Hector McNeil, Co-Founder and Co-CEO of HANetf: There has been a lot of excitement around the approval of spot price Bitcoin ETFs in the US. There is some genuine cause for the celebration. The approval should unlock new flows of money into Bitcoin and helps mainstream the asset class.
But it is worth taking a step back and putting it into some perspective. The ETFs approved by the US regulator are not the world’s first Bitcoin exchange-traded products. Indeed, for several years now, European investors have had access to almost identical products, just with a slightly different label: exchange-traded commodities, or ETCs. The ETC Group Physical Bitcoin ETC (BTCE) has been listed on stock exchanges in both Germany and Switzerland since 2020. In that time, it has seen its assets under management swell to over $1.3billion. There are several such spot price Bitcoin ETCs listed in Europe, albeit with BTCE being the market leader in terms of both size and trading volumes.
Within Europe, these products cannot be classified as ETFs. The one letter difference between ETF and ETC, however, has caused some confusion. But European investors should be familiar with gaining spot price commodity or single asset exposure through ETCs rather ETFs. For example, if a European investor buys an exchange-traded product to gain exposure to gold, chances are they are buying an ETC. These might be colloquially referred to as ETFs, but they sit under the ETC label in the same way Europe’s Bitcoin ETCs do.
But there are some differences between the physical spot price Bitcoin ETFs and their ETC equivalents in Europe – differences that are actually in Europe’s favour. For example, The US spot Bitcoin ETFs can only use cash for creation/redemption. So, the ETF issuers will have to go out and buy Bitcoin, rather than receiving the coins themselves from Authorised Participants (APs), which could cause additional friction. For European Bitcoin ETCs, in-specie create / redeem is standard. BTCE only offers in-specie creation/redemption. So effectively the AP will buy Bitcoin and deliver to our custodian, after which we will issue units to the AP. Due to these restrictions US spot ETFs are also heavily reliant on Coinbase due it being one of the only US regulated crypto operators. 9 of the ETFs use Coinbase for (just check if its custody and other roles). European ETCs have the advantage that they have a much wider panel of custodians to choose from.
Within the wider ETF ecosystem, the US spot price ETFs are also at a disadvantage. There appears to be restrictions specific to the US surrounding market makers being able to trade in Bitcoin for hedging. If market makers in the US cannot hedge with Bitcoin, they will have to use futures to hedge their positions. Historically, there has been a large basis between spot and futures, with futures typically trading at a large premium to spot. If this continues you could see wide spreads and/or the ETF trading at a premium to NAV.
European ETPs like BTC can also incorporate local features that bring signicant benefits as well. For example BTCE allows end investors to redeem directly with the issuer. This provides another level off assurance to the investors that the coins are behind the ETC and can call on them as and when. It also means in Germany the ETC is tax free if held for more than 1 year.
It is also worth noting that UK investors cannot buy either the US Bitcoin ETFs or the European Bitcoin ETCs. Proxy exposure exists, such as the ETC Group Digital Assets and Blockchain Equity UCITS ETF (KOIN), which provides equity exposure with tight correlation with Bitcoin. But we do hope the move will lead to the Financial Conduct Authority (FCA) reviewing their rules around UK investors using Bitcoin ETCs, perhaps under the same “complex instrument” classification that short and leveraged ETPs are currently classified under.
So as participants in the 7+ year old European crypto ETC market we are all asking what’s the big deal and also we are opening our arms wide and welcoming US product providers and investors to the crypto ETP market. Better late than never!
