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Will Bitcoin ETF’s Takeoff in 2021? It’s Already Happening in Canada

We are in one of the biggest crypto bull runs ever recorded in the entire history of cryptocurrencies. Institutional investors are pouring money into Bitcoin as prices flirt with all-time highs. The increasing interest among institutional investors in Bitcoin is leading to rising demand for Bitcoin-backed investment instruments. One such Bitcoin-backed financial instrument is the concept of a Bitcoin ETF.

Will Bitcoin ETFs change the way people view cryptocurrency?

Before diving into a concise history of Bitcoin ETFs, let us look at what a Bitcoin ETF is. ETF stands short for exchange-traded funds. In traditional finance they represent a basket of different securities and were popularized by investment advisors like Vanguard. The most popular ETFs replicate the entire S&P 500, which allow investors to gain value when the entire market moves upwards.

A Bitcoin ETF is a fund that simply tracks the value of Bitcoin but trades on a traditional market exchange rather than a cryptocurrency exchange. Leveraging Bitcoin ETFs, investors can gain exposure to Bitcoin without having to go through the hassle of signing up for a cryptocurrency exchange.

The First-Ever Bitcoin ETF Launched in Canada

The first-ever Bitcoin exchange-traded fund was, quite surprisingly, launched on the Toronto Stock Exchange on Thursday, 18th February 2021. Toronto came as a surprise location to many because neither it is the largest ETF market globally nor has a history of selling similar exchange-traded products like Europe. In Europe, exchange-traded products similar to Bitcoin ETFs have already managed to garner about US$6.5 billion in assets. We will discuss these exchange-traded products or ETPs in the coming segments.

What added to the surprise was that the Canadian equity market was only 8% of the United States. The total volume of assets that Canadian ETFs has locked in them is US$215 billion that is less than the asset volume of a single S&P 500 ETF fund named SPDR.

Regardless, Canada’s earnest efforts to build a reputation as a place for ETF product development paid off when Purpose Bitcoin ETF, with the ticker BTCC, registered nearly $400 million worth of trading volume in only two days since its launch.

Launch of the Second ETF, Possibility of Two More

A day after Purpose Bitcoin ETF’s launch, the Toronto Stock Exchange witnessed another ETF label. However, the debut of Evolve Fund Group’s Bitcoin ETF (EBIT) was received with a muted response and recorded a far less impressive trading volume of $14.5 million worth of shares.

Experts feel that the liberal and innovation-focused regulatory environment of the Canadian stock exchanges helped it stay ahead of other countries worldwide, especially its North American neighbor: the United States. In the US, the Security and Exchange Commission (SEC) has rejected multiple applications for Bitcoin ETFs over concerns of unscrupulous price-manipulation and insufficient liquidity.

In what could be a third bitcoin ETF in the Canadian market, the CI Global Asset Management, a subsidiary of a firm overseeing more than $230 billion in assets, did file a preliminary prospectus last Friday. Another Canadian Firm, 3iQ, filed a similar prospectus for a Bitcoin ETF past week.

The Situation in The United States

The tussle between the US SEC and the proposals to launch a Bitcoin ETF has been ongoing for nearly five years. In 2016, the Bats BZX exchange submitted to SEC for a rule change that could have permitted it to list and trade shares of Winklevoss Bitcoin Trust.

Had Bats BZX got the approval, it would have become the first Bitcoin exchange-traded fund license to appear on a stock exchange that is fully regulated. It filed the proposal on June 30, 2016. After much deliberation, the SEC denied permission on March 10, 2017, citing difficulties in preventing manipulation and fraud.

To say the United States is ripe for a Bitcoin ETF would be a massive understatement. The potential for ETFs is 27 times larger in the US than in Canada. While in Canada, there is 70 billion worth of assets locked in the bond ETFs, in the United States, it is US$1.1 trillion. Whenever a Bitcoin ETF launches in the US market, analysts predict that the growth could be explosive.

ETPs in Europe

Although these are not ETFs, exchange-traded products or ETPs in Europe crossed the asset volume of 1 billion euros by the end of the last year. Three funds crossed the asset volume of 100 million euros.

These were XBT Bitcoin tracker, BTCetc-Bitcoin ETP (BTCE GY), and WisdomTree Bitcoin.

The XBT Bitcoin tracker was the first in its category to come to the market in 2015. The other two were introduced in June and December 2019, respectively. Both have grown despite having more than average fees. Strong demand for such products and funds worldwide reflects the value that these investment instruments have to offer.

How Bitcoin ETFs Could Help Crypto Market at Large

Apart from offering a chance to leverage the significant growth potential of the currency, the advent of Bitcoin ETFs has several other advantages for its investors. It comes with lower compliance risks and can mitigate some of the sector’s record-keeping and reporting issues, more so because it is an investment option known to the investors and registered with the policymakers.

It would also resolve some of the longstanding storage-related problems since many investors do not show much willingness to manage wallets, keys, and other crypto-specific information on their own.

For the overall crypto economy, especially the provider side of the system, Bitcoin ETFs come with another major merit. Even after registering significant growth in its prices and trading volume, the crypto economy has not yet been able to garner the kind of institutional respect it deserves.

In spite of improving on its usability and spread, the size of the crypto-economy has remained non-significant compared to the fiat-based economy. Merging with traditional exchanges will bridge this gap to a large extent. Experts believe that the approval of an ETF product in the US would further augment these institutionalization efforts.

How earning from cryptos would be taxed is also often a nebulous area in many of the economies. Having vague or uncertain ideas about how to define a revenue stream is counter-productive to growth. Trading in Bitcoin ETFs through traditional exchanges would help to clear away these uncertainties. Both the investors and authorities would see it as regular stock-exchange income which, in turn, encourages more and more users to hop on the crypto bandwagon.

Finally investors might be able to place Bitcoin ETFs in a retirement savings vehicle like an individual retirement account (IRA) and potentially save on taxes.

The Future of Bitcoin ETFs

It’s true that no single instrument has the capability of single-handedly altering the fate of a financial system. But, given the expansion of crypto assets in the past year and the interest of traditional investors to incorporate more alternative investment strategies in their portfolio indicate that the time for crypto-based ETFs has come.

It is evident from the rise of the Grayscale Bitcoin Trust in the United States. Despite having a riskier and costlier operative structure, investors are plowing cash into it in the absence of an ETF.  The trust has garnered about $34 billion in assets from investors who are willing to pay a premium as high as 7.5% to get in. The average premium in its lifetime is 37%.

This fact alone stands testimony to the fact that markets in the US and other places in the world have arrived at that point where it is only natural that more and more Bitcoin ETFs appear as a positive continuation to its promising history.

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