is now valued at the grand total of about $1m.

With such paltry sums of money flowing into the funds, it is becoming clear the sector is not economic; the industry standard minimum assets in an ETF is about $25m.

Global operators such as Vanguard have an in-house rule of $100m for an ETF to be viable.

Chris Brycki, chief executive of ETF specialist robo-advice group Stockspot, says: “This group of funds just got hit with disastrous timing. They missed the peak.

“With the amounts of money we see in these funds now, they would be costing a lot to run. They could have costs that are equal to a substantial portion of their overall value. They just would not be paying for themselves.”

Some investors are puzzled why there was ever a need to offer ETFs based on cryptocurrency, particularly when any investor could simply buy Bitcoin, Ethereum or its cousins on the open market. But fund managers had hoped to attract a wider range of investors by offering crypto through the regulated framework of an ETF.

ETF Securities head of distribution Kanish Chugh says “it took us five years to get these ETFs approved and we have no intention of closing them or turning our backs on them now”.

Chugh blames high regulatory fees and related legal hurdles for the small amount of money collected by the funds to date.

Certainly the ETFs have not been widely picked up by all institutional players; For example, the ETF Securities crypto ETFs are offered by CommSec but they are not offered by NAB Trade.

Financial advisers cannot offer advice on crypto currency but they can advise on listed securities such as Exchange Traded Funds.

The launch of listed ETFs meant that advisers could “fit” crypto on their product menus and work inside the regulatory framework.

The merit of the crypto ETF was meant to be that retail investors did not have to go outside of their comfort zone and create digital wallets or deal with specialist crypto exchanges in order to trade

A recent report from the Australian Securities and Investments Commission suggested 40 per cent of Australian investors hold crypto.

“This suggests local investor are just not using ETFs for crypto, they are going direct and buying the coins from specialist exchanges,” Brycki says.

Some of the major players in the ETF industry are uncomfortable with ETF funds being linked with highly speculative investments.

In the US, a collection of top funds including Blackrock, Fidelity, Invesco and StateStreet have lobbied Wall Street regulators to “support more consistent identifications” among ETFs.

In Australia, a number of top ETF providers, such as Vanguard, have backed a similar proposal which aims to clarify “labelling” issues in the sector, whereby products as diverse as crypto funds and plain vanilla ETFs are currently lumped together.

ASIC has been reviewing the proposal for some months. It was submitted by the Financial Services Council and aims to clearly categorise traditional passive ETFs from active products. It is understood the plan would block some funds from being categorised as ETFs if they were deemed too risky for retail investors.