The Trajectory Of Crypto ETFs So Far

In recent decades, there have been technological revolutions driven by the internet that have re-shaped industries, societies, and behaviors. In fact, there has been a compound annual growth rate (CAGR) of 24.3% in smartphone adoption, 13% in social media adoption, and 10.9% in industrial robots. These figures show that technological adoption has been fast and diverse since 2009. 

That disruption has spread to the finance industry as well. And two of the biggest financial innovations of the past few decades—ETFs and cryptocurrency—may soon come together. Similar to ETFs that offer exposure to traditional companies, blockchain ETFs such as the Amplify Transformational Data Sharing ETF BLOK offer exposure to companies that are a part of or are connected to the cryptocurrency market. These instruments, however, only offer indirect exposure to cryptocurrencies. Once approved, cryptocurrency ETFs would have the power to allow direct investments in the core digital assets, allowing more control and accessibility for investors. 

Traditional ETFs Vs Cryptocurrency ETFs 

To understand how a digital currency ETF works, let us visualize a bunch of top cryptocurrencies and their price behavior over a period of time. A cryptocurrency ETF would theoretically track these cryptocurrencies on an exchange. 

The U.S. ETF market reached 1,988 products and $3.4 trillion in assets in 2019, making it the largest ETF market in the world. In comparison, only a dozen crypto ETFs products are currently available, though none have been approved by U.S. regulators. However some believe that a Bitcoin ETF stands a chance of gaining regulatory approval in 2021.

Crypto ETFs: A Game of Benefits and Risks

Amplifying Returns with Leveraged Crypto ETFs

In traditional markets, a leveraged ETF is a security that uses financial derivatives and debt to amplify the returns of an underlying index. While a traditional ETF typically tracks the securities in its underlying index on a one-to-one basis, a leveraged ETF may aim for a 2:1 or 3:1 ratio to magnify exposure.

Similarly, leveraged cryptocurrency ETFs use underlying tokens of the mainstream cryptocurrency, mainly Bitcoin, to amplify returns. For example, a 3x Long Bitcoin ETFs can give users a 30% return if Bitcoin goes up 10% in a day. 
 

Source – Crypto ETFs: A Game of Benefits and Risks

The most important thing to know about leveraged ETFs is they are meant to be held over the short term—even if they’re invested in crypto. Gate.io's recent research compared the performance of 3X-long leveraged ETFs in BTC and NASDAQ from January 2019-April 2020 confirm this.

Results from the BTC leveraged ETF showed that short-term holdings bring a greater probability of higher returns, while holding for longer periods proved to be an extremely high-risk strategy due to the volatility of the cryptocurrency market. The report found that, even more so than traditional leveraged ETFs, leveraged crypto ETFs are more suitable for short-term holdings because of the volatile nature of the asset. 

Source – Crypto ETFs: A Game of Benefits and Risks

As cryptocurrency regulations are being more clearly defined in Europe and Asia, various markets have introduced cryptocurrency ETFs.  Wilshire Phoenix is the latest company waiting to secure SEC approval to list shares of a bitcoin-related ETF. The closest thing to a bitcoin ETF in the U.S. is the Bitcoin Investment Trust (GBTC), which owns bitcoins on behalf of investors and allows them to trade in shares of the trust, replicating some aspects of an ETF. Its sponsor, Grayscale Investments has purchased more than 1.5x the number of bitcoins mined since the third Bitcoin halving for its bitcoin trust, which indicates a strong underlying demand for Bitcoin.

While we are still waiting for the first Bitcoin ETF to hit a U.S. exchange, there is hope that cryptocurrency regulations will soon allow for the advancement of the industry. The growth of cryptocurrency ETFs could bring an influx of investments into the digital asset market, fuelling mainstream adoption of cryptocurrencies.

Marie Tatibouet is the CMO of Gate.io