The launch of bullion-backed ETFs shot gold into the stratosphere. Could SEC approval do the same for Bitcoin?
Australia’s only provider of a spot Bitcoin ETF, Global X, says there has been strong inflows since the US Securities and Exchange Commission (SEC) approved spot bitcoin ETFs from a range of fund managers on January 10.
However, senior product and investment strategist David Tuckwell told Stockhead there remains challenges for the broad adoption of Bitcoin ETFs in Australia and the US.
The SEC approval will enable US investors to easily access the 15-year-old cryptocurrency through traditional securities exchanges with the world’s largest economy.
Senior product and investment strategist David Tuckwell told Stockhead it has seen “a few million trickle in” to the Global X’s 21Shares Bitcoin ETF (CBOE:EBTC) in the past week or so.
EBTC and the Global X 21Shares Ethereum ETF (CBOE:EETH) track performance of the price of Bitcoin and Ethereum respectively in Aussie dollars.
“Our Bitcoin ETF currently sits on a perfectly respectable $40 million in assets under management,” he says.
Tuckwell says one of the problems cryptocurrencies have is most trading has taken place on unregulated platforms.
“They were very much operating outside of these very important guardrails established by regulators, which has consequences like we’ve seen with FTX,” Tuckwell says.
One of the world’s largest crypto exchanges FTX filed for bankruptcy last year with its founder Sam Bankman-Fried found guilty of money laundering and fraud.
“Bitcoin ETFs bring that trading out of an unregulated setting into a highly regulated marketplace,” Tuckwell says.
“With that comes better outcomes for consumers with legal contingencies in place for consumers if something goes wrong.
“There is more screening of service provides and some of the conflicts of interest that have plagued these exchanges like FTX or Binance are removed.”
Tuckwell says the SEC approval of Bitcoin ETFs is being compared to the launch of gold ETFs 20 years ago.
Interestingly, the first global gold ETF launched was Gold Bullion Securities, which listed on the ASX on March 28, 2003, by ETF Securities and its major shareholder, none other than Tuckwell’s father Graham.
Seoul-based Mirae Asset Financial Group, which owns Global X, bought out ETF Securities in 2022.
“Before gold ETFs came along 20 years the only real way people could invest in gold on exchanges was to invest in gold mining companies,” Tuckwell says.
“When gold ETFs came along a lot of people who owned shares in gold mining ETFs sold them off and bought gold bullion ETFs instead leading to a major run up in the gold price.”
Tuckwell says many people are thinking with the SEC approval of Bitcoin ETFs there will be a re-run of the gold ETFs experience.
He says following the gold theory investors won’t be limited to buying shares in Bitcoin mining companies on exchanges and instead will buy Bitcoin ETFs leading to structurally higher prices of the cryptocurrency.
“In my opinion, I don’t think it will be as extreme as the gold case because the market capitalisation of these Bitcoin miners is far less than the gold miners, like Newmont, so there’s less money to switch over,” he says.
“It still has the market excited and will definitely be worth watching what happens in the coming years and months to the Bitcoin price as a result.”
Tuckwell says spot Bitcoin ETFs work quite simply with an ETF issuer like Global X buying Bitcoin, which is held in the fund.
“We then issue ETFs against Bitcoin which the fund holds so if you own our Bitcoin ETF by extension you legally own a certain amount of Bitcoin,” he says.
“Spot Bitcoin ETFs work the same way as gold bullion ETFs which would buy a whole bunch of gold bars and stick them in a bank vault then issue units against those gold bars.
“So, if you own units in gold bullion ETFs by extension you are the legal owner of gold bars or part of one. It is very straightforward.”
Tuckwell says the ETF industry in Australia and the US is driven primarily by financial advisors.
“It’s not driven by millennials, and it’s certainly not driven by people with loose change with the ETF market advisor driven,” he says.
“Because of the legal issues which have plagued crypto exchanges, and because they don’t connect into advisor platforms, financial advisors in Australia and the US have for the larger part steered clear.
“Much of the excitement is that Bitcoin ETFs do connect into the financial advisor platforms and infrastructure so there is potential advisor take up as well.”
However, Tuckwell says under Australian laws advisors giving personal financial advice are required to possess competence in what they’re giving advice on.
“Crypto is not something that advisors are naturally fluent in, and the way advisors upskill is by professional accreditations but there aren’t really any on the sector,” he says.
Tuckwell says it is also not clear whether professional indemnity insurance for finance advisors provides coverage for crypto, still considered a volatile new asset class.
Tuckwell says ASX Clear, which is the sole provider of clearing services for Australia’s equity markets, provides yet another obstacle for financial advisors in the crypto sphere.
“ASX Clear is an invisible engine room that drives our exchanges like CBOE and the ASX,” he says.
“Whenever any ETF or ASX 200 share trades, brokers are required to post what they call margin against the trade.”
Tuckwell says it’s like winning a house auction where you have to say put up a deposit representing a percentage of the house price.
“Where the sting in the tail for Bitcoin and Ethereum ETFs in Australia comes in is those margins are onerous,” he says.
“For most ETFs in Australia you’d be looking at ASX Clear margins of 10% but whereas for Bitcoin ASX Clear wants 40% and Ethereum they want 50%.
“You can imagine the balance sheet strain that translates into for brokers.”
The jury is still out as to whether the SEC will approve an Ethereum ETF, with the deadline for the final decision in May.
SEC chairman Gary Gensler, a well-known critic of the crypto industry, cast doubt on doubt over whether it would follow Bitcoin and receive ETF approval.
“Importantly, today’s commission action is cabined to ETPs holding one non-security commodity, Bitcoin,” Gensler said after the SEC decision.
“It should in no way signal the commission’s willingness to approve listing standards for crypto asset securities.”
The price of Ethereum has started to rally, despite the comments from Gensler. Tuckwell says successful legal proceedings against the SEC when they originally blocked Bitcoin ETFs may set the precedent for Ethereum ETFs to be approved as well.
“In my mind that’s the market saying contrary to the public comments of its commissioner the SEC is going to or at least be forced to by courts approve Ethereum ETFs as well,” Tuckwell says.
The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead. Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.