Published: December 1st, 2021
Invesco, the American investment firm, has joined forces with crypto index frim CoinShares to bring a bitcoin-backed European exchange-traded product (ETP) to market.
An ETP is akin to an exchange-traded fund (ETF) in that both track the performance of an underlying financial asset. For traditional investors, ETFs and ETPs are risk-mitigated financial instruments that make it easier to gain exposure to crypto price movements. Investing through an ETP/ETF means they don’t have to hold crypto directly. Crypto-backed ETPs have already found a market in Europe, with Germany and Switzerland each having a significant footprint.
Invesco’s Physical Bitcoin ETP (BTIC) will be listed on Deutsche Börse Xetra, Germany’s stock market for exchange-traded funds. The company says it will be 100% backed by holdings in BTC.
BTIC’s price performance will be tracked against the CoinShares Bitcoin Hourly Reference Rate index, minus a fixed fee of 0.99% annually. Zodia will provide custody services for the new product. It’s a UK-based digital asset company recognised by Britain’s Financial Conduct Authority (FCA).
Invesco, with more than USD 1 trillion in assets under management, was one of the first American companies to apply for a Bitcoin futures ETF this past August; soon after SEC chair, Gary Gensler said he’d prefer the introduction of such products instead of a physical Bitcoin ETF that was tied directly to a cryptocurrency.
The company withdrew ETF its futures application in September, citing the SEC’s insistence on 100% exposure to Bitcoin futures as a key barrier.
In a blog post announcing the launch, Gerald Buxton, Invesco’s head of EMEA ETFs and indexed strategies, said the decision to begin with a spot bitcoin ETP in Europe rather than a US bitcoin futures-based product was down to the firm’s belief that ‘trades in physical Bitcoin gives us a more observable market.’
‘We have a concern about the depth of synthetic liquidity and what that might do to valuations over time. It’s not something we’re completely comfortable with.’
He also said that BTIC has been in development since early 2018. The firm has worked to create and structure an instrument that would be recognisable to institutional investors as something similar to a traditional ETF.
Most of the client discussions Invesco has had about the new ETP have been around gaining ‘safe’ exposure to the world's leading crypto and how to trust in its valuation.
Back in the US, Invesco is aiming for SEC approval on a spot or ‘physical’ Bitcoin ETF submitted jointly with Galaxy Digital in September.
According to the SEC filing, the proposed Invesco Galaxy Bitcoin ETF will custody physical Bitcoin while tracking the Bloomberg Galaxy Bitcoin Index’s performance as its price-performance indicator.
The nascent fund hasn’t said which exchange its shares would trade on if approved. Neither have the two companies said what the ticker symbol will be or who will look after custody services.
The SEC has repeatedly said no to or delayed decisions on physical Bitcoin ETF applications, pointing to long-held worries over the coin’s extreme volatility and the financial watchdog’s concerns about market manipulation.
In an interview with the Wall Street Journal in September, SEC chair Gary Gensler said that "there is nothing of intrinsic value behind bitcoin other than what somebody else is willing to pay for it.’
A list of US crypto spot ETF applications maintained by Bloomberg Intelligence goes back as far as 2013 and counts more than a dozen applications not sitting on desks at the SEC waiting for approval.
Another nine applications are under review for ETFs tied to bitcoin futures contracts.
Crypto futures ETFs have risen in popularity after Gensler’s public comments about the SEC being more inclined to say yes to a bitcoin futures ETF rather than a fund backed by physical BTC, have also been influential
Both Invesco and Galaxy Digital were among the first to apply for this type of fund in September. An application by Illinois-based Amplify ETFs followed shortly after with plans for investments in Canadian Bitcoin funds, Bitcoin futures, and instruments that offer mainstream exposure to the decentralised finance (DeFi) market.
The first bitcoin ETF was proposed by the Winklevoss brothers in 2013. It was ultimately rejected by the SEC after a five-year wait. The proposal to list and trade the Winklevoss Bitcoin Trust’s commodity-based shares on the BATS BZX Exchange was voted down 3-1 by the commission in 2018.
At the time, bitcoin’s price dipped by three per cent in response to the news.
The SEC said that it did not agree with the Winklevoss brothers' claim that bitcoin markets are ‘particularly resistant to manipulation.’ It also raised concerns about issues related to fraud and investor protection.
The SEC pointedly said that its denial of the application should not be taken as an evaluation of whether blockchain technology or cryptocurrencies have value as an investment or source financial innovation.
But the watchdog said that a crucial part of its mission is to protect investors and prevent fraudulent or manipulative acts or practices. Long-held worries about fraud and manipulation of bitcoin had not been dispelled, and the fact that crypto markets are mainly unregulated and beyond the SECs’ regulatory reach was another primary concern.
At the time of writing, the SEC has yet to approve a cryptocurrency-based spot ETF. At the start of the year, it published an opinion listing a series of ‘significant investor protection issues that need to be addressed first before such funds can be offered to retail investors.
The agency said that more than three-quarters of BTC’s trading volume happens outside the continental USA and that 95 per cent of the volume is transacted across non-US exchanges.