The launch of bitcoin futures on a major exchange has accelerated the race among ETF providers in both Canada and the United States to be first to market with products that track the digital currency.
On Sunday, the Chicago-based Cboe Global Markets exchange became the first to offer a futures contract for bitcoin, while CME Group (also Chicago-based) is set to trade on Dec. 18.
While news of these launches has sparked much debate among some of the largest asset managers globally, it's good news for the exchange-traded-fund industry, which has been waiting patiently for a way to cash in on the bitcoin craze.
Bitcoin and other cryptocurrencies have surged in value in recent months, creating a ripple effect of investor interest. The bitcoin price surpassed $16,000 (U.S.) late last week, a monstrous gain after starting the year near $700.
"The launch of the futures trading is just one more domino that seems to be falling into place in the approval of a bitcoin ETF," said Eric Balchunas, U.S. ETF analyst with Bloomberg Intelligence.
In the United States, there are already approximately 12 ETF filings in queue looking to provide investors access to both the bitcoin or blockchain-technology market. Seven of them are looking to access the bitcoin futures market, while two others are competing to be the first direct-to-bitcoin ETF. The most famous among them is the Winklevoss Bitcoin ETF (COIN), which was filed more than three years ago.
In Canada, at least two investment firms have publicly filed to launch what could be the first bitcoin exchange-traded funds in North America.
In September, Toronto-based Evolve Groups Inc. was the first ETF provider to file regulatory papers with the Ontario Securities Commission for the launch of an actively managed bitcoin ETF that will invest directly or indirectly in the CBOE bitcoin futures. Last month, ETF pioneer Som Seif's investment firm Purpose Investments Inc. filed a preliminary prospectus for a bitcoin trust that seeks to replicate the performance of the price of bitcoin but does not directly indicate whether it will track a bitcoin futures market or store physical bitcoin.
"It's a very exciting time for us as we get ready to see how the futures trade next week, as well as the market depth and the level of interest and demand that goes into it and the overall impact on bitcoin," said Raj Lala, president and CEO of Evolve Funds. "I don't think anyone can tell you what is going to happen over the next week but it's definitely a step in the right direction in providing more people with access to the price of bitcoin."
Canadian provider Horizons ETFs Management (Canada) Inc. has also been closely monitoring the bitcoin market and has plans to build an ETF that will track the bitcoin currency. The firm recently filed a preliminary prospectus for a blockchain ETF in the U.S that will track the Horizons blockchain Index that seeks to invest in companies that stand to benefit from the growth of blockchain technology.
Now, with U.S-based trading platforms providing or preparing to offer access to bitcoin futures, ETF providers are racing to see who can launch the first fund in North America.
"There is an absolute race going on among both Canadian and U.S players who are scrambling to be the first ETF player in North America," said Steve Hawkins, president and co-CEO of Horizons ETFs. "But there is a lot of push back at bank levels, auditor levels, regulator levels and security exchange levels. Much of this push back is around the fact that many don't know what bitcoin is and that it isn't your traditional currency, or that it hasn't actively traded in the market before. Everyone wants to be first doing this in the ETF space, but no one has real experience in the bitcoin market."
But not everybody is jumping for joy with the news of U.S exchanges opening their doors to bitcoin futures. Many of the large U.S brokerages, including Goldman Sachs Corp. and JPMorgan Chase and Co., publicly announced their concerns in an open letter to regulators, stating the exchanges rushed the approval process and failed to get enough feedback from market participants on margin levels, trading limits, stress tests and clearing.
The next step will be left up to the regulators – both in the U.S and in Canada – as to whether they approve the filings for bitcoin ETFs. Many in the industry believe Canada will be the first to market as Canadian regulators tend to be more liberal than their U.S counterparts, in which case Canadian firms could see flows from U.S investors tempted to send their money north to gain early access. No ETFs are expected to be approved until next year.
In the U.S, Mr. Balchunas is predicting that the number of bitcoin-related ETF filings will double or triple over the next month.
"There's plenty of space and enough assets that are going to be coming in for issuers to say we want a piece of that and we are willing to compete in that market because there is a big audience in this space and room for several people to thrive," Mr. Balchunas said. "Based on some other products we have seen in Sweden and the U.S., it is very possible that any ETF that launched could see close to a $1-billion in trading every day in the U.S – that's similar to what Google trades and obviously very attractive for many issuers."