SEC Approves First Bitcoin Mining ETF

SEC Approves First Bitcoin Mining ETF

 Published: February 9th, 2022

US investment firm Valkyrie Capital has had a green light from the US Securities and Exchange Commission for a Bitcoin Mining ETF. Focused on renewable energy, it went live yesterday (Tuesday the 8th of February, 2022) on the Nasdaq. Its ticker symbol is WGMI, crypto jargon for 'we're gonna make it.’

According to the application submitted to the SEC at the end of January, 80 per cent of the Valkyrie ETF’s assets are in firms that earn at least half of their total profits from Bitcoin mining. Mining demands specialised computers that draw vast amounts of electricity as they compete across the blockchain to solve complex puzzles to verify transactions.

The ETF's most significant holdings are in Bitfarms, Argo Blockchain, Stronghold, Cleanspark, and Hive Blockchain. The application says that these companies use at least 77 per cent renewable energy to power their operations.

In an interview with Bloomberg, Valkyrie CEO Lea Wild said investors are 'looking for ways to gain exposure' to Bitcoin miners. She also said the departure of Bitcoin miners from China to places like Washington state and upstate New York were also factors driving the ETF launch.

The SEC application names former Bill Cannon as Valkyrie’s head of ETF portfolio management. He was previously Managing Director of Guggenheim Partners. Theseus Partners co-founder Stephen MacClurg is Valkyrie’s chief investment officer.

Valkyrie's new entry is the latest in a flurry of crypto-backed or 'focused' ETFs. Earlier in February, major US crypto investor Grayscale announced the launch of its 'Future of Finance' ETF, which invests in fintech and blockchain firms.

But there have been more fails than successes in the race to get SEC approval. Last month the regulator ejected applications from Skybridge, Fidelity, and First Trust Advisors for spot Bitcoin ETFs.

It's happening against a backdrop of rising corporate interest in cryptocurrency investments. In January, Big Four accounting and auditing firm KPMG's Canadian division announced that it had taken positions in both Bitcoin and Ethereum.

Slowly warming to crypto ETFs

As recently as three weeks ago, the SEC rejected another application for a spot market Bitcoin ETF, this time from asset management giant Fidelity.

On the 26th of January, the US regulator said Fidelity's application for its Cboe BZX Exchange did not sufficiently explain how it would stop fraud. The SEC has cited fraud concerns before when rejecting previous applications.

‘We have concluded that BZX has not met the burden of proof required by the Exchange Act and the SEC's Rules of Practice in showing that its proposal can stop market manipulation or fraudulent acts in order to protect investors, as well as the public,’ the SEC wrote in its decision to reject the bid.

An exchange-traded fund (ETF) is a publicly-traded instrument pegged to the value of an underlying asset, in this case, Bitcoin. A 'spot' Bitcoin ETF that tracks the day-to-day price action of BTC doesn't exist yet in America because the SEC is worried about potential price manipulation in crypto markets.

Last week (wc the 31st of January), the body said that it had also rejected a joint application for a Bitcoin ETF from SkyBridge and First Trust Advisors. That makes it six rejections since November for the regulator, and there are nine more waiting in the approvals queue.

Traders can invest in a futures Bitcoin ETF in the US. Because these ETFs don't track Bitcoin directly as an underlying asset, they are seen as less risky. As a derivative instrument, futures ETFs are regulated by the CFTC agency.

Boston-based Fidelity has more than USD 4 trillion in assets under management and has successfully launched a BTC spot ETF in Canada. The company applied to the SEC for its Bitcoin spot ETF back in March 2021.

Across the border, crypto ETFs find their footing

Fidelity’s Canadian Bitcoin ETF is called the Fidelity Advantage Bitcoin ETF (FBTC) and is listed on the Toronto Stock Exchange (TSE) rather than an American exchange.

After suffering rejections by the Securities and Exchange Commission in Washington for its first proposals for a spot Bitcoin ETF, the firm decided to launch one next door in Canada and prove it could be effectively risk-managed to protect investors.

Bitcoin spot ETFs are already listed in several countries around the world, including Brazil, Canada, and Dubai. The SEC remains unconvinced and has so far rejected every application for a Bitcoin spot ETF, which would give traders and investors direct exposure to Bitcoin’s often volatile price swings.

As an interim step to placate major asset management firms like Fidelity, the SEC and sister agency CFTC gave the green light for Bitcoin futures ETFs to be listed. Fidelity, which is one of nearly a dozen applicants waiting on approval for a spot or ‘physical’ Bitcoin ETF in the US, said in a press statement that its prospectus for a Canadian spot product could go ahead as ‘no national financial regulator has expressed concern about these instruments.’

The Canadian BTC ETF is actively managed and based on holdings of 'physical' BTC rather than offering exposure to BTC through a futures contract.

When Fidelity made its Canadian move, analysts at Bloomberg wrote that it ‘should be awkward for the SEC that one of the biggest names in US investing has been forced to head north to deliver a spot crypto ETF to its clients.’

Fidelity is now focusing on crypto

The Canadian BTC ETF launch came days after Fidelity received approval from regulators in Toronto to open a new entity called Fidelity Clearing Canada (FCC). It's the county's first institution providing digital services in asset trading and custody.

Prior to that, in September, Fidelity's US crypto division conducted a poll of institutional investors. Its findings said that 70 per cent of asset managers planned to buy or gain exposure to digital assets in the near future, with over 90 per cent saying they would do so by 2026.

That could be why Fidelity’s digital assets arm recently announced plans to add more than 100 staff in order to meet accelerating institutional demand for Bitcoin and other digital assets.

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