John Hyland is the global head of exchange-traded products for Bitwise Asset Management, a position he took less than a month ago. Hyland was a key figure in bringing the first oil and commodity ETFs to market when he was CIO of United States Commodity Funds. Now he’s hoping to use that expertise to bring some of the first U.S.-listed cryptocurrency ETFs to market with Bitwise, a firm that launched a private crypto index fund last year.
While the Securities and Exchange Commission has yet to approve any bitcoin or cryptocurrency exchange-traded products, Hyland believes that could change relatively soon. Read on to find out when Hyland sees the first crypto ETF coming to market and what form it will take.
ETF.com: Is the ETF industry any closer to addressing the SEC’s concerns about cryptocurrency funds than it was several months ago?
John Hyland: I do think we’re closer and there are four reasons why. The first has to do with custody. Right now, we custody our private fund's crypto assets with a small regulated custodian. The big five ETF custodians are looking, but not yet jumping into, offering the service.
However, I spent half an hour last week talking to one of the three largest ETF custodians, and I think the way forward for them will be to hire existing regulated custodians, like ours, as "subcustodians" while they build up their own expertise. That solves one major issue for the SEC.
Of course, an ETF that holds futures or swaps on the coins, and not the coins themselves, could already be custodied by any one of the ETF custodians that also handles futures-based commodity or currency ETFs.
The second reason has to do with enhanced regulated trading. A number of the major ETF market-making shops are setting up crypto trading desks. In addition, even some of the big stock exchanges are setting up regulated trading platforms. Thus, a crypto ETF, and its market makers, will be able to transact on platforms that have similar regulatory status to what they do with equities. This will all happen this year, or next year at the latest.
Reason No. 2 also means that reliable third-party pricing will be available for setting iNAVs and NAVs.
Finally, one concern of the Division of Trading and Markets at the SEC is how crypto ETFs will behave in real life. Well, they already exist in Europe (four of them), on regulated exchanges (Nasdaq), in size ($600 million in AUM), and for several years now (since 2015).
Unless these funds have some sort of major failure to function as ETPs, this will actually be the SEC's live experiment.
ETF.com: How likely is it that we’ll see a bitcoin or cryptocurrency ETF approved anytime soon?
Hyland: I think we get them sooner rather than later. But I also think that if we don't see any action by the SEC in the next two months, we’ll jump to 2019 and beyond. I don't see the SEC going from red light to green light anytime near the midterm election. It’ll make them gun-shy.
I handicap the odds of a U.S. ETP in crypto as follows: 20% chance in 2018; 60% chance in 2019; and a 20% chance beyond 2019.
ETF.com: Where do you stand on the whole physical versus futures bitcoin ETF debate? Is one better than the other? Is one more likely than the other?
Hyland: There’s about $6 billion to $7 billion of actual bitcoin traded a day. There’s about $40 million to $50 million of bitcoin futures traded per day.
From that standpoint, physical probably makes sense. It's a deeper, more liquid market. You don't have to deal with buying the futures and rolling them. You don't have to deal with backwardation and contango. Those issues go away, and those costs go away.
In theory, that should be the more logical way to do it. The reality from the standpoint of the regulators is there is an easier path forward for them to approve something tied to futures, because futures are regulated products in the U.S., and they’re trading on the Cboe.
If you can accept that the United States Oil Fund LP (USO) can hold CME/Nymex futures contracts on crude oil, then you should be able to, as a regulator, accept that a fund can hold [Cboe-listed bitcoin] futures trading in Chicago.
From that standpoint, I can see them going ahead and permitting futures-based products. But in the long run, I believe owning the actual underliers is probably the long-term better design.
ETF.com: If and when the SEC does approve the first cryptocurrency ETF, do you think that's going to open the floodgates for many other crypto products to come to market?
Hyland: Yes, because from the regulatory standpoint, if you've accepted the argument that a futures-based bitcoin product can be declared effective, on what grounds do you then turn around and deny the next three or four issuers?
Everybody who has the same outline of a product is going to probably be declared effective in roughly the same small time frame.
The only area where it could be different is leveraged products. For those, the depth of the market becomes a bigger issue. Price volatility multiplied by leverage becomes a bigger issue.
ETF.com: What types of cryptocurrency ETPs are you looking to bring to market, and how will you differentiate yourself from the many other ETF issuers that are also trying to bring crypto ETPs to market?
Hyland: Our core proposition for investors is offering diversified baskets of coins via a passive index. That’s what our existing private fund does. In each market that we file for public products (U.S., Europe, wherever), I anticipate the first product filed will be for an index basket.
At present, looking at what has been filed with the SEC, everybody else is trying to get a bitcoin and/or an inverse bitcoin product out the door, not a basket. That is the biggest point of distinction.
The only index we currently produce is a long-only, market-cap-weighted index of the 10 largest cryptocurrencies ("HOLD 10"). However, we’ll certainly go on to produce other indices as we move forward—maybe with more coins, or fewer, or selecting the best on some basis other than size and liquidity.
We’ll also file for products outside the U.S. I think we’re likely to file [in London] in the near future. Unlike the U.S., there are already bitcoin ETPs in Europe, so our first filing will likely be the index basket. Still, if the incremental cost of offering a single-coin ETP is low, we might as well go for it.