CRYPTO MOVERS AND PRICES
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Bitcoin (BTC) reached new record highs of about USD 50,500 overnight. The broader crypto market is marginally lower to unchanged on the move.
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The Ontario Securities Commission (OSC) has given a green light to the launch of the Purpose Bitcoin ETF. The new offering, which will trade on the Toronto Stock Exchange and is described as “the world’s first bitcoin exchange traded [fund],” will invest directly into physical BTC and is an incremental improvement to the asset's mainstreaming as an investment class.
The ETF’s manager is Toronto-based investment services firm Purpose Investments. Gemini Trust Company will serve as the Fund’s “sub-custodian,'' providing custody of BTC associated with the product. According to its prospectus, the “Fund invests… in long-term holdings of Bitcoin in order to provide Unitholders with a secure, convenient, lower-cost alternative to direct investment in” the asset.
Purpose Investments expects that BTC will be purchased from trading platforms and OTC desks with “due diligence'' conducted on each “source” before purchases are executed. Gemini, Coinbase Pro, and “other government regulated trading platforms and OTC counterparties” are listed as sources for BTC purchases.
Units of the Fund are “issued and distributed on a continuous basis” while, in order to meet certain regulatory conditions, non-residents of Canada may not own more than 40% of the ETF’s units.
Despite the aforementioned geographical restriction, the fund’s prospectus notes that Purpose Investments has the option to not take action should ownership by non-Canadian residents exceed 40% if legal counsel advises that “failure to take any of such actions would not adversely impact the status of the Fund…”
Holders of units may exercise redemption during any regular “Trading Day” at a price “equal to the lesser of" a) 95% of market price, or b) the net asset value per ETF Unit. The prospectus states the Fund’s units could trade in the market at a premium or discount to the net asset values of the ETF.
The approval of the Purpose BTC ETF comes as 2 similar products are currently being considered by regulators in the U.S. VanEck Associates Corp. and Valkyrie Digital Assets have filed with the SEC to launch BTC ETFs in the U.S. Similar to the Purpose BTC ETF, the 2 proposed U.S. products offer investors exposure to physical BTC.
The SEC has denied over a dozen BTC ETFs to date, which offered exposure to physical BTC and futures. SEC Commissioner Hester Peirce, who dissented against the SEC’s rejection of Bitwise’s BTC ETF last year, said in an interview with CoinDesk that she believes “we are ready for a [BTC] exchange trade product” and “people are looking for ways through our regulated securities markets to access [BTC], and if we don't give them the natural way which I think would be an exchange traded product, they’re going to look for other ways to do it…” Peirce added that while products offering exposure to BTC have emerged, such options “might not be the most direct or cost-effective.”
BTC ETFs maintained considerable mindshare amongst the coin’s proponents in 2018 and 2019 when dozens of firms attempted to move such products past the SEC. While the popularization of other exchange traded products has reduced the emphasis on an actual ETF, this is another long-awaited announcement on BTC’s path to mainstream investment adoption.
That said, it appears that the reason the Purpose product was approved and 4 others rejected is because it only appears to be a small jump from the existing process offered by listed trust products. For example, we still expect this product will have “quirks” to intraday pricing, similar to some of the incumbent products.
Our understanding is many of the firms that are expected to be market makers still haven’t received approval to trade physical BTC. These firms are therefore most likely to trade 1 of the close-month CME BTC futures to provide intraday pricing for daily activity. The issue with this is that the BTC futures curve has been historically volatile and rarely flat. Therefore, the intraday pricing is very likely to deviate from the NAV of the physical BTC held by the ETF provider, similar to what’s seen in already-existing vehicles.
While we view the approval of a North American ETF as an incremental step from an investment perspective, in practice we’re unsure that the market is getting access to a vehicle that’s all much more effective than what’s already available.