06.16.21
Advisors Confront Expanding Crypto Maze
by: Rich Blake
Cryptocurrency, in case you haven’t noticed, has arrived.
Investment products tied to digital assets—Bitcoin, of course, being the best known—keep popping up.
Get used to it.
Regulators right now are weighing numerous prospectus proposals, and a decision on whether to grant a green light to the first-ever Bitcoin (BTC) exchange-traded fund (ETF) is expected imminently.
Compared to, say, equity mutual funds, crypto funds comprise a small bucket—for now.
But it’s relatively complicated menu of offerings, and one that many financial advisors are, at some point, going to have to get their heads around—especially if crypto’s gaudy returns keep making headlines.
Plus, even if there is a major correction, some investors could see it as a long-term buying opportunity.
Some existing products are structured as private funds. Some trade in over-the-counter (OTC) markets. There are products that involve exposure to crypto via futures tied to BTC’s spot market price (available on exchanges such as Coinbase and Kraken); other crypto-themed funds are publicly traded vehicles that obtain exposure to the burgeoning asset class indirectly, i.e., they buy publicly traded stocks of companies connected with the blockchain industry, or of those, like MicroStrategy, that hold BTC on their balance sheets.
Here's a summary of what's happening in this space, touching on some products that are already on the market and flagging some that are coming up around the bend. All of this assumes that investors, hesitant to own crypto directly, are going to be looking for professional guidance.
A Big Bank Goes All In
This past March, in a landmark move for a major U.S. bank, Morgan Stanley began offering wealthy clients exposure to BTC via a series of private limited partnerships.
One of them, a Delaware-domiciled pooled investment fund—that is not subject to the Investment Company Act of 1940—was jointly created by NYDIG and FS Investments, with Morgan Stanley in the role of private issuer.
Not long after its launch, the FS NYDIG Select Bitcoin Fund LP had garnered nearly $30 million.
ETF Issuers Play Waiting Game
New York-based fund manager VanEck has, for years, attempted to come to market with an ETF that tracks the price of BTC.
Who hasn’t been tracking BTC’s price? It has been as buzzed-about—and as volatile—as any asset can get, digital, physical or otherwise.
As of mid-June, BTC traded in spot markets (24 hours, 7 days a week) at $40,000, roughly 40% off the all-time high price of about $65,000 reached in mid-April.
One year ago at this time, BTC was below $10,000.
The Securities and Exchange Commission is soon expected to hand down its verdict on whether VanEck will be able to launch a pure-play BTC fund that would trade on the Cboe BZK exchange.
Back in late April, the SEC delayed its deliberations on the VanEck product offering for 45 days, so, at that point, industry members marked the middle of June on calendars.
Additionally, the SEC is weighing BTC-tied ETF applications from WisdomTree and Kryptoin. (A decision on the latter’s proposed fund was just formally delayed until July).
Northern Exposure
In February, Canadian regulators gave their blessing to the first-ever North American ETF directly tied to the price of BTC. Within one month, that vehicle, Purpose Investments' Purpose Bitcoin ETF, reached $1 billion. The Canadian greenlight, coupled with the recent installment of an ostensibly crypto-friendly Gary Gensler as SEC chairman, was, in tandem, taken as a sign that the dawning of the era of publicly traded, pure-play crypto funds indeed was close at hand.
But because of the delays, and controversy surrounding crypto’s role in cyber attacks decisions, some industry members are now speculating that if there are any floodgates to open it’ll more likely happen in 2022 or 2023.
Crypto-Themed ETFs Already Here
The Amplify Transformational Data Sharing ETF (ticker: BLOK) trades on the NYSE Arca and, while not directly invested in crypto, does invest in the stocks of 45 companies that are considered well-positioned to benefit from blockchain. Its top holdings are Microstrategy, PayPal and Square.
BLOK is similar to the Bitwise Crypto Industry Innovators ETF (ticker: BITQ) noteworthy for being the first ETF in the U.S. to be allowed by the SEC to use "crypto" in its name.
Major Manager Enters Fray
Invesco recently filed to launch an ETF that will, similarly, invest in companies in the crypto space, as well as up to 10% in BTC futures.
The Invesco fund would seek to track the Alerian Galaxy Global Cryptocurrency-Focused Blockchain Index. The index is composed of: stocks of digital asset companies (85%); cryptocurrency futures (10%); and exchange-traded products and OTC private investment trusts, such as Grayscale's (5%).
James Seyffart, an ETF research analyst at Bloomberg Intelligence, told Blockworks that Invesco likely does not believe the SEC will greenlight a crypto ETF anytime soon.
OTC-Traded Trust Funds
Osprey Funds CEO Greg King recently told CNBC that his firm plans to convert Osprey’s Bitcoin Trust (OBTC) to an ETF when the regulatory picture becomes clearer.
With $160 million in assets under management, OBTC is one of two publicly traded, via the OTC market, trust vehicles that offer investors exposure to BTC. Grayscale Bitcoin Trust (GBTC) is the other. It is the 800-pound gorilla in the trust vehicle realm, with about $30 billion in assets under management.
Controversially, GBTC carries a hefty 2% management fee. Osprey, by contrast, has a fee of 0.49%.
Game Changer?
Customers of some U.S. banks will soon be able to buy, hold and sell BTC through their existing accounts. That’s because crypto custody firm NYDIG has partnered with Fidelity National Information Services in an effort to enable U.S. banks to offer BTC.
NYDIG is talks with some of the biggest U.S. banks.
Banks are seeking BTC access because the data is in and it clearly screams out a trend that can’t be shrugged off—customers are shifting more of their “regular” money to crypto exchanges.