Bitcoin ETF – Under supervision

So far, investing in cyber currencies such as Bitcoin is usually very time-consuming. No wonder then that the financial industry is trying to develop appropriate products. Investors are now waiting for approval of the first Bitcoin ETF.

The strong price movements of the digital money Bitcoin seem almost adventurous. In 2017 alone, the price increased at times by 1900 percent to more than 18 500 US dollars. Investors of the first hour would still have a whopping profit in the last range between $ 6000 and $ 8000. On the other hand, those who have reached the top levels suffered heavy losses. But how do you invest in the Internet money?

At the futures exchanges in Chicago, for example, investors can bet on the future development of the cyber currency through so-called futures. The Swiss bank Vontobel has issued an endless investment certificate that shows the price of the digital currency against the dollar. Exchange-traded index funds (ETFs) do not yet exist. One important reason for this is that they are subject to extensive prudential obligations. “The regulators are particularly concerned that the underlying Bitcoin is not yet developed enough and can be manipulated,” says Marc Oliver Rieger, a professor at the University of Trier.

An ETF would be an uncomplicated and cost-effective solution

The US Securities and Exchange Commission, the Security Exchange Commission (SEC), misses similar clear rules in Bitcoin trading as it does on a stock exchange. The US investment company VanEck now believes that it has found a solution to minimize the risks. The VanEck SolidX Bitcoin Trust ETF, for which it has applied for admission to the SEC, relies on pricing on OTC trading platforms. The acronym OTC stands for “Over The Counter” and describes over-the-counter transactions. “We have an agreement with the OTC traders that we can use the prices used for their institutional clients,” says Jan van Eck, chief executive officer of the investment company. These prices also followed the order size and were an important part of the market structure. This ETF concept also includes insurance for storing the digital assets. “We think this is currently the best protection for investors,” says van Eck.

It will also be important for regulatory approval to know where the data for the index of a Bitcoin ETF comes from. For example, the Coinmarketcap.com website lists more than 200 cryptocurrency trading platforms worldwide. These digital marketplaces are trading around the clock and, unlike the major stock exchanges, without a closing price. How is the appropriate price found? The index specialist MVIS, a VanEck company, has also developed a solution in cooperation with the data provider CryptoCompare. It takes into account the price and trading data of approximately 85 major crypto exchanges worldwide in the index compilation. These are weighted according to the trading volume of the individual stock exchanges. “A factor is also included in the calculation, which takes into account the time zones and the trading frequency over certain periods,” explains Thomas Kettner, index expert at MVIS.

In addition, special challenges have to be taken into account when dealing with virtual currencies, for example when spin-offs originate from the original Bitcoin with other cryptocurrencies. “After a spin-off, instead of a coin, investors now hold two coins with different valuations in their digital repository, so it makes sense that the resulting value must also be included in the index calculation,” says Kettner. The solution: The currency created by the spin-off – for example Bitcoin Cash – is added to the index for one day. Then it is removed and its equivalent in bitcoins reinvested in the index.

MVIS has also developed indices from several cryptocurrencies, which include Bitcoin as well as Ethereum, XRP and Litecoin with different weights. Institutional investors are already signaling interest. Scientist Rieger is sure that an ETF on Bitcoin would also meet with large demand among private investors. On the one hand, because it would be an uncomplicated and cost-effective solution for investors interested in this underlying. “On the other hand, unlike a certificate, ETF investors do not have to bear the risk of the issuer’s insolvency,” says Rieger.

For investors, Bitcoin & Co. may soon not only be of interest as a speculative object, says investment expert van Eck. “Over time, debt issues around the world are likely to boil and crypto-currencies may be in demand as a hedging instrument on the market.”

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