Crypto coming to an ETF near you

Finance & Fury Podcast

Hi – hope you’re all going well and welcome to Finance and Fury.

In this episode – look at cryptoasset investments and the increase in accessibility for retail investors through alternative structures – as in Western economies – US, EU, and Aus – these are becoming available for retail investors through structures like ETFs – i.e. exchange traded funds

1. This comes off the back of Treasurer Josh Frydenberg- looking at a series of regulatory and tax proposals covering digital wallets and crypto assets – focus being on reducing scams and fraud
2. The move could also include the introduction of an outline for central bank digital currency - which has been covered in depth already in previous episodes – may cover any actual announcement when there is more news about the actual policy
   1. In past episodes - Covered the BIS framework for what they consider cryptoassets – many have viewed this as legitimacy given to crypto – but it is legitimacy purely in the form of an asset – not a currency which was the original concept as a medium of exchange
   2. But these recent legislative developments seem to be an adoption from financial institutions to make money – and potentially a barrier to entry for anyone looking to get into supplying crypto – need for a DAO – decentralised autonomous organisation – another topic for another day – but institutions see money being made and want a piece of the action
   3. Late into last year - the Commonwealth Bank of Australia announced plans to support trading of 10 crypto assets on its app, which has 6.5 million active users.
   4. On top of this – there is a new megatrend – Crypto ETFs –

Before we get into that – I want to make one observation - Two ways cryptoassets have been treated by governments – it is based around those countries that adopt and those don’t – and instead outright ban cryptoassets – this has been based around the power dynamic between politicians and companies, in particular banks and investment firms – in other words – who politicians are beholden to based around funding interests

1. Lets first look at countries where the politicians are not influenced by the lobbyists from major global banks – something like China – where the politicians are de-facto controllers of the economy have greater control over the banks due to having a semi-communist/fascist makeup – they have done their best to ban cryptoassets
   1. We have seen a lack of innovations in investment products and outright bans on certain investments in cryptoassets – as well as enforcement from governments
2. But in countries where companies – in particular the financial system through lobbyists have the power to influence the politicians who make the rules – essentially, those that are the other way around from China – we are starting to see a adoption of crypto assets – not as a currency to replace what the central bank provides – but as an alternative asset class that banks can capitalise off through the demand of the population
   1. Banks and most companies have one goal – to make money – every company wants to do this – investment managers and banks do this through what is known as FUM – the funds under management – the more money that people invest in their products, the more revenues they can generate due to percentage charges – in additional to brokerage
      1. I did an episode on the BIS framework a while ago – where they actually defined crypto assets – and talked about the securitisation of traditional assets, such as shares or bonds – in essence – the central banks of central banks sees no problem with the financial system in the west adopting crypto – as long as it is an asset– not as a currency or as a replacement to the fiat monetary system we have in place – as they have their own designs in mind – there can be no competition for the medium of exchange –
         1. It is the building block for confidence in the economy – plus – taxation is the key to this – the government needs one single currency they can domestically track and monitor to make sure they get what they determine is their share of your money through taxation.
      2. Banks will make a lot of money through governments allowing retail investors the ability to purchase crypto related assets through banks/asset managers – which is why there has been large lobbying efforts from institutions like Goldman Sachs and other banks for this regulatory push
   2. In the end – investment managers (fund managers and the banks) will make money through Investment products if people purchase them (i.e. their FUM increases and based around the same % they make more money – 1% at $1bn is more than 1% at $100m) – they will get their hands on anything they can that investors want to hold – and the more they want to hold an asset, the higher the money made from a MER/ICR can be

Now – this is Not advice – general information only based around what product are available in the market – need to take into account your own personal situation - Two types of indirect investments – An ETF with an underlying crytpoasset and those that are considered crypto adjacent

First type – underlying crypto – these are the simplest

1. Let’s call this Indirect cryptoassets – In a way, this has been the moment the investment world has been waiting for - ETF Securities appears set to be the first Australian ETF provider to launch a listed security that tracks the spot price of two of the world’s largest cryptocurrencies, Ethereum and Bitcoin.
2. This is still Subject to regulatory approval – but if passed - ETF Securities is set to launch into the crypto world – this will done through a partnership with 21Shares, who are the largest crypto provider based in Europe. The agreement will see ETF Securities launch Australia’s first Bitcoin and Ethereum ETFs
3. The two listed funds will be able to be purchased through the ASX rather than purchasing through a wallet or off someone in the blockchain:
   1. The ETFS 21Shares Bitcoin ETF and ETFS 21Shares Ethereum ETF will provide Australians with a way to invest in Bitcoin and Ether, via funds operated by ETF Securities, in partnership with 21Shares.
      1. BTC and ETH had been two of the two major cryptoassets classes over the past decade and those with the most traction.
   2. Once they receive final approval, both ETFs are set to trade on the ASX and Chi-X exchange.
   3. This will increase the access for every day investors – but on top of this – access through superannuation for those with platforms that allow access to ASX ETFs
   4. This can have major ramifications – mainly through the increased level of FUM – The more money that can flow into an asset – and the higher the desire = the higher the prices can climb
   5. The actual structing of this asset is unknown – the PDS isn’t available at this stage as it is sitting with ASIC – but if it is like their precious metals funds it shouldn’t rely on future contracts
   6. In the U.S. regulators appear to be reluctant to approve a spot Bitcoin ETF (which holds actual Bitcoin rather than futures contracts), placing Australia ahead in the game.
4. The second type – is a different Crypto assets – many ETFs are not exactly crypto – it is crypto adjacent = through purchasing companies that deal with block chain and other crypto related activities –
   1. Australian fund management company BetaShares’ new crypto company exchange-traded fund (ETF) has been in massive demand due to the underlying securities
   2. There is a Capital Appreciation Portfolio Diversification (CRYP) fund which enables investors to gain exposure to 50 pure-play-listed crypto companies from around the world, such as exchanges, mining companies and equipment firms.
   3. Some of the top companies on CRYP include Galaxy Digital (12.0%), Marathon Digital(11.3%), Coinbase Global (10.7%), Silvergate Capital (10.2%) and MicroStrategy (9.4%).
   4. Investors blasted through the existing ETF record of $5.8 million ($8 million Australian dollars) within minutes and soared to a total of almost $31.3 million ($42.5 million AUD) by the end of opening day, signalling massive pent up demand for crypto exposure on the ASX.
      1. Many people want to demand these assets – so the prices of these funds can be elevated with the increase in FUM
   5. But – since its launce in November 2021 – the price has dropped by 40% - sitting at its low point at around $6.8 when it closed on the first day of trade for $11.19
   6. Plans for more investment products beyond just what has been allowed to date – BTC backed bonds - Goldman Sachs, and a handful of other tier-one US banks, are figuring out how to use bitcoin as collateral for cash loans to institutions,
      1. Emulating tri-party repo type arrangements (a way of borrowing funds by selling securities with an agreement to repurchase them, involving a third-party agent) - banks are exploring ways to follow the same path of not touching bitcoin, like other synthetic products.
         1. Goldman is working on getting approved for lending against collateral and tri-party repo - And if they had a liquidation agent, then they were just doing secured lending without ever having bitcoin touch their balance sheet, whilst still using the price of this as an offset
         2. Goldman is not alone; a handful of big banks are following the trail blazed by crypto-friendly banks Silvergate and Signature, both of which announced bitcoin-backed cash loans earlier this year
      2. The regulatory stance on activity like this remains complicated – but ETF providers are likely to start moving into this space

Things to watch out for – remember all of this is general information only – not intended to make a financial decision based around

1. There is a shift in western countries – an acceptance of major crypto assets – great if you are into crypto – but don’t confuse this as another step towards something like BTC becoming a dominant medium exchange – where you will be able to use your BTC to purchase goods at Woolworths or other places
   1. Instead – this is in an essence enshrining crypto assets as something that purely has a monetary value attached to it based around the demand for the product –
   2. Looking at the nature of speculation around cryptocurrencies – there were many uses and hence, many individuals demanding this – people needed it as a medium of exchange for illicit activities, others were thinking that it was going to replace fiat currency, others have purchased it because they think the price will go up – hence a speculative bet – what this round of legislation does is further enshrines the concept that it is purely a speculative asset with no fundamental valuation –
   3. But Crypto ETFs are an inferior product to owning the actual crypto - with prices potentially becoming disconnected from the underlying asset on a daily basis – especially if it is based on future contracts –
      1. It also introduces third party risks – you don’t hold the asset but simply the ETF – which represents the price of the asset
   4. But it is an easier method for a lot of people to access ownership in Crypto – hence, demand capacity and asset flow can increase – all else being equal, this translates into an increase in the price
      1. If every person who invested invests 1% of their portfolio into crypto as a hedge/alternative asset – then prices would increase dramatically
   5. But the market is complex and unregulated at this stage – which means that it is still the wild west – especially with volatility – BTC and ETH are not at risk of being some scam with a new coin listing – but they can still be risky due to price fluctuations

The major thing to remember when thinking about to invest is to ask yourself one question: How does this help me achieve my goals?

1. Everyone has different goals – passive income targets, purchasing a property, retiring debt free – a range of different targets – but the question should be always “how does this asset fit within my plan to achieve my goal” – if there is an investment that doesn’t fit this plan, then maybe it is something to double check
2. If you are interest in crypto – then these expansions are good news for you – you will have greater access to these forms of investments or if you are looking to diversify

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