Crypto ETFs explained

On Thursday, Bloomberg reported that the SEC was set to allow the first US bitcoin futures ETF to begin trading next week, in what would be a “watershed moment” for the crypto industry.

The next day the SEC’s investor education office tweeted: “Before investing in a fund that holds Bitcoin futures contracts, make sure you carefully weigh the potential risks and benefits.” Those 20 words caused the price of bitcoin to break $60,000 for the first time in six months, close to an all-time high of $64,895.

But what are crypto ETFs and why is this all such a big deal?

What is a crypto ETF?

To answer that, we need to back up a little. An exchange traded fund, or ETF, is a financial instrument that tracks the value of a particular asset or a collection of assets. Its main benefit is that it allows investors to diversify their holdings without actually owning any of the assets themselves. For example, a gold ETF would track the value of gold reserves it represents. Similarly, a crypto ETF would track the value of one or more crypto assets and a bitcoin ETF would track the value of just bitcoin.

Importantly, ETFs are traded on traditional market exchanges rather than crypto exchanges.

Bitcoin ETFs already exist in some countries. Many such funds have been launched in Canada, Brazil, Europe and Dubai just this year. But approval from the SEC represents the holy grail for cryptocurrency enthusiasts — one that would spur the adoption of crypto ETFs worldwide and give further legitimacy to cryptocurrencies in the process. SEC approval is crucial not just because the US is the world’s largest and most sophisticated financial market. It now also accounts for the largest share of the world’s bitcoin mining as China has been cracking down on crypto miners and traders since May.

How do crypto ETFs work?

The main appeal of crypto ETFs is that they work exactly like ETFs backed by traditional assets. They come in two forms:

■ Physical-backed: To create this type of crypto ETF, an asset management company must buy some actual coins from the market, just as it would buy shares for a traditional ETF. It can then set up a fund that represents the value of the crypto assets it holds and list it for trading on the stock exchange. If the value of the fund’s digital coins increases, so does the value of your investment.

■ Futures-backed: In this type of ETF, shares in the fund aren’t based on actual coins but on crypto futures contracts. A futures contract is simply an agreement to buy or sell an asset at a predetermined price at a specified time in the future. These are less risky than physical-backed ETFs because there are no physical assets to be protected. This is the type of bitcoin ETF the SEC is reportedly set to approve.

Pros of crypto ETFs

Convenient: When it comes to crypto, the biggest advantage ETFs have over direct investments is that investors don’t have to handle the underlying asset. While crypto exchanges have made it easier to buy and sell cryptocurrency in the past few years, things like setting up digital wallets and understanding how private and public keys work remain hurdles to large-scale crypto adoption. Crypto ETFs let investors benefit from the new asset class with their existing brokerage accounts.

Safe(r): Since they’re traded to traditional exchanges, all ETFs are highly regulated. This means regulators can monitor and analyse their performance and protect against price manipulation within the ETF markets. However, the underlying asset’s price can still be manipulated through unregulated crypto exchanges. Crypto exchanges and wallets are also susceptible to hacking attacks and theft. Crypto ETFs protect against these risks as you don’t own any actual crypto. And in a futures-backed crypto ETF, the fund doesn’t own any crypto either.

Cheaper: Buying a large collection of cryptocurrencies is a long and complicated process that involves opening accounts with several crypto exchanges and maintaining numerous digital wallets. Crypto ETFs give you exposure — albeit indirectly — to numerous crypto assets through a single investment. ETF fees are also generally lower than those of traditional managed funds.

Cons of crypto ETFs

Limited choice: There are few such funds currently available to invest in. But if the SEC were to open the door to crypto ETFs, that could change quickly. Limited choice is a concern at the asset level, too. Traditional ETFs include a wide range of securities to minimise risk. But most crypto ETFs track only a few digital currencies.

Crypto-related risks: While they are in some ways safer than investing directly in cryptocurrencies, crypto ETFs nonetheless carry over many of the risks of the underlying assets they represent. Cryptocurrencies are volatile and so are crypto ETFs. And physical-backed funds, which buy and store actual cryptocurrencies, need to manage other crypto-related risks, such as hacking.

A cop-out? To cryptocurrency purists, these virtual assets represent a hedge against fiat currencies and the central banks and governments that control them. A bitcoin ETF would by definition be regulated by a government, and investors wouldn’t actually be buying any crypto either.

Let’s move on to the other big developments of the week.

Starting up, teens are tapping Twitter

Teenagers are tapping into #StartupTwitter to build products, access founders and venture capitalists, and scout for freelance gigs in India’s booming startup ecosystem.

They are eager to learn and share — their timelines are filled with threads on growth and productivity hacks, and they tweet on non-fungible tokens and financial literacy. And the public display of their knowledge and curiosity is catching attention. (read more)

• Crypto exchanges have recorded a spurt in student investors as the disruptive asset class has found favour with the community as an investment. About 15% to 20% of all the users are students and in the 18-20 years age group.
• A war of wages is on for experts in cryptocurrency technologies such as blockchain, fuelled by demand from IT services companies serving global clients, consulting firms and fintech startups. This crunch in crypto talent is pushing the salaries to up to Rs 80 lakh per annum for those with 8-10 years of experience.
• Indian cryptocurrency exchanges have started reporting and blocking trading accounts, which undertake suspicious trades after government agencies raised red flags over cryptocurrencies being used for money laundering.
• Bollywood actor Salman Khan will soon launch a non-fungible token (NFT) collection. These will be available on Bollycoin.com and will be purchasable via its native token by Bollycoin, which will open for presale later this month. The NFT platform will go live in December.

Ixigo cofounder Aloke Bajpai

For Ixigo, IPO is the best option: Going public is the best option for the travel portal as it not only gives an exit to investors but also allows customers and other stakeholders to hold shares in the company and grow with it, cofounder Aloke Bajpai told ET in an interview.

Bajpai, along with cofounder Rajnish Kumar, recently won in the Comeback Kid category at the Economic Times Startup Awards 2021.

Genrobotic founders (from left) Arun George, Vimal Govind, Rashid K and Nikhil NP

Genrobotic Innovations’ overseas expansion plans: Genrobotic Innovations, which won in the Social Enterprise category at the ET Startup Awards 2021, is planning to work with the UK, Malaysian and South Korean governments to deploy cleantech and medical solutions.

Cofounder and CEO Vimal Govind MK, in an interview, spoke about what drives the firm to focus on manual scavenging and how it plans to leverage technology to address pressing social issues. (read more)

Zostel asks Sebi to reject and suspend Oyo’s IPO: Oyo’s IPO is “non-maintainable as Oravel’s capital structure is not final”, Zostel (Zo Rooms) has written to the Securities and Exchange Board of India (Sebi) seeking to quash the hospitality major’s draft IPO papers and suspend the offering.

Interestingly, Zostel’s note includes a presentation by Oyo promoter SoftBank, which in an earnings report in 2016 mentioned that Oyo had acquired Zostel.

More global biggies line up for Paytm’s $2.2-billion IPO: Paytm’s IPO has garnered interest from a set of new investors, including US-based asset manager Alkeon Capital as well as funds managed by Morgan Stanley and Goldman Sachs. The new investors join a list of bidders that are in talks to invest in Paytm’s anchor investment as well as its IPO.

Dream11 has suspended its operations in Karnataka, as the fantasy gaming platform battles complaints alleging violation of the newly implemented Karnataka gaming ban.

Exactly a week ago, Bengaluru Police filed a first information report (FIR) against Dream11 founders Harsh Jain and Bhavit Sheth following a complaint that the Mumbai-based firm had continued to offer gaming services on its platform a week after the state government notified the new rules disallowing what it termed as “games of chance”.

Dream11 continues to maintain that it is compliant with all the laws.

A week into their flagship sales, ecommerce players have recorded higher sales than last year but still lower than what they were expecting, according to industry executives, analysts and logistics experts we spoke with.

The first-week GMV may have been lower than expected because last-minute changes to the sale dates meant they started during ‘Shradh’, considered an inauspicious time for purchases. But the companies could still make up for this in the next two sale events before Diwali, which could take daily shipment volumes to around nine million from around six million last year, industry players told us.

Urban Company cofounders Varun Khaitan, Raghav Chandra, Abhiraj Singh Bhal

Urban Company has made a slew of changes to its payment policy for service partners, days after they took to the streets protesting the startup’s wage policy.

• The company will slash the highest commission it charges beauty service professionals to 25% from 30%.
• The startup will also marginally increase prices of high-demand services across categories to increase the take-home pay of partners.
• This will reflect in prices over the coming months so that a sudden cost increase does not result in a drop in demand.

Urban Company (formerly UrbanClap), in a blogpost, listed a 12-point programme to improve earnings of service professionals on its platform.

• Investors line up for cloud kitchens, online food brands: Hygiene BigBite — a cloud kitchen backed by Serial entrepreneur K Ganesh — has raised $15 million from Falcon Edge, amid heightened investor interest in the sector. Last week, Rebel Foods, among the largest cloud kitchens in India, became a unicorn as it raised $175 million in its latest round at a $1.4-billion valuation.
• Pristyn Care in talks to close new round at over $1.2 billion valuation: The Gurugram-based healthcare startup is in talks with investors like Sequoia Capital US and others to raise $90-110 million. If the latest funding round goes through, the company will see its valuation double to $1.2-1.4 billion in six months after it raised $53 million from investors led by Tiger Global valuing it at $550 million in April.
• Neobank Open raises $100 million from Temasek, others: Neobanking startup Open has raised $100 million in a funding round led by Singapore’s sovereign wealth fund Temasek, along with participation from new investors like Google, Visa and Japan’s SBI Investment. The fundraising will close in the coming weeks, a person directly aware of the matter said.

The Narendra Modi government is considering a “rethink” of the safe harbour framework enjoyed by social media platforms in the country. This comes at a time when calls to further regulate Facebook have intensified across the world following revelations by whistle-blower Frances Haugen.

That’s about it from us this week. Stay safe and get that jab.