Fully-fledged crypto ETFs just months away

The first digital asset ETFs hit the boards of Australian exchanges just days ago, Betashares Crypto Innovators (ASX: CRYP) and Cosmos Global Digital Miners Access (CHI-X: DIGA) now listed here. But this is only the beginning, a raft of other ETF’s composed of digital currencies and crypto-adjacent companies expected in the months ahead, in response to ASIC’s approval of spot-backed crypto products in the last fortnight.

“I’m hopeful we’ll have both a Bitcoin and Ethereum ETF out as soon as feasible, certainly within months and not years,” says Ilan Israelstam, co-founder and head of strategy, Betashares.

On its first day of trading last Thursday, CRYP's $40 million of new investor money set a new single-day record for Australian ETFs.

The biggest market for the latest Betashares product are investors who have long had an interest in buying into cryptocurrency, but are put off by the complexity and risk.

“We’re finding a lot of people who are already invested in crypto but who also want to own some of the companies in the space,” says Israelstam.
“These companies have their own profitability and revenue runway that goes beyond the cryptocurrency, so they’re buying CRYP as a complement to the digital coins.”

And that’s a key point here. These ETFs aren’t invested in cryptocurrency, but in companies that operate within crypto-adjacent sectors of the market.

What’s under the hood?

CRYP tracks the Bitwise Crypto Innovators Index, built by San Francisco-based company Bitwise Index Services. It comprises up to 50 “pure-play” firms in the space including cryptocurrency exchanges, crypto mining companies and those that service them. Crypto brokerage firm Coinbase, which listed with a market cap of US$70 billion in April, institutional asset manager Galaxy Digital and business intelligence software firm Micro Strategy rank among the top five positions as of 4 November.

Funds

Cracking crypto with a clever ETF

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For access to the index, which has a US$40.9 billion market cap and trades at a forward PE average of just over 36 times, Betashares charges a management fee of 0.67% a year. That sounds steep – but when you consider that a single Bitcoin currently costs just north of $85,000, it makes sense…well, sort of.

"The picks and shovels" of cryptocurrency

The other of these Australian trailblazers, DIGA, is the first product offering from startup Cosmos Asset Management, a fund manager that launched around two years ago. The firm’s CEO Dan K. Annan, Junior says Cosmos was among the first to approach Australia’s watchdog ASIC about listing a crypto ETF here. 

Explaining the resistance it met, in a process that stretched more than 18 months before reaching this point, he says the delay is due to a lack of understanding.

“We spent quite a bit of time educating the market, regulators and putting together our team to try and deliver this asset class for investors,” Annan says.

Under the umbrella of digital currency expert Mawsons Infrastructure, the Cosmos ETF is described as a “pure-play” digital mining play. It’s based on the Global Digital Miners Index, with each of the 30 names meeting the following criteria:

1. Each security must have a market cap of at least US$100 million.
2. 80% of the business’s revenue must be generated from digital currency mining or infrastructure.
3. Median daily trading turnover must be at least US$1 million.
4. Most of the companies that are listed on international exchanges are miners of Bitcoin, though some also mine other cryptocurrencies.

Diga replicates the Global Digital Miners Index, currently holding 15 of the names in its portfolio.

“As more of those are listed on international exchanges, the daily volume will continue to grow," Annan says.

What's the overseas experience?

Given these ETFs are the first of their kind to list locally, it’s worth looking at what’s already occurred overseas. BITO, a Bitcoin ETF run by ProShares, was listed on the New York Stock Exchange in April, which became the highest-trading ETF on record when volumes quickly topped US$625 million.

Such products turned up first in Canada, where a Bitcoin and Ethereum ETF were launched in March.

“The US ETF solidified for regulators globally, including in Australia, that this asset class is here and we need to consider making the asset class available to our citizens,” Annan says.

Should you consider a crypto ETF?

Not if you’re risk-averse and probably no more than 5% or 10% of your total portfolio, and that's if you’re feeling particularly heroic.
“Investors need to be aware of the volatility and the risk the asset class presents,” Annan says.

He emphasises this type of product isn’t intended as a core allocation for any portfolio, only as a satellite exposure to the crypto asset class. But the potential rewards are also high.

“If you allocated just 1% of this to a 60/40 portfolio, it contributed 17% of return to the overall portfolio. If you allocated 3%, it generated 37%; and 5%, it generated 50% of returns to the overall portfolio,” Annan says.

“This is a volatile asset class and from an allocation perspective you need to review your portfolio allocation and determine how much risk you’re prepared to take.”

Not a crypto ETF

You need to bear in mind that this isn’t a cryptocurrency ETF – such products exposed directly to digital coin futures aren’t legal here, yet.

“These are the picks and shovels of the companies – Marathon, Galaxy, and others that mine Bitcoin. That’s what we’ve focused on,” Annan says.

“A Bitcoin ETF would see the physical coin wrapped in an ETF for investors to trade on an exchange. Perhaps the best analogy is comparing a physical gold ETF to one that holds gold miners.”

It's important for investors in this asset class to “lift the hood” and understand what they’re buying. Annan says a key goal in launching DIGA was to provide a transparent way for people to buy Bitcoin miners.

When will we see a Bitcoin futures ETF here in Australia?

Annan says they’re ready for it right now but are waiting for the regulator and the exchanges to adopt systems and processes to allow for Bitcoin ETFs.

Similar to the ProShares product that set a new NYSE trading volume record, the second local offering that was listed here last Thursday, CRYP, broke an Australian ETF record. Betashares’ co-founder and head of strategy Ilan Israelstam is thrilled at the early response to the product.

“The core of the market is people who have long been interested in the crypto economy but who don’t want the complexity or risk of buying from an exchange directly. They want a traditional regulated structure,” he says.

“It’s still only very early, but we’re also seeing lots of people that already own cryptocurrency but who also want to invest in some of the companies.”

These include the likes of Galaxy Digital Holdings, Coinbase Global, and MicroStrategy – which each rank among CRYP’s top five holdings. The first of these is a merchant banking institution dedicated to digital currencies, while Coinbase is a US-based crypto exchange platform. MicroStrategy is a business intelligence software company that holds such a huge volume of Bitcoin on its balance sheet that it’s considered something of a proxy for cryptocurrency.

Israelstam echoes Annan’s comments about the need to educate the market and the regulations surrounding these products. And he’s confident the first two products are just the first of others.

Referring to the physical Bitcoin ETFs already available in North America, he says such products are their preference.

“We’re hopeful that what we’ve seen from the regulator recently, and we would prefer that. And the problem with the futures products is that you’ve got other external issues," says Israelstam. 

He says the “rolling” of futures-based products can be both a positive or a negative for investor returns.

“But regardless of whether it’s a cost or a benefit, it’s a part of your performance that you have no control over, and it can be very significant if it’s a very sharp curve, as we saw in the oil market during COVID in 2020.”

Betashares is ready for them now, says Israelstam. The delays hinge not only on the regulator but also on the availability of such products on financial planning platforms, which requires ratings from research houses. Getting such approvals for unlisted funds sometimes takes years of building a track record before the required ratings are granted.

“This will be much quicker,” says Israelstam. “We’re talking months, certainly, and not years.”

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