Why crypto ETFs may not be for everyone

Investors tempted to utilise ETFs to access the cryptocurrency market are not necessarily getting what they might expect. The advice is timeless ... only invest what you can afford to lose.
Why crypto ETFs may not be for everyone

With cryptocurrencies like Bitcoin and Ethereum hitting fresh highs and new investors being drawn in via exchange traded funds (ETFs), there seems no end in sight to the frenzy for these hard-to-gauge assets.

A top ETF promoter in Asia, speaking anonymously, told AsianInvestor that some investors now believe Bitcoin (BTC) is at a point where it could be considered a tactical portfolio asset or used for pure alpha generation.

The question remains, however, whether an ETF is an appropriate vehicle for playing the crypto game.

In October, the US Securities and Exchange Commission approved the first US Bitcoin-linked ETF. Investors poured more than $1 billion into the ProShares Bitcoin Strategy fund, boosting cryptocurrencies across the board.

Despite this, the market remains a mystery to many and the massive fluctuations in value that can occur in a short time span remain a trap for the unwary, analysts agree.

This week, a popular cryptocurrency named after the TV show Squid Game collapsed from a high of $2,800 as the currency’s anonymous creators pulled $3.3 million out, leaving ordinary investors with nothing.

Conduits for crypto

Hong Kong-based family officer investor Timothy Tsui is a fan of BTC and told AsianInvestor: “For those who are too afraid to hold BTC outright, or whose investment mandate does not allow them to hold cryptocurrency, I think ETFs are a great way to get exposure to crypto.”

“We have definitely seen an increase in demand for these products and we expect interest from APAC-based investors to increase for BTC and other crypto asset ETFs,” Viktor Ostebo, head of institutional trading at Singapore-based Flow Traders Asia told AsianInvestor.

“We are also seeing more in this space for the region, for example the BetaShares Crypto Innovators ETF expected to launch in the coming days.”

Better pathways

But Aleksey Mironenko, managing director at Hong Kong advisory firm Leo Wealth believes there may be other, more appropriate routes.

Aleksey Mironenko, Leo Wealth

“These ETFs will have large premiums and discounts to the actual values of whatever cryptocurrency they invest in, because they do so through futures, not through holding the cryptocurrency directly.

Futures correlate strongly to their underlying asset, but can trade rich or cheap, he said.

For example, over the past five months, BTC futures in the US have been as cheap as -1.6% vs BTC and as rich as +5.6%, he said, adding that while they were a proxy, they were not the same as owning Bitcoin directly, either through an ETF that physically holds Bitcoin or through a brokerage.

There is no risk in the investment vehicles themselves, since they trade on regulated exchanges and liquidity is provided by firms who fully comply with regular KYC/AML procedures. The added risk comes from any futures component.

“Taking on the added risk of some crypto ETFs and the relatively high fees are not necessary to access cryptocurrency these days, especially for non-US investors," said Mironenko.

“Even in the US, Interactive Brokers recently offered a way to trade Bitcoin directly, with transaction fees of 0.2%, compared to the annual charges of 0.95% on the new ETFs,” he said.

Game changer?

Asked whether these crypto ETFs were a real game changer for investors who have been wary of the volatility of investing directly in Bitcoin, the anonymous fund promoter said crypto exchange traded products (ETPs) track Bitcoin or Bitcoin futures, so their performance and volatility should be closely matching those of Bitcoin.

“Therefore, they don’t help with concerns on volatility or risk of cryptocurrencies. However, like all ETPs, they provide a different and potentially convenient way to access the cryptocurrency for certain categories of investor.”

Index providers are also responding to the crypto craze, providing investors with ways to monitor the growth of the digital assets ecosystem.

This week, FTSE introduced a digital asset index series, but with an indication that this is not like regular indexing. Their product statement says, “Unlike stocks and bonds, digital assets, as a new and unregulated asset class, require that even the most fundamental of index development needs - price data - had to be more fully understood and trusted."

Uncharted waters

It's clear these service providers, like the traditional banks and asset managers, are all in uncharted territory, relying on partnerships with new fintechs to maintain market coverage and bring crypto to the wider market.

Mironenko predicts that in due course "traditional investors will be excited by being able to buy (a cryptocurrency) ETF from Fidelity, Vanguard and other more traditional brokers. In addition, where these ETFs really matter is in bringing closer a direct physical ownership Bitcoin ETF which, after some competition, will probably end up with fees of sub 0.2% as well."

Ostebo added: “Bitcoin strategy ETFs are suitable for investors seeking exposure to the entire digital assets ecosystem. However, those seeking exposure to a specific coin price should seek an alternative investment method.”

Meanwhile, Tsui’s advice for any investor looking to gain some confidence at investing in this new asset class is to only invest what you can afford to lose. He acknowledges that crypto asset prices can be highly volatile, but that of course is part of the attraction on the upside.

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