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How Bitcoin ETFs are Opening Markets

Bitcoin-backed Exchange Traded Funds are on the rise internationally. While US residents await approval of the first SEC approved fund, other jurisdictions are moving forward.

An upcoming Korean Exchange Traded Fund (ETF) that tracks the price of Bitcoin has been announced by asset management firm Korea Investment Management,  a subsidiary of Korea Investment Holdings Co (KIH). Started in 2002, KIH has more than $21B USD under management.

ETFs track an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange.

The new ETF will track the price of bitcoin as it trades on Korbit, the largest of South Korea’s bitcoin exchanges, and will be traded on the sole securities exchange operator in South Korea, Korea Exchange (KRX). Investors can trade in the KRX securities markets through a trading account at one of many security companies with KRX membership.

"The main difference between ETFs and other types of index funds is that ETFs don’t try to outperform their corresponding index, but simply replicate its performance. They don’t try to beat the market, they try to be the market."

In 2012 the very first regulated bitcoin fund launched. An ETF simply named “the Bitcoin Fund,” which is traded exclusively on the Hedge Fund Marketplace platform, Exante. The fund achieved the biggest single investment vehicle gain in world history, with a 4,847% return, when Bitcoin’s price spiked at the end of 2013. EXANTE is under the jurisdiction of the European regulator MiFID.

In July 2013, the Winklevoss twins filed their application for an ETF in the US. “The investment objective of the Trust is for the Shares to reflect the performance of the price of Bitcoins, as measured by the Winklevoss IndexSM ("Winkdex®"), less the Trust’s expenses.”

“The Shares represent units of fractional undivided beneficial interest in and ownership of the Trust and are expected to be traded under the ticker symbol "COIN" on the NASDAQ.” – NASDAQ

The twins have been patiently waiting for regulators to approve the fund ever since, and are keeping active with their bitcoin price index, the Winkdex, and launching their own Exchange on Wall Street, Gemini.

The island of Jersey saw it’s first fund in 2014, the Global Advisors Bitcoin Investment fund (GABI). “Jersey aspires to be the leader in the digital currency revolution by playing a crucial role in the bitcoin ecosystem regulation,” states the company site. GABI is regulated by the Jersey Financial Services Commission.

Earlier this year an ETF from Barry Silbert called the Bitcoin Investment Trust (BIT) began trading in the US. The security is trading on OTC Markets’ top marketplace, OTCQX, under the trading symbol GBTC. BIT is sponsored by Grayscale Investments, a wholly-owned subsidiary of Digital Currency Group (DCC).

In their latest quarterly report, BIT reported a market value of $35,575,920 USD, owning 135,677 bitcoins. 48 thousand of these bitcoins were famously picked up when Silbert won them at an auction in Dec 2014. The bitcoins were seized during the Silk Road investigation, then auctioned off by the US Marshal’s Service.

There are also efforts to launch full Bitcoin ETFs on the horizon. In Europe, the City of London based bitcoin exchange Coinfloor announced plans to launch a bitcoin ETF last year, and is already billing itself as “the world’s most liquid Pound Sterling to Bitcoin order book.”

Aside from ETFs, bitcoin Exchange Traded Notes (ETN) are also available for investors looking to gain exposure to the digital currency. While both bitcoin ETFs and ETNs are designed to track the prices of bitcoin, an ETN is more like a bond.

An ETN is a senior, unsecured, unsubordinated debt security issued by an underwriting bank. Similar to other debt securities, ETNs have a maturity date and are backed only by the credit of the issuer. If an ETN’s issuer were to receive a credit downgrade, shares of the ETN would likely experience a downturn, unrelated to the price of bitcoin that it is tracking.

The first ETN made public for bitcoin is the Bitcoin Tracker One, a bitcoin note launched in May this year, available in 179 countries. The note is managed by Sweden based XBT Provider, a public Limited Liability Company traded on the Stockholm Stock Exchange. Bitcoin Tracker One is available on the NASDAQ/OMX in Stockholm under the ticker COINXBT.

There is a key advantage to purchasing bitcoin tracking ETFs and ETNs. The underlying asset, bitcoin, is largely traded on unregulated exchanges. If a Bitcoin ETF trades on a major exchange, investors could simply buy shares of the ETF at any brokerage. Regulation also allows for institutional investors to gain access to bitcoin markets, as they are largely precluded from trading unregulated securities.

A clear downside is the the fees. To invest in the BIT, for example, investors pay premium prices for free trading shares, as well as an annual two percent administration and safekeeping fee.

“That charge is steeper than most ETFs”, said Eric Mustin, vice president of ETF Trading Solutions at WallachBeth Capital.

“BIT investors could be paying 5 percent more than if they simply bought bitcoin on an exchange—when considering Grayscale’s fee, and issues with setting a fair price in a relatively non-liquid market.”
— – Mustin

The annual fee for the SPDR Gold Shares ETF is only 0.4%. However, Grayscale representative Barry Silbert justified that the annual fee is comparative to the 1 percent charge most bitcoin platforms and exchanges levy.

"From a cost perspective you’re no worse off."
— – Barry Silbert

While it is often said that bitcoin is a volatile and risky investment, there are many more volatile ETFs available. In a recent Bloomberg article two ETFs are referenced; the Global X FTSE Greece 20 ETF (GREK) and the Deutsche X-Trackers Harvest CSI 300 China A-Shares ETF (ASHR). After the recent collapse of Chinese stocks and the Greek crisis, both funds’ volatility more than tripled in a relative short amount of time.

“The two countries’ crises are entirely different. One is a stock market supernova, the other a black hole of debt. But in one sense they’re a pair: GREK and ASHR are both showing more volatility than the Direxion Daily Junior Gold Miners Index Bull 3x Shares (JNUG). This is basically the most volatile ETF, if not security, on the planet, making bitcoin look like a short-term Treasury note.”
— – Bloomberg


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