ETFs are investment products that allows investors to more easily and cost effectively gain exposure to investable assets. There are two U.S.-based bitcoin ETFs currently under review by the SEC: the Winklevoss Bitcoin Trust ETF (COIN) from the Winklevoss brothers Tyler and Cameron, and the XBTC ETF from SolidX, a blockchain investment fund.
As Needham reported this week, the SEC has until March 11th to make a final decision on the COIN ETF. And if it is approved, Needham estimates $300M in assets will flow into the ETF in its first week.
Two additional data points indicate ETF approval will be very good for bitcoin's price and the legitimacy of cryptocurrencies as an asset class:
Number one: The Bitcoin Investment Trust, still the only U.S.-based exchange-listed product that tracks the underlying price of bitcoin, is trading at a 30% price premium over bitcoin today. This premium was as high as 60% in 2015. This means some investors in the world would rather pay 30-60% more to gain exposure to bitcoin through a regulated and institutionally managed investment vehicle. Oh, and GBTC has $200M in AUM.
Number two: When gold ETFs were first introduced in the mid-2000s, led by sponsors Benchmark Asset Management and Gold Bullion Securities, the gold spot price tripled within 5 years. Many more soon followed around the world. Having read through both the COIN and XBTC S-1 filings with the SEC, I thought a good way to help us understand them would be a comparison chart of important features. For the time-starved, here are the main differences:
- The Winklevoss' Brothers COIN ETF is all in the family: they use their own Gemini Exchange to buy and secure bitcoin underlying the ETF shares. They use their own Gemini Exchange Auction Price as the price index to calculate portfolio value. They offer no insurance, although they have a sophisticated and well-explained cold storage process (also a Gemini custodial service)
- The SolidX ETF is more diversified: it uses a portfolio of respected independent services for buying and storing bitcoin and tracking its price. Their bitcoin holdings are insured up to $125M compared to an initial offering size of $1M. But they're fairly vague about the process for securing their bitcoin
Here are the key differences and features between the two ETFs:
|Name||COIN ETF [Form S-1]||XBTC ETF [Form S-1]|
|Listed Exchange||BATS||NYSE Arca|
|Bitcoin Exchange||Gemini Exchange||a mix of major exchanges (eg, Coinbase, Kraken, and OKCoin) and the OTC market for large trades (eg, $500K or greater)|
|Offering||Baskets of 10000 shares which represent, on the first day of trading, 1000 bitcoin each||Baskets of 10000 shares with no specified quantity of bitcoin represented|
|Initial Offering Size||$65 million (1000 baskets of 10000 shares at $65 per share, a price which will change depending on bitcoin's price at launch)||$1M|
|Fees||Don't know||Don't know; only clue is this NYSE Arca filing, regarding transaction fees: "Such expenses may vary, but the Trust currently expects such expenses to constitute 1% or less of the value of a Basket."|
|Price Index||Gemini Auction's daily bitcoin auction price||XBX, a composite reference rate for the price of bitcoin|
|Storage||Gemini custodial services - cold storage using multi-sig and chain of custody with regular audits||"a sophisticated technology system specifically designed to secure its bitcoin" ( we can assume it's cold storage, but I don't know if it's multi-sig and what audit and verification procedures look like)|
|Insurance||None provided||Yes, up to $125M for 3 types of insurance: crime, excess crime and excess vault|
If you're unsure which is better, you still have time to decide. Needham estimates there's a less than 25% that the COIN ETF will be approved in its current form. Though you can still gain exposure to bitcoin in other ways: by directly buying bitcoins yourself through a major licensed exchange like Coinbase, or by buying listed products such as the GBTC and in Europe, COINXBT and COINXBE.
Given the highly volatile but uncorrelated nature of bitcoin investment, I would recommend investors hold only a small portion of their investable assets in bitcoin and related cryptocurrencies: less than 5%, and closer to 2%. But cryptocurrencies as an asset class is now more than $15B in total AUM, and my view is that this will grow to $100B in the next 10 years.
Disclosure: I am/we are long GBTC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I own a material amount of bitcoin and cryptoassets. In fact, perhaps an irresponsible % of my net worth.