Bitcoin ETFs unleashed on the ASX: what’s next?

For many of us, thoughts about “cryptocurrency” are accompanied by the word “speculation” perhaps followed by images of imprisoned FTX crypto entrepreneur Sam Bankman-Fried. 

Whatever your initial reaction is to cryptocurrency more broadly, or Bitcoin more specifically, the digital currency has undeniably cemented a place within the financial landscape.

The big recent news is the local listing of the first spot Bitcoin ETFs, including the VanEck Bitcoin ETF (ASX: VBTC). VanEck was the first ETF issuer, in 2017, to file for a Bitcoin futures ETF with the US Securities and Exchange Commission.

While the US wasn’t yet ready for a Bitcoin ETF, European regulators were moving forward. In November 2020, VanEck successfully launched its Bitcoin ETN 1 on exchanges in Europe. Since then, with more regulatory oversight and better infrastructure, Bitcoin trading has improved to better meet the needs of institutional players, including better custody, transparency, and security.

"It has been a long journey, but we think one that gives Australian investors access to the Bitcoin opportunity," said VanEck's Portfolio Manager Pranav Kanade and Deputy Head of Investments and Capital Markets, Jamie Hannah.

The pair hosted a webinar on Thursday, where they fielded numerous questions from prospective investors. We’ve laid out some of the most insightful exchanges in the following Q&A.

What differentiates VBTC from other Bitcoin ETFs?

First off, it's the only one on the Australian Stock Exchange…with the most stringent regulatory requirements of any exchange in Australia. It has taken us three years of regulatory work with the ASX to get this over the line, who had 75 pages of questions. We have had multiple meetings over many years to get this product launch, and they drilled into this product. To an extraordinary length. Doing full due diligence right down into Gemini - our custodian. So there's been a lot of work that's gone in, and hence why, the ASX has taken a lot longer than other exchanges.

There are two other competing products out there listed on Cboe, and unfortunately they're not plugged into all the brokers, so not everyone can trade through Cboe. A lot of local brokers in Australia don't have the ability to access that exchange. But we're listed on the premier exchange, the ASX.

We also have the lowest fee in the market. And we have a long history of managing digital assets, with over $100 billion of traditional assets under management. My day-to-day job is managing investments across the world in traditional asset classes of shares and bonds. So, this is just another asset class in terms of the portfolio management functions that we run.

What has driven the price surge in Bitcoin since early 2023?

In 2022, you had a whole bunch of crypto centralised businesses that were, either exchanges or lending businesses in the crypto space, that went bankrupt for a variety of reasons. Those bankruptcies resulted in forced selling of Bitcoin, Ethereum, and several other crypto assets.

So, it ended the year on a pretty low mark, as you add a whole bunch of forced sellers of these assets, coupled with tightening monetary conditions. The US, the ECB, and the Bank of Canada were all tightening throughout 2022. Those two factors really hurt the price of Bitcoin coming into 2023.

And beyond that, in January there was an easing of monetary conditions. So global liquidity got better, which, again, was the catalyst for Bitcoin as well as other risk assets.

Another big catalyst was the banking crisis in the United States, when Silicon Valley Bank went under. There was this light bulb moment for a lot of folks, the realisation that “hey, the cash that I have in the bank might be at risk. Maybe I need to have some asset outside of the system, to have a hedge against the banking system”. That led a lot of people to think about buying some Bitcoin and another pivotal event last year.

The next big one was the market's expectation of a Bitcoin ETF approval, because that would ultimately bring a new cohort of investors into the space, who couldn't have previously bought it.

This year, the ETFs went live, there's been over US$15 billion of inflows into these, which has been a massive positive. For every US dollar of inflows, that creates almost a 4-7x impact on the price. That US$15 billion inflow could theoretically have five times the impact in terms of the market cap growth it can create for Bitcoin.

Who are the market makers and how does the liquidity work?

Susquehanna, Flow Traders, Jane Street and Nine Mile. Since the start of the year, the US has taken over $20 billion dollars’ worth of assets into Bitcoin ETFs.

It's unlikely we'll see that same number here, but they have already got the pipes and the contributions in place to set this up. So, liquidity should not ever be a problem in Australia, because we have the same large market makers operating in Australia as we do in the rest of the world.

Why use an ETF to access bitcoin?

For most investors, it’s simpler and easier to invest in an ETF rather than holding bitcoin directly. You can trade a bitcoin ETF on ASX and hold it in your trading account like any other stock or ETF. If you hold bitcoin directly, you are responsible for safe storage. Whereas with a bitcoin ETF, the fund manager is responsible for buying and storing the bitcoins. 

VanEck’s bitcoins are held in custody with Gemini, one of the world’s largest crypto custodians, which are regulated in the US. They hold the bitcoin offline in cold storage, which means it is not connected to the internet and is less susceptible to hacking.

A bitcoin ETF also offers institutional grade protection. ETFs are established investment vehicles which are subject to regulatory oversight designed to protect investors.

How does Bitcoin compare to other crypto currencies such as Ethereum?

Bitcoin is a finished product, and in my opinion, is the only product in the crypto market that has achieved true product market fit. There's not much change in the economic profile of Bitcoin, or how the blockchain itself functions. The core developer community behind Bitcoin is very hesitant to make new changes, because the point of this is it wants to be a store value. And for something to be a store value, people need to take comfort that it's not going to constantly change.

All the other digital assets are trying to expand on the Bitcoin idea that you can have a public ledger. But they're layering in this fact that you can have a programming language on top of that ledger, and then build applications on that ledger that the world could use one day. So, everything outside of Bitcoin is trying to experiment in a very different idea. Bitcoin is a little bit of a one-on-one asset, which is, it's trying to just be digital gold.

For more information, visit VanEck's website here.