Crypto ETFs Create Opportunities

October 25, 2021

[Join us for our webinar, "Unpacking The Crypto ETF Dilemma," Tuesday, Nov. 16, 2021 at 12 p.m. ET]

There’s an expression in the crypto world that’s used quite often: “not your keys, not your coins.” The idea is that if you don’t control the private keys associated with your crypto assets, you aren’t really in charge of those assets.

It’s a concept born from the decentralized ethos of crypto, where intermediaries are looked upon with skepticism or even scorn. In his 2008 white paper, Satoshi Nakamoto spoke of the “inherent weakness” of the trusted third-party model and proposed that his creation, Bitcoin, was the better system.

Bitcoin was designed to facilitate peer-to-peer payments, cutting out traditional financial institutions from the equation. Banks, credit card networks and the Fed weren’t necessary when you had something like Bitcoin.

It was a radical idea, and one that didn’t even seem possible for many decades. But Nakamoto’s invention—which used a combination of cryptography, game theory and networking technology— enabled the transfer of value from one person to another without the aid of a trusted intermediary for the first time.

Different Strokes

Bitcoin’s anti-establishment origins were reflected in the communities that embraced it early on. From anarchists to libertarians to underworld figures, these were the types of people who didn’t want to interact with the traditional financial system.

But even in those early days, there was plenty of demand from others who bought bitcoin not because of any worldview, but simply because of its utility or its investment merits. The same rings true today.

Just because bitcoin or crypto more broadly can be used in a certain way doesn’t mean everyone wants to use it in that way. Today, Coinbase custodies more than 11% of all crypto assets in the world on its platform, and it’s just one of many centralized custody providers.

Users of Coinbase can take their assets off of Coinbase and into a self-custodied “wallet,” where they have more control over them, but most users don’t do that. Because with more control comes more responsibility and often, more risk.

ETF Value Proposition

If you follow crypto Twitter, you see if quite often: Well-meaning participants of this new decentralized ecosystem become victims of hacks. More often than not, these are users who custody their own crypto assets. But in some cases, they are customers of platforms like Coinbase who fall victim to phishing schemes and other social engineering techniques.

A compromised Coinbase account is much more debilitating than a compromised account at someplace like Schwab, as crypto assets can be stolen with very little friction.

This is where something like a bitcoin ETF could add a significant value. No dealing with keys, no dealing with a separate crypto account. An ETF makes buying and selling crypto assets as easy as buying the SPDR S&P 500 ETF Trust (SPY) or the SPDR Gold Trust (GLD). And in the U.S., we finally have the first round of bitcoin ETFs coming to market, all of them linked to futures contracts.

But look, I’m not here to bash Coinbase. It’s a fantastic, innovative company. And millions of people are using its services each day without any problems. Nor am I here to bash the concept of self-custodying. There are pros and cons to each approach to interacting with crypto assets. It’s up to each individual to decide which option is best for them.

In some cases, the non-ETF options might even be better. For instance, you can’t stake your crypto to earn yield with an ETF (though an ETF might do it on your behalf in the future). There are other advantages and disadvantages to explore as well.

More Questions

We are in the early innings for bitcoin ETFs in the U.S. October saw the launch of the first futures-based bitcoin ETF (BITO) to much fanfare. Initial trading and asset gathering confirmed what we’ve all suspected, which is that pent-up demand for bitcoin in an ETF wrapper is real. If all goes well, futures-based strategies  could be followed by the first ETFs that directly own bitcoin, and then possibly ETFs tied to other crypto assets like ether.

The launch of those ETFs will give investors plenty of new options … and plenty of new questions as well.

In what cases are ETFs the appropriate vehicle for investing in crypto? Which is better, a “physically backed” crypto ETF or a futures-based ETF? Where can advisors add the most value when it comes to crypto?

There are the types of questions we will be exploring in our upcoming webinar, “Unpacking The Crypto ETF Dilemma,” on Tuesday, Nov. 16  at 12 p.m. ET. We’ve put together an amazing panel, including Matt Hougan, chief investment officer of Bitwise; Ric Edelman, founder of the Digital Asset Council of Financial Professionals; and Tim McCourt, managing director and global head of equity products at CME Group.

Matt’s deep knowledge of crypto and ETFs perfectly complements Ric’s three decades in the RIA business. And Tim brings the expertise of the futures markets that existing ETF efforts center around.

Our conversation with Matt, Ric and Tim will encompass a lot of the topics touched on in this piece and much more. We are also counting on you to hit us with questions, so please drop us a line with your questions at any time before or during the panel. This roundtable is for you.

Join us in the conversation.

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