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By most measures the launch of bitcoin exchange traded funds in the US has been a rip-roaring success, but industry participants say coming innovations will turbo-charge the crypto ETF industry further still.
Just over a year on from their debut, US-listed bitcoin ETFs already hold $120bn of assets. The largest, the $57bn iShares Bitcoin Trust (IBIT), was the world’s fastest ETF to get to $10bn, $25bn and $50bn in AUM, has already surpassed iShares’ Gold Trust and is closing in on the $80bn SPDR Gold Shares (GLD) as the planet’s largest commodity exchange traded product.
According to Matt Hougan, chief investment officer at crypto specialist Bitwise Asset Management, though, we haven’t seen anything yet.
“If we look forward 10 years, I bet the largest ETP in the US hasn’t launched yet,” Hougan said at the recent Digital Assets Forum in London. “I believe [the largest will be] an index-based approach,” Hougan added, referring to the diversified indices that make up most ETFs.
His words came just days before the listing of the first spot cryptocurrency index, or basket, ETF in the US, the Hashdex Nasdaq Crypto Index US ETF (NCIQ), which holds bitcoin and ether in a single product.
As things stand, there remains a barrier to further diversification in the US, however. The Securities and Exchange Commission has taken the view that while bitcoin and ether are commodities, many other digital tokens are securities. The latter definition complicates the path to creating ETFs holding them, as they would be subject to the 1940 Investment Company Act, which mandates more robust investor protection.
With a changing of the guard at the SEC from Gary Gensler — known for his scepticism of all things crypto — to a more crypto-friendly face under President Donald Trump, some believe the logjam may be broken and these definitions reassessed.
Since November there has been a rash of cryptocurrency ETF filings in the US for products predicated on tokens such as solana, Ripple’s XRP and litecoin, as well as a potential basket product from crypto pioneer Grayscale.
Hougan said resolving the security-commodity definition debate could open the floodgates.
“Until we get clear definitions it will hold the market back. But once we get these definitions, I believe we will get an explosion of products in the US,” he said.
Eric Pollackov, global head of ETF capital markets at Invesco ETFs, also speaking at the Digital Assets Forum, went further, alluding to crypto equivalents of the JPMorgan Equity Premium Income Fund (JEPI), the popular “covered call” ETF that uses derivatives to generate enhanced income, albeit at the expense of surrendering some potential capital gains, and for which Grayscale has already filed.
“We are going to be having covered calls etc, everything that we have for equities,” Pollackov said. “But we need to differentiate between a commodity and a security.”
“There have been more than 50 filings since January 1. We are not even in the first inning of innovation that’s coming from cryptocurrency.”
Even Trump himself may be looking to get in on the act. One of the three ETFs for which his Trump Media and Technology Group has applied for a trademark is a Truth.Fi Bitcoin Plus ETF, implying exposure to more than just bitcoin itself.
Basket-based crypto index ETPs already exist in some other jurisdictions. Hashdex itself already runs one in Brazil and two in Europe, holding as many as a dozen digital tokens, such as ripple, solana and cardano, as well as bitcoin and ether.
Overall, Europe boasts 37 crypto basket or index ETPs, issued by 18 providers, according to data from ETFbook. The range includes equal-weighted, mid-cap and momentum variations on the standard market capitalisation-based model, as well as actively managed vehicles seeking to beat a passive index.
However, they have yet to set the world on fire. At $430mn, the Hashdex Nasdaq Crypto Index ETP (HASH) is the largest basket fund, according to ETFbook, and in aggregate the 37 funds hold $1.1bn.
This is a relatively small share of Europe’s wider crypto ETP market, where 210 funds hold $18bn of assets and five single-token ones — four bitcoin and one solana — individually hold more than all the basket ETPs do in total.
Despite this slow start, Hougan believed crypto index ETFs would come into their own as more institutional investors dip their toe in the asset class.
“To date, crypto has mostly been a retail phenomenon,” he said. “Professional investors have been slow to allocate due to both regulatory and reputational risks.
“But my guess is that over the next 10 years that’s going to change. As crypto is normalised, more and more professional investors are going to come into the space. And in every asset class I’ve studied, professional investors just love indexing. I don’t know why crypto would be different.”
He argued that most of existing crypto ETP investors were hardcore “fans” who have strong views pro or anti specific coins and would want to express that in a focused product.
“Again, I expect this to change,” Hougan said. “I suspect it’s going to be normal to allocate 2-5 per cent to crypto, and I think a lot of people will just want to buy a basket because they won’t want to pick any specific coin.”
Irrespective of this, however, Hougan believed flows into US-listed pure bitcoin ETFs will still surpass last year’s punchy number this year.
“When you look at ETF history, the first year is never the biggest year. Even if no one else bought bitcoin, apart from those that already hold it, I think flows this year will be much higher than they were last year,” he said.
