Asset managers blame SEC rules for move to pull bitcoin ETFs


Invesco’s surprise decision to drop the launch of a Bitcoin futures exchange-traded fund in the United States was in part driven by its view that regulatory constraints would make it too expensive for investors, the manager revealed. .

Last month, the $ 1.6 billion asset manager put aside plans to launch a Bitcoin strategy ETF just hours before the fund’s listing in New York.

The Invesco vehicle was said to have been the second such ETF to launch, just 24 hours after the Bitcoin ProShares Strategy ETF (BITO), which staged the second strongest launch in history with nearly $ 1 billion. stock dollars changing hands on the first day of trading. BITO currently has assets of $ 1.3 billion.

Yet despite the time, effort, and money put into producing the 69,000 word, 75-page brief, Invesco told the Securities and Exchange Commission that it no longer wished to sue the ETF.

The Atlanta-based company said concerns about costs and investor suitability were a major factor in its decision, particularly with the generally ascending bitcoin futures curve known as contango, this which means that a fund typically incurs a loss when it rolls a one month front contract into a longer term contract.

One of the hurdles was that it became clear that the SEC was only considering allowing ETFs with 100% exposure to bitcoin futures.

“We thought future CMEs were going to be a very effective part of the portfolio. We never thought they would be effective when they were 100% of the proceeds, ”said Anna Paglia, Global Head of ETFs and Index Strategies at Invesco.

Rather, Invesco’s ideal portfolio was a mix of futures, swaps, physical bitcoins, ETFs, and private funds investing in the bitcoin industry, to help protect investors in the event of a cash shortage.

“Our inability to do this really motivated our decision,” Paglia said. “The more we investigated the market and the space, the more we realized that there were better ways to provide that particular exposure instead of going ahead and giving investors something that wasn’t. in line with what they expect from Invesco.

“We did a number of simulations and the cost of rolling futures contracts produced a 60 to 80 basis point drag. [a month]”Paglia said.” We’re talking big numbers, 5-10% annualized. It wouldn’t be a simple replication of the [bitcoin] index without significant tracking error. She also raised concerns about the capacity and liquidity of the futures market.

Paglia said Invesco applied for a futures ETF within 24 hours of SEC chairman Gary Gensler, suggesting he was comfortable with the idea of ​​a currency-based ETF. Regulated bitcoin futures contracts traded on the Chicago Mercantile Exchange. The SEC continued to reject any ETF’s claims on the basis of holding physical bitcoin, a market that the SEC says is vulnerable to “fraudulent and manipulative acts and practices.”

“We knew being the first to go out was really important, which is why we filed within 24 hours of Gensler’s statement,” she said.

It was only after its filing that Invesco did a “deep exploration” to determine if the product and packaging would be suitable for investors, Paglia said.

“We really thought long and hard before withdrawing this file. We know people would ask questions and scratch their heads. It was easier to say ‘yes’ and see how it went than ‘no’ and explain the decision. We had to make this difficult choice and take the decision in hand. I would do the same again.

BITO was expected to be followed by nearly a dozen similar vehicles, but its only competition to date is the $ 60 million Bitcoin Valkyrie (BTF) Strategy ETF and the 9 Million VanEck (XBTF) Bitcoin Strategy ETF. million dollars, alongside the $ 10 million Global X Blockchain. & Bitcoin Strategy ETF (BITS), a hybrid fund that invests in a mix of bitcoin futures and shares of blockchain-related companies.

San Francisco-based Bitwise Asset Management, which manages $ 1.7 billion in crypto-related assets, was among other houses to withdraw a case for a futures-based ETF.

Matt Hougan, chief investment officer, acknowledged that this was “somewhat unusual” given that “our case was a lot of work, a lot of legal work, a lot of intellectual work and business alignment work.”

He cited two factors for the decision. First, when Bitwise filed “we felt there would be more flexibility in how the product is built,” Hougan said, without the need to create a Cayman Islands subsidiary for tax purposes, and with the possibility of owning products such as Canadian spots. Bitcoin ETF alongside futures contracts.

Second, Hougan said that BITO’s success in raising assets has “exceeded” the capacity of futures traders, intermediaries who solicit or accept orders to buy or sell futures contracts, who have responded by raising prices.

“Our opinion was that an ETF based on futures was going to be flawed,” Hougan said. “When we filed we thought it would be worth it, but the costs built on the costs – the contango, commission merchants, added costs to work through a Cayman affiliate – so we have ultimately decided it was not in the best interests of long-term investors.

His take on existing futures ETFs is that “if you make a short-term bet [they] maybe. For long-term investors, there may be better opportunities. “

“At the end of the day, we want to put a cash ETF in the market,” Hougan added. “Ultimately [there will] be US spot ETFs. I don’t think we’ll be sitting here in three years asking if there will be any.

Invesco said it is currently focusing on other ways to provide exposure to cryptocurrencies. Tt has launched two crypto-focused equity ETFs and is also hoping to eventually get approval for a bitcoin spot ETF.


Comments are closed.