The voice of crypto is rising and the market’s insatiable appetite for risk is driving the trend that, today, saw the launch of BetaShares’ Crypto Innovators ETF (CRYP) on the ASX.
The Australian launch came hot off the heels of a flurry of Bitcoin strategy ETF launches in the US last month, namely: Proshares (BITO), Valkyrie (BTF) and the much anticipated but now-delayed Van Eck (XBTF). However, investors who think these are one and the same are encouraged to exercise caution. It is important to note the ins and outs of each and how the Australian product stacks up against its US counterparts.
A new dawn
Gary Gensler, a former Goldman Sachs partner, was appointed Chair of the SEC in February 2021. A tech progressive, people such as yours truly best knew Gensler from his MIT open source lecture series in blockchain and fintech. The crypto community was right to be enthusiastic about the appointment. Gensler, in becoming a public servant, needed to serve his masters in Washington D.C. In the early months of his role as regulator he moved cautiously and circumspectly. By August however, Gensler began to signal the Commission’s openness to a Bitcoin ETF in the US but one focused exclusively on Bitcoin futures where the laws governing them offered enhanced investor protections under a 1940s mutual fund law. The crypto ETF space reached a crescendo and by September Coindesk reported the SEC was “reviewing almost two dozen ETF filings for bitcoin, bitcoin futures, ether and ether futures products”.
A pure-play Bitcoin ETF would be superior to existing futures ETFs, in terms of its ability to closely track the performance of the coin, yet SEC approval is unlikely to materialise any time soon ”due to concerns about regulation in the underlying Bitcoin market” according to Bloomberg.
Futures and forwards are legal contracts that lock the buyer and seller into future-dated transactions where the price, date and form of delivery are predetermined at the outset. Futures contracts are exchange-traded instruments standardised for features such as quantity and quality whereas forwards are private and customizable agreements that trade over-the-counter. A Bitcoin ETF that invested in futures contracts carries different risks to one that held BTC outright because the price of the futures will deviate from the price of BTC as time passes by.
In restricting US crypto ETFs to futures contracts traded on the CME they effectively became subject to regulation by the CFTC, a sister agency to the SEC. It was a way to maintain a tight leash on an industry which regulators regarded as a fickle beast.
In fact, participants are so bearish on the prospect of a Bitcoin spot ETF they believe U.S. regulators are “more likely to approve an Ethereum futures-based ETF before giving the greenlight on a fund that holds Bitcoin directly”. Bitcoin, followed by Ethereum, has the highest market cap of all coins. However Ethereum has a high volume relative to its market cap largely due to its popularity as the, current, go-to protocol for developers and users of decentralized apps (dApps). However, other protocols – aptly named ‘ETH-killers’, such as Solana (SOL), Polkadot (DOT) and Polygon (MATIC) are rapidly ascending that throne.
CRYP, BTCR – A different approach
So how is BetaShares’ Crypto Innovators ETF different to its US counterparts?
Short answer – equity.
But more specifically CRYP is an equities ETF. It does not hold cryptocurrencies directly. Rather, it invests in companies that are exposed to the blockchain and crypto industry. Looking at its top 10 holdings below, CRYP primarily invests in blockchain tech companies which have exposure to Bitcoin but also so much more. The fund is therefore more akin to SPDR’s Tech Sector Fund (XLK) than it is to the BTC futures ETFs currently listing in the US.
Mind you, CRYP isn’t exactly an innovator in the crypto and blockchain equity space either. Volt’s Crypto Industry Revolution & Tech ETF (BTCR) beat it to the punch having listed in the US in early October. Like CRYP, BTCR invests in companies that generate a significant portion of their earnings from crypto-related services.
To say that blockchain-based ETFs are similar to pure-play Bitcoin ETFs like Grayscale (GBTC) is a gross mischaracterization. That’s akin to saying gold miner ETFs like the GDX are similar to gold trusts like the GLD. The former carries business risk while the latter carries the volatility of the underlying commodity. Blockchain ETFs hold companies that are exposed to Bitcoin and, by extension, carry bitcoin risk. In addition, however, they also carry the non-systematic (business) risks that are inherent in every tech company seeking to create value through innovation and experimentation.
Is CRYP worth it?
If you set up an online broker with access to international equities, it would not at all be difficult to buy any and all of the securities held by CRYP, sans the fees. What investors in CRYP pay for are the quarterly systematic rebalancing of the portfolio to mark its investments to market and generally removing the hassle of portfolio management while maintaining equity exposure to the sector. And the price of that convenience?
Under its fund profile, CRYP charges a management expense ratio of 0.67%, however, with certain additional costs applicable. Those tenacious enough to explore the weeds of its Product Disclosure Statement will discover the following:
To put it simply, the fund will charge investors 0.67% in management fees AFTER deducting for its costs incurred. These costs include:
- Recoverable expenses normally incurred in the day to day operation of the Fund.
- Indirect costs.
- Transaction costs.
- Application and redemption fees.
- Stockbroker fees.
CRYP heralds a new dawn for Australian investors seeking portfolio diversification. And not just diversification into crypto and crypto-related investments but also diversification across these investments to partially reduce non-systematic risk associated with any one company. These crypto tech ETFs have a role to play alongside crypto ETFs that buy the coins or their futures.
Jeff Gao is CEO of Cypherpunk Holdings (CSE:HODL), a listed company investing in cryptocurrencies and companies with privacy technology businesses or assets.