Crypto ETFs’ Popularity Soars, but Will the US Relax Restrictions?

Exchange-traded fund (ETF) inflows have surged past the record set in 2020, with cryptocurrency ETFs becoming some of the best performing funds in Europe. For US investors looking to gain exposure to the space, such as Ark Invest’s Catherine Wood, Canadian crypto ETFs have become a popular alternative.

But despite the growing crypto ETF trend and Fidelity Investments recently pushing for this to change, these funds remain banned in the US. Is the country falling behind by not offering crypto ETFs?

Crypto ETFs among best-performing funds in Europe

Eight of the 10 best-performing ETFs so far this year are European-based funds tracking cryptos, reported The Wall Street Journal last week. A crypto ETF run by Swiss firm 21Shares – 21Shares Binance BNB ETP [ABNB] – is up 723.77% this year, while CoinShares’ Ether Tracker One [COINETH SS] is up 416.06%. Its Ether Tracker Euro [COINETHE SS] has gained 309.81% in the same period, while the 21Shares Ripple XRP [AXRP] has risen 201.86% year-to-date, as of 20 September. In comparison, the S&P 500 is up a more modest 17.30% so far in 2021.

When 21Shares launched the ABNB crypto ETF in October 2019, it held around 1.1 million coins worth about $20.7m, or $18.52 each – each coin is now worth more than $400, giving it total assets under management of more than $451.5m, reports The Wall Street Journal. The ABNB crypto ETF has been up more than 1,900% since inception. Overall, investors have added $3.4bn into global crypto ETFs already in 2021, according to Simon Mott, chief marketing officer at Trackinsight, reports The Wall Street Journal, pushing total assets to $9.25bn, of which the majority is in Europe.

Cathie Wood seeks exposure to crypto via Canadian ETFs

Ark Invest is using one of its funds to invest in Canadian bitcoin ETFs, as the Cathie Wood-led firm seeks fresh ways to gain crypto exposure. The $5.7bn ARK Next Generation Internet ETF [ARKW] submitted a filing on 10 September, which included reference to holding exposure to cryptos via “exchange-traded funds domiciled in Canada”.

Ark Invest already has exposure to bitcoin through its Next Generation Internet ETF, with 5.38% of the fund currently invested in the Grayscale Bitcoin Trust [GBTC]. It’s the second-largest holding in the fund after Tesla [TSLA] (10.17%) and ahead of Coinbase [COIN] (5.07%).

Grayscale Bitcoin Trust is up 210.19% in the last 12 months, though it has fallen year-to-date by 1.5%, as of 20 September’s close. The first Canadian Bitcoin ETF – the Purpose Bitcoin ETF [BTCC] – has fallen 11.99% since launching in February. The ARK Next Generation Internet ETF, which is down 1.02% so far in 2021, has gained close to $691m in new investor funding this year, according to Bloomberg.

Is the US falling behind by not offering crypto ETFs?

Investors and issuers continue to wait for regulators to approve crypto ETFs in the US, with a huge backlog of applications at the US Securities and Exchange Commission (SEC), reports Bloomberg. Ark Invest is among those in line, having teamed up with 21Shares for a fund in the US.

The SEC is concerned about investor protection and that crypto ETFs could be susceptible to fraud if it’s unable to monitor trading in the underlying assets. For US investors, buying a crypto ETF that trades overseas remains out of reach, as most big brokerages restrict buying of funds that trade on overseas exchanges, reports The Wall Street Journal.

In a recent move, US-based Fidelity Investments urged the SEC to approve its bitcoin ETF in a private meeting, Bloomberg reported last week. The president of Fidelity Digital Assets, Tom Jessop, alongside other Fidelity executives, met with SEC officials via a video call, in which they made a case for why the regulator should approve its product. This included increased investor appetite for virtual currencies, the growth of bitcoin holders and the existence of similar funds in other countries.

There’s little doubt that the pressure is growing on the SEC to allow US investors access to crypto ETFs, but as to when that moment will finally arrive is yet to be made clear.