SEC greenlights bitcoin ETFs

On 10 January 2024, the US Securities and Exchange Commission (SEC) announced its approval for the first spot bitcoin exchange traded funds, offering investors exposure to the most popular cryptocurrency. Designed to mirror the performance of Bitcoin, the 11 bitcoin ETFs are listed and traded on US regulated exchanges. They are required to have rules designed to, amongst others, prevent fraud and manipulation, address standards of conducts and conflicts of interests, as well as to protect investor and public interest. For example, the iShares Bitcoin Trust is listed and traded on Nasdaq.

Despite approving the listing and trading of the below 11 bitcoin ETFs, the SEC said it did not endorse or approve bitcoin, and have advised investors to remain cautious about the risks associated with bitcoin and products whose value is tied to cryptocurrencies (digital payment token derivatives or “PTDs”).

Approved Spot Bitcoin ETFs:

1. Grayscale Bitcoin Trust (GBTC)

2. Bitwise Bitcoin ETF (BITB)

3. Hashdex Bitcoin ETF (DEFI)

4. Blackrock's iShares Bitcoin Trust (IBIT)

5. Valkyrie Bitcoin Fund (BRRR)

6. ARK 21Shares Bitcoin ETF (ARKB)

7. Invesco Galaxy Bitcoin ETF (BTCO)

8. VanEck Bitcoin Trust (HODL)

9. WisdomTree Bitcoin Fund (BTCW)

10. Fidelity Wise Origin Bitcoin Fund (FBTC)

11. Franklin Bitcoin ETF (EZBC)

Source: Morningstar, Issuer Form S-1s. Securities and Exchange Commission EDGAR Online. Securities and Exchange Commission, 10 Jan. 2024, www.sec.gov/edgar.shtml.

Spot Bitcoin ETF

Spot Bitcoin ETFs aim to provide exposure to bitcoin.

Investors can tailor their choice by considering the below criteria: fees and liquidity. For long-term investors, fees should take precedence, while those actively trading ETFs should prioritise liquidity. It's essential for investors to monitor how trading costs can impact overall performance.

Fees:

The Bitwise Bitcoin ETF boasts the lowest ongoing fee at 0.20%. However, fees on ETFs offered by ARK, Fidelity, VanEck, and iShares are all within 5 basis points of Bitwise's ETF. Issuers have also utilised fee waivers to attract assets initially. Six bitcoin ETFs are set to launch with a 0.00% fee after waivers, but it's important to note that each waiver comes with its limitations, typically lasting for six months and applying to the first $1 billion to $5 billion in assets. While waivers are temporary, investors should consider the long-term perspective and opt for one of the lowest-cost ETFs after the waiver periods expire. This still provides ample choices.

An exception to this trend is Grayscale, whose proposed fee currently stands at 1.50%. Despite the higher fee, investors won't receive additional benefits. Therefore, those seeking bitcoin exposure may find better options elsewhere.

The SEC's simultaneous approval of multiple filings sparked intense fee competition among issuers throughout the application process, benefiting investors. The emphasis on lower fees and costs has become crucial for attracting new assets, prompting issuers to enter the market with competitive fee structures.

Spot Bitcoin ETFs substantially undercut the high fees imposed by existing crypto funds. Currently, Grayscale trusts have a fee range of 2% to 3%, and the largest Bitcoin futures ETF charges 0.95%, which is considerably higher than the 0.20% price tag proposed in Bitwise's Spot Bitcoin ETF filing. Additionally, Investors in the current Bitcoin futures ETFs incur an additional fee when transitioning from one futures contract to the next, a concern that spot Bitcoin ETFs do not encounter.

Spot Bitcoin ETFs are expected to closely mirror their net asset value, providing a safer option for investors compared to early Bitcoin trusts. Additionally, the ability to create and redeem shares daily helps maintain a balance between demand and supply. If you hold a positive outlook on Bitcoin as an investment asset, this development could be a significant game-changer and warrants a closer examination.

Liquidity:

Investors must be mindful of their own expenses. Engaging in frequent trading and executing large trades incurs liquidity costs that can accumulate rapidly. Buy-and-hold investors generally face lower exposure to liquidity risks compared to market makers and day traders.

Risk warnings:

1. Trading of payment tokens and their derivatives has largely been on unregulated markets. In general, regulators globally consider payment tokens and their derivatives as highly risky products that are considered not to be suitable for most retail investors to trade. There have been allegations of fictitious trades and market manipulation.
2. If you trade unregulated products, you will not be protected by regulations administered by MAS in Singapore. MAS is unable to help you if you face difficulties in recovering your assets such as cryptocurrencies and monies, or become a victim to unfair or manipulative practices.
3. Unregulated markets may not be subject to the integrity and price transparency rules, registration and/or licensing requirements, audit, market surveillance and trade reporting requirements, anti-money laundering and anti-fraud rules, disaster recover or cybersecurity requirements, and market manipulation rules. As a result, digital payment tokens and their derivatives may be more susceptible to manipulation and fraud, which increases the risk of trading in digital payment tokens and their derivatives.
4. Digital payment tokens and their derivatives are specified investment products that have more complex features and higher risks characteristics that can be more difficult for retail consumers to understand. They tend to have little or no intrinsic value and are difficult to value. Their prices also tend to fluctuate very widely. Investors are advised to exercise extreme caution if they wish to trade Bitcoin ETFs or other digital payment token derivatives.
5. Investors must be prepared to lose more than the amount they put in due to the leveraged nature of derivatives such as futures.
6. Where in doubt, you should not transact in the digital payment token derivatives if you are not familiar with the product. This includes how the product is created, and how it is traded.

For more information about digital payment tokens and risks, please visit www.moneysense.gov.sg.

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