ETFs have been generating quite a buzz from the cryptocurrency market the past few months. Investors buy and sell ETFs via the stock exchange. It’s crucial to grasp how liquid your holdings are, and the more frequently you trade with ETFs, the better your understanding will be. One of the major companies that have the longest history with ETFs is VanEck.
How did VanEck derive the price for Bitcoin in the early days?
VanEck is an investment management company, headquartered in New York City, New York, US and founded in 1955 by John van Eck. The company has satellite offices in Frankfurt, Germany, and Australia.
Jan van Eck, the current CEO of VanEck, launched one of the first ETFs in the 2000s and the US became a US$ 4 trillion industry. The launch provided unprecedented liquidity and access to harder-to-access areas.
Nobody understood the price of bitcoin at the early stages. In order to do so for the institutional investors, they had to come up with a benchmark that would be sufficient for the task of pricing bitcoin. The company created the criteria after its German subsidiary tracked the top 50 markets with their partner, CryptoCompare, during their pricing and validation stage.
They were aware that in the second stage, the derivative markets would be fixed around physical things that are traded. At the time, the future contracts by CBO and CME were built.
One of their commodity traders were very influential in building the first golden commodity contracts. They comprehended that cash delivered contracts are truly an improved version of future contracts.
What was Bitcoin trading like in its early days?
According to Director of Digital Assets Strategy at VanEck/MVIS, Gabor Gurbacs, bitcoin transactions would require the sender to send funds to the receiver who is a complete stranger to the sender. A few days later, the user would get the public key via E-mail and the private key in a physical letter and would have access to blockchain or bitcoin. This structure was bitcoin trading in 2012.
The whole process from purchase to settlement usually lasted 5 to 7 days if the geographical location was around 400 to 500 miles. Gabor added that the KYC system has also gotten better since the early days of cryptocurrency.
What are ETFs and why are they important?
An Exchange-Traded Fund (ETF), according to Investopedia, “is marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange”.
According to Gabor, liquidity is the single keyword as to why ETFs are essential. Once an ETF issues a share, then companies called Authorized Participants (AP) buys these underlying stocks of the exchange rate fund and exchange it for the ETF share.
Gabor used the S&P 500 Index as an example stating that if you bought the S&P 500 stock by stock, it would be difficult to replicate that performance. If a large company does the work for you and buys the underlying assets, then you can directly exchange it for the share, making the purchasing process more efficient and cheap.
These companies hold a large amount of these underlying assets so that they can add liquidity whenever you want to issue or redeem shares of the funds. This way you get an extra set of liquidity from these AP who are incentivised to buy and sell securities.
What are the advantages or upsides to ETF?
There aren’t many disadvantages to ETFs. They add liquidity, have KYC requirements and is the most trustless form of investing in the crypto space.
Some of the bitcoin holders dislike the idea of having some asset manager accumulating large amounts of bitcoin and acting on behalf of the customers. They believe that this goes against the spirit of bitcoin.
ETFs require Net asset value (NAV). Every day, in the bitcoin blockchain, you can show your wallet sizes, and ETFs can show their NAV. They are committed to keeping up the bitcoin’s standards in the space.
Some people prefer to store their assets in different cold storage solutions while others oppose the idea of carrying around millions of dollars worth of assets on a device as it wouldn’t be that safe. ETFs, add the layer of security and professional asset management around it.
Crypto trading requires tax reporting and reporting of your other assets which are incredibly difficult. ETFs are designed to provide tax efficiency and lower transaction and management costs.
How was the experience with the regulators when you first filed for ETF?
Whey, the company, first filed for ETF, the guys there responded to them saying that the futures market doesn’t exist yet and so they got rejected. They refiled it when the future contacts from CBO and CME came out by the end of 2017. The response was very similar to the previous.
They said you should withdraw as the future’s market hasn’t matured enough. There was only a US$ 150 to 200 million worth of future’s trading at the time which is small, compared to other commodities.
This difference in trading was not the case as there were minor futures that had ETFs on it, so they decided to work around their questions, resulting in them having an ever-moving target.
They even wrote a letter explaining how the future markets are ready for ETFs. They had to go back and forth with the regulators, and during this, the regulators mentioned that they are focusing on market surveillance.
How are the markets inspected and why do markets need to grow up for ETFs to be utilised?
The US equity and futures market participants are generally part of the Inter Surveillance Group. It’s a group of exchanges that larger guys are part of it.
They provide trade data to parent exchanges and front-line market surveillance in their respective jurisdictions.
According to isgportal.org:
“ISG has two main purposes:
(1) the coordination and development of programs and procedures to identify possible fraudulent and manipulative activities across markets; and (2) information sharing.”
Grown-up markets are required for ETFs to come in. Large exchanges of the world are incredibly lucrative businesses and its in their best interest to be clean. At least 95% of them should be clean, and they want to be so.
It all eventually comes down to trust as nobody wants a fraud or sketchy exchange and thus they need to grow up. According to Gabor, they are on the right path.
What are Gabor’s thoughts on ETFs evolving in the digital asset space in the future?
The digital asset space is primarily retail. Some of the OTC markets and exchanges have confirmed this.
For example, crypto trading platforms don’t have the best execution type of principles applied to their system. High-frequency market makers are scouting for retail investors from those platforms every second. These are the best bid and offer principles from US equity exchanges, applied to crypto platforms, and ETF will provide the necessary security for it.
It’s easier to open up a German bank account than getting a Level 3 tier at a crypto exchange.
Larger players who have regulatory requirements and have their skin in the game should come to the market because right now crypto companies enjoy their monopoly in their space. For this reason, they might not give the best pricing and customer protection to their customers.
He believes that the retail and institutional standards are nonsense and will change over time.
Retail investors should be able to access private investments. He hopes that the retail and institutional standards will change for the better in the coming decade or so.
Anthony Pompliano and Gabor both agree that we should move from a system where the masses deem intelligence as wealth.
What are Gabor’s thoughts on single asset ETFs and multi-asset ETFs?
Gabor states that it’s more likely for a single asset ETF to be approved than a multi-asset ETFs.
Bitcoin has a much higher reputation than any other cryptocurrencies. MVIS was one of the first to launch a multi-asset index, and Gabor spent six months in Frankfurt, Germany with 20 analytics team to do that.
Gabor stated that he does believe in the power of diversification and hopes that multi-asset products come to the market regardless of whoever the issuer is. The key to this is to make sure that the tokens are clean and offer liquidity.
The impact of tokens on the crypto market
Getting a regulatory approval on anything is a big deal, and the result is usually good as regulators will get a chance to understand the space more. Bitcoin can’t be frozen, and that was one of the reasons they are looking into this decentralised and trustless cryptocurrency.
Gabor believes that the stable coin Tether, “has solved the problem of US dollar and money on RAM“. Tether is fast; people want to see their holdings and trade large amounts of assets. Tether has created that market.