June 21, 2024

Firms pitch inverse cryptocurrency funds after SEC’s bitcoin ETF approval

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US asset managers are vying to launch exchange traded funds with leveraged bitcoin exposure and expand into bitcoin-based options and other cryptocurrencies after last week’s Securities and Exchange Commission approval of 11 spot bitcoin ETFs.

ProShares this week disclosed plans to launch five ETFs, including one that would offer twice the daily exposure to a bitcoin-tracking index and others to provide inverse bitcoin returns, paying out up to double any decline in an underlying index, according to filings with the SEC. The extra leverage in the ETFs — which are not designed to be long-term investments — would amplify swings experienced by the already volatile bitcoin price.

ProShares, which declined to comment on the filings, is working in the newly unencumbered part of the market alongside firms such as Grayscale Investments, which last week filed to launch a product that will sell options on its $26bn bitcoin ETF. So are asset managers including BlackRock, which is looking to widen its massive ETF line-up to include exposure to other cryptocurrencies — foreshadowing future clashes with wary regulators.

“I see value in having an ethereum ETF,” BlackRock chief executive Larry Fink told CNBC last week. Ethereum is a widely used blockchain with its own cryptocurrency (ether, or ETH, the second-largest token behind bitcoin). The SEC in October allowed a number of ether futures ETFs to launch.

Any such strategy will need to pass muster with the SEC, which approved spot bitcoin ETFs after years of reluctance and with serious reservations.

SEC chair Gary Gensler cautioned in his statement about the spot bitcoin ETF approvals that they did not “signal anything about the commission’s views as to the status of other crypto assets under the federal securities laws or about the current state of non-compliance of certain crypto asset market participants with the federal securities laws”.

Ether ETFs were likely to face “significant hurdles to overcome, but if the SEC denies it, I don’t think that’s the end of the story,” Chris Brodersen, a managing director specialising in blockchain and digital assets at accounting firm EisnerAmper. “I think these companies will do exactly what they did with bitcoin, which is go back and look for more clarity if necessary or look to the courts for some relief and try again.”

The SEC’s loss in a legal battle with Grayscale last year is widely seen as a turning point away from nearly a decade of denial, allowing bitcoin ETFs to pull in nearly $900mn in their first three days of trading earlier this month despite more than $1bn of outflows from Grayscale’s ETF.

Various US issuers have previously secured approval for double-leveraged and inverse ETFs. Covered call ETFs, which sell options on underlying holdings to generate income, have boomed in popularity in recent years.

Joe Hall, an attorney at Davis Polk, which advised Grayscale on its recent bitcoin ETF conversion, described the proposed leveraged and options-based bitcoin strategies as natural extensions.

“How long that takes, I couldn’t tell you, but if there’s already analogues in ETF land or financial derivatives on the basic product, I suspect that those all end up being approved one way or the other,” he said. “But I think it’s a very different question once you get outside of bitcoin.”

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