Ben Strack

<div id="highlights-block_623ddfe02ffb2" class="highlights">
 <ul>
 <li>The proposal to broaden the definition of an exchange could help spot bitcoin ETF approval by mid-2023, according to Bloomberg Intelligence analysts</li>
 <li>Bitwise Asset Management Chief Investment Officer Matt Hougan says there is a pathway to approve a spot bitcoin ETF without this change</li>
 </ul>
 
</div>



ETF issuers in the US continue vying to launch a fund that would invest in bitcoin directly, but Bloomberg Intelligence analysts predict one won’t be approved until crypto platforms are forced to comply with Securities and Exchange Commission (SEC) rules.



A rule change proposed by the SEC could be the key to a spot bitcoin ETF approval by the middle of 2023, Eric Balchunas and James Seyffart said in a research note published Thursday.&nbsp;



The SEC proposed to broaden the definition of an exchange in the Securities and Exchange Act of 1934 to include “systems that offer the use of non-firm trading interest and communication protocols to bring together buyers and sellers of securities,” according to a <a href="https://www.federalregister.gov/documents/2022/03/18/2022-01975/amendments-regarding-the-definition-of-exchange-and-alternative-trading-systems-atss-that-trade-us" target="_blank" rel="noreferrer noopener">January 26 filing</a>. 



“Expanding the definition of an exchange could eliminate the agency&#8217;s primary objection to the products by bringing cryptocurrency platforms under the SEC&#8217;s regulatory framework,” the Bloomberg Intelligence ETF analysts wrote.



The SEC most recently delayed its decision to rule on the proposed bitcoin ETFs by NYDIG and Global X earlier this month.



“The commission has consistently required that the listing exchange have a comprehensive surveillance-sharing agreement with a regulated market of significant size related to bitcoin, or demonstrate that other means to prevent fraudulent and manipulative acts and practices are sufficient to justify dispensing with the requisite surveillance-sharing agreement,” the SEC wrote in its March 10 decisions on the NYDIG and Global X applications. “The listing exchange has not met that requirement here.”



The SEC won’t approve a spot bitcoin ETF without new regulation or surveillance agreements between traditional and crypto exchanges, Balchunas and Seyffart explained.



“Traditional exchanges such as the NYSE would find it almost impossible to secure such accords with every exchange that offers bitcoin trading absent official regulation,” they added.&nbsp;



<blockquote class="wp-block-quote">“The proposal to broaden the definition of an exchange would force crypto platforms to comply with SEC rules, potentially satisfying the agency&#8217;s oversight concerns.”</blockquote>



The Bloomberg analysts expect the change to be finalized sometime between November 2022 and May 2023.



<h3>Fund groups weigh in&nbsp;</h3>



Leah Wald, CEO of Valkyrie Funds, said that based on her company’s interactions with regulators, it makes sense that this would be the final hurdle to overcome.



“They have said all along that they would be hesitant to put an unregulated product into a regulated fund wrapper,” she told Blockworks.



<blockquote class="wp-block-quote">“Bringing digital asset exchanges into the fold would remove that objection and likely clear the path for a spot bitcoin ETF.”</blockquote>



Wald said that while it is tough to predict when the SEC could approve such a fund, she does not expect the agency to do so before next summer.



But Matt Hougan, chief investment officer of Bitwise Asset Management, argued that while the redefinition of an exchange could have big implications, there is a pathway to approve a bitcoin ETF without this change.



The SEC&#8217;s rules do not require that the market for the underlying spot commodity be regulated and subject to surveillance agreements prior to approving an exchange-traded product (ETP), he explained. Instead, the agency requires that there is a “regulated market of significant size&#8221; that can be surveilled as a way of gaining proxy surveillance of the market as a whole.



“We and other applicants believe that the CME bitcoin futures market is a ‘regulated market of significant size,’ and believe we have demonstrated this in our applications,” Hougan told Blockworks.



<blockquote class="wp-block-quote">“I continue to think the SEC can and will approve a bitcoin ETF prior to redefining what an exchange is.”</blockquote>



Valkyrie and <a href="https://cms.blockworks.co/bitwise-tries-once-more-for-spot-bitcoin-etp/" target="_blank" rel="noreferrer noopener">Bitwise</a> are among the swathe of issuers that have not been able to get their proposed bitcoin ETPs approved. The SEC, however, has approved several ETFs investing in bitcoin futures contracts, including one from Valkyrie.



Executives at several fund groups <a href="https://cms.blockworks.co/will-bidens-executive-order-speed-up-spot-bitcoin-etf-approval/" target="_blank" rel="noreferrer noopener">recently told Blockworks</a> they thought President Biden’s <a href="https://cms.blockworks.co/whos-in-charge-of-what-breaking-down-the-crypto-executive-order/" target="_blank" rel="noreferrer noopener">executive order</a> on digital assets could be a bullish indicator for spot bitcoin ETF approval.



Grayscale Investments is trying to convert its Bitcoin Trust (GBTC) to an ETF. <a href="https://cms.blockworks.co/support-for-spot-bitcoin-etf-revs-up-as-agency-holds-course/" target="_blank" rel="noreferrer noopener">Public comments</a> have rolled in from investors and crypto companies executives, many of which supporting the move. The SEC is expected to rule on the conversion by July, after a 240-day review period.



The biggest impact of the redefinition of an exchange, if it occurs, would be on the prospects for non-bitcoin crypto ETFs, Hougan said.&nbsp;



“If Coinbase were regulated and if it could have surveillance techniques in place,” he noted, “you could build ETPs on a wide variety of crypto assets, or crypto index ETFs.



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<hr class="wp-block-separator">

Is a Change to ‘Exchange’ Definition Key to Bitcoin ETF Approval?

<div id="highlights-block_61c36e84b351b" class="highlights">
 <ul>
 <li>The ProShares Bitcoin Strategy ETF (BITO) underperformed spot bitcoin by 2.34% from its launch on Oct. 19 to Dec. 21, according to Bloomberg Intelligence Analyst James Seyffart</li>
 <li>BITO’s December inflows total roughly $50 million so far, compared to $1.2 billion in October, FactSet data shows</li>
 </ul>
 
</div>



The underperformance of the US’s first bitcoin futures ETF relative to the crypto asset’s spot price in its first two months of trading limit the types of investors interested and ultimately its asset growth, according to industry professionals.&nbsp;



But offerings that include a smaller allocation to bitcoin futures contracts could see more demand in 2022, some argued, particularly among longer-term investors.



Bloomberg Intelligence ETF Analyst James Seyffart noted in a Twitter post on Wednesday that the ProShares Bitcoin Strategy ETF (BITO) underperformed spot bitcoin by 2.34% from its launch on Oct. 19 to Dec. 21.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">The first <a href="https://twitter.com/hashtag/Bitcoin?src=hash&amp;ref_src=twsrc%5Etfw">#Bitcoin</a> futures ETF &#8212; <a href="https://twitter.com/search?q=%24BITO&amp;src=ctag&amp;ref_src=twsrc%5Etfw">$BITO</a> &#8212; is trailing spot by 2.34% with just about two months of data. Extrapolating that out: it will underperform spot by 13-14% in it&#39;s first year&#8230; <a href="https://t.co/2saAfp20u0">pic.twitter.com/2saAfp20u0</a>&mdash; James Seyffart (@JSeyff) <a href="https://twitter.com/JSeyff/status/1473652943689863173?ref_src=twsrc%5Etfw">December 22, 2021</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Extrapolated out over 12 months, Seyffart added, BITO would trail spot bitcoin by between 13 and 14% in its first year on the market.&nbsp;&nbsp;



“That’s a pretty big gap between bitcoin and your fund,” Bloomberg Intelligence ETF Analyst Eric Balchunas told Blockworks, noting that many financial advisors likely would not invest in the offering on behalf of clients. “That said, I think BITO is a great trading tool, and I think it will continue to be used for short-term exposure. It tracks great short-term, and its correlation is awesome.”



Though BITO was the first bitcoin futures ETF to launch in the US, the Valkyrie Bitcoin Strategy (BTF) launched three days later. It currently has about $55 million in assets under management, according to Valkyrie Investments’ website.



The VanEck Bitcoin Strategy ETF (XBTF) and the Global X Blockchain and Bitcoin Strategy ETF (BITS) launched in November. XBTF and BITS have $17 million and $9 million in assets, respectively.



Unlike the other three bitcoin futures products, BITS also invests in ​​US companies that directly own digital assets and may gain access to blockchain companies indirectly through ETFs.



Industry professionals <a href="https://cms.blockworks.co/a-futures-based-bitcoin-etf-could-be-suboptimal-heres-why/" target="_blank" rel="noreferrer noopener">have labeled roll costs</a> as one of several downsides to bitcoin futures ETFs. Maintaining a smaller allocation to bitcoin futures allows the firm to be “nimbler” to potentially find better value and reduce roll costs, Global X Research Analyst Matt Kunke <a href="https://cms.blockworks.co/global-x-offers-different-type-of-bitcoin-futures-etf/" target="_blank" rel="noreferrer noopener">told Blockworks last month</a>.



“I’m going to be watching it next year to see if it gets any looks,” Balchunas said of <a href="https://www.globalxetfs.com/introducing-bits-the-case-for-blockchain-equities-and-bitcoin-futures/" target="_blank" rel="noreferrer noopener">the Global X offering</a>.



<blockquote class="wp-block-quote">“BITS just seems like it’s one of those ETFs that could be palatable enough to an advisor given that small roll [cost], but at the same time have more kick than a blockchain stock ETF.”</blockquote>



<h3>Remaining demand for bitcoin futures ETF?</h3>



BITO notched inflows of more than $1.2 billion from its launch until the end of October, according to FactSet Data. Flows into the product have slowed, as they totaled $542 million in November and $50 million so far in December.&nbsp;



“Obviously it has completely plateaued, as all of the people who wanted to buy BITO have bought it basically,” Balchunas said. “Maybe those flows trickle in for the next couple months.”



Dave Nadig, CIO and director of research for ETF Trends and ETF Database, said that investors, particularly those who have invested in commodities, understand the deficiencies of futures versus spot.



“The funds really target a small Venn diagram of people who want crypto exposure on a fairly short-term basis but are unwilling or unable to access the crypto markets directly,” he told Blockworks. “I would not expect the [assets under management] to move significantly, as I suspect these funds will be trading vehicles.”



Though Nadig added he does not expect any new “plain-vanilla” bitcoin futures ETFs, other types of products, such as WisdomTree’s Enhanced Commodity Strategy Fund (GCC), could make allocations to bitcoin futures.



GCC, an actively managed ETF seeking to provide broad exposure to a diversified basket of commodities, <a href="https://cms.blockworks.co/wisdomtree-plans-to-launch-more-crypto-offerings-in-2022/" target="_blank" rel="noreferrer noopener">became the first ETF</a> to add bitcoin futures in October.



<h3>Still no spot bitcoin ETF</h3>



The US Securities and Exchange Commission (SEC) has rejected a variety of <a href="https://cms.blockworks.co/when-will-the-sec-approve-a-spot-bitcoin-etf/" target="_blank" rel="noreferrer noopener">spot bitcoin ETF proposals</a>, while regulators in Europe, Canada and other regions have allowed such products to trade.



“The SEC is unlikely to approve a spot Bitcoin ETF in 2022, we believe, leaving US investors reliant on less-efficient futures, trusts and themed equity ETFs for fund exposure,” Seyffart wrote in a Dec. 9 research note, adding that Ethereum futures ETFs could reach US exchanges before a spot bitcoin product.&nbsp;



As part of its <a href="https://cms.blockworks.co/sec-rejects-vanecks-proposed-spot-bitcoin-etf/" target="_blank" rel="noreferrer noopener">denial of VanEck’s planned spot bitcoin fund</a>, the SEC said in a letter that the Cboe BZX Exchange, on which the ETF’s shares would have traded, “has not met its burden” that the proposal meets the requirements of the Securities Exchange Act of 1934.



“The SEC cannot have been much more clear in their guidance. Any approval would be a shocking surprise,” Nadig said.



<blockquote class="wp-block-quote">“I give essentially zero odds to a pure Bitcoin ETF in 2022.”</blockquote>



Balchunas said he always expected the ProShares Bitcoin Strategy ETF to be used by traders more than long-term investors, noting that his optimism for an ETF that invests directly in bitcoin remains strong.&nbsp;



“I think a spot bitcoin ETF, and ultimately different takes on it — like a spot Ethereum, a crypto picking active ETF, a crypto basket…S&amp;P of crypto — is going to fly off the shelves,” he said, “and be the big category that we all are expecting.”



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What Does Demand For Bitcoin Futures ETFs Look Like in 2022?

<div id="highlights-block_617996312e2a3" class="highlights">
 <ul>
 <li>VanEck’s ETF will cost 65 basis points compared to the 95bps price of bitcoin futures ETF by ProShares and Valkyrie Investments</li>
 <li>ProShares being first to market was an important advantage as competitors will be facing “a long, uphill slog trying to chase down BITO,” ETF Store president says</li>
 </ul>
 
</div>



VanEck appears to be ready to bring to market its bitcoin strategy ETF after its <a href="https://www.sec.gov/ix?doc=/Archives/edgar/data/1137360/000113736021000971/ck0001137360-20201231.htm" target="_blank" rel="noreferrer noopener">latest SEC filing</a> on Wednesday, though industry watchers said demand for the offering could be muted compared to similar products that launched last week.



The launch of the VanEck Bitcoin Strategy ETF (XBTF) was slightly delayed, though the firm declined to comment on why. VanEck had <a href="https://www.sec.gov/Archives/edgar/data/0001137360/000113736021000952/vaneckbitcoinstrategyetf48.htm" target="_blank" rel="noreferrer noopener">filed a new date on </a>Tuesday, stating that the filing was expected to become effective on Wednesday.



Bloomberg Intelligence ETF Analyst Eric Balchunas said in a Twitter post that the latest filing means the ETF will likely start trading on Thursday or Friday.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">VanEck has officially &#39;gone effective&#39; (legalese for ready for launch) So good chance <a href="https://twitter.com/search?q=%24XBTF&amp;src=ctag&amp;ref_src=twsrc%5Etfw">$XBTF</a> starts trading Friday poss Thursday. Waiting on listing announcement or company to confirm tho.. <a href="https://t.co/bbFbWatnJ5">pic.twitter.com/bbFbWatnJ5</a>&mdash; Eric Balchunas (@EricBalchunas) <a href="https://twitter.com/EricBalchunas/status/1453398925373755394?ref_src=twsrc%5Etfw">October 27, 2021</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



“VanEck is excited to offer a long-awaited bitcoin exchange traded product to the U.S. market,” Ed Lopez, Head of ETF Product at VanEck, previously told Blockworks. “We were the first asset manager to file for a bitcoin futures ETF back in 2017, and we are offering what would be the most competitively priced ETF in the category when we come to market.”



A VanEck spokesperson did not immediately respond to Blockworks’ request for comment.



<h3>What will the demand be?</h3>



The fund is likely to be the third bitcoin futures ETF to launch in the US, following the launches of similar funds by ProShares and Valkyrie Investments last week.&nbsp;



The ProShares Bitcoin Strategy ETF (BITO) has <a href="https://cms.blockworks.co/proshares-bitcoin-futures-based-etf-to-begin-trading-tuesday/" target="_blank" rel="noreferrer noopener">more than $1 billion</a> in assets under management after trading for a week. Valkyrie Investments’ Bitcoin Strategy ETF (BTF) began trading on Friday, <a href="https://cms.blockworks.co/valkyries-btf-trades-10m-in-first-5-minutes/" target="_blank" rel="noreferrer noopener">trading $10 million in its first five minutes</a> on the market.



While the Valkyrie and ProShares offerings carry a fee of 95 basis points, the VanEck product will cost 65 basis points.&nbsp;



“This ETF should get some looks given its lower price point and VanEck’s reputation, but initial demand will be muted compared to the ProShares offering,” Nathan Geraci, president of The ETF Store, told Blockworks.



<blockquote class="wp-block-quote">“First mover was such an important advantage in this particular category and competitors will be facing a long, uphill slog trying to chase down BITO.”</blockquote>



Dave Nadig, CIO and director of research for ETF Trends and ETF Database, said that VanEck’s differentiator will be price, which will matter but will likely not create “a flood” of inflows.&nbsp;



“In general, later entrants will have a tougher time,” he explained. “Liquidity begets liquidity in the ETF market, especially for access-oriented products like these.”

VanEck Ready to Launch Delayed Bitcoin Futures ETF

<div id="highlights-block_61795c02435e3" class="highlights">
 <ul>
 <li>Fund would provide an easily accessible way for investors to hedge their bitcoin position without selling, Brinker Capital senior portfolio manager says</li>
 <li>A similar fund that launched on the Toronto Stock Exchange in April has about $11 million (CAD) in net assets</li>
 </ul>
 
</div>



Fund group Direxion is seeking to launch an offering that would allow investors to systematically short bitcoin futures just days after the first bitcoin futures ETFs in the US hit the market.



The Direxion Bitcoin Strategy Bear ETF offers managed short exposure to CME bitcoin futures contracts, according to <a href="https://www.sec.gov/Archives/edgar/data/1424958/000119312521308123/d248159d485apos.htm" target="_blank" rel="noreferrer noopener">an SEC disclosure</a> filed Tuesday evening. It does not invest directly in bitcoin. The filing does not indicate a ticker or expense ratio for the planned offering.



“The fund will generally maintain its short exposure to bitcoin futures during periods in which the value of bitcoin is flat or declining as well as during periods in which the value of bitcoin is rising,” the document states.



The proposed fund may also short an ETF that invests in bitcoin futures and is expected to hold money market funds, deposit accounts with institutions with high-quality credit ratings, and short-term debt instruments, including US government securities and repurchase agreements.



New York-based Direxion has 79 ETFs trading in the US with combined assets of nearly $28 billion, <a href="https://www.etf.com/channels/direxion-etfs" target="_blank" rel="noreferrer noopener">according to ETF.com</a>. A spokesperson for the firm did not immediately return Blockworks’ request for comment. 



The filing comes after ProShares and Valkyrie Investments launched ETFs that would invest primarily in bitcoin futures contracts — the first of their kind in the US.&nbsp;



The ProShares Bitcoin Strategy ETF (BITO) has <a href="https://cms.blockworks.co/proshares-bitcoin-futures-based-etf-to-begin-trading-tuesday/" target="_blank" rel="noreferrer noopener">more than $1 billion</a> in assets under management after trading for a week. Valkyrie Investments’ Bitcoin Strategy ETF (BTF) also debuted last week, <a href="https://cms.blockworks.co/valkyries-btf-trades-10m-in-first-5-minutes/" target="_blank" rel="noreferrer noopener">trading $10 million in its first five minutes</a> on the market.



Valkyrie also <a href="https://cms.blockworks.co/valkyrie-files-for-leveraged-bitcoin-futures-etf/" target="_blank" rel="noreferrer noopener">filed on Tuesday</a> to launch a leveraged ETF that would provide 1.25x exposure to the bitcoin reference rate.



While early demand for long bitcoin futures ETFs has been strong, there is likely demand on the other side as well, according to Grant Engelbart, senior portfolio manager at Brinker Capital.



<blockquote class="wp-block-quote">“Direxion is also likely taking advantage of the recent approvals with a product that is similar but different and arguably important to the marketplace,” he told Blockworks. “There is also a potential to take advantage of the steeply contangoed bitcoin futures curve.”</blockquote>



The Direxion fund would be similar to one already trading in Canada: Horizons ETFs Management’s <a href="https://www.horizonsetfs.com/ETF/BITI" target="_blank" rel="noreferrer noopener">BetaPro Inverse Bitcoin ETF (BITI)</a>. That fund launched on the Toronto Stock Exchange in April and has about $11 million (CAD) in net assets.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">They have a -1x bitcoin futures ETF in Canada called <a href="https://twitter.com/search?q=%24BITI&amp;src=ctag&amp;ref_src=twsrc%5Etfw">$BITI</a> and while its gotten pretty wrecked, when it works it WORKS (as bitcoin tends to sells off fast), here it is up 52% in 6 wks flat earlier this yr. Thus, this ETF will prob find an audience (of vol-seeking traders) <a href="https://t.co/mtRElkw1cv">pic.twitter.com/mtRElkw1cv</a>&mdash; Eric Balchunas (@EricBalchunas) <a href="https://twitter.com/EricBalchunas/status/1453112630160277509?ref_src=twsrc%5Etfw">October 26, 2021</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Engelbart said he believes the proposed Direxion fund would see adequate demand split between active traders and short-to-intermediate-term investors, noting that there will be people who feel bitcoin is overvalued that will want to systematically short.&nbsp;



“While many people hold bitcoin in some fashion, there is not an easy way to play the other side of the market outside of futures, which have limited retail accessibility,” he explained. “There are many cryptocurrency investors that are sitting on large gains, and this tool provides a vehicle to hedge their position without selling that’s easily accessible.”