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Curatia Analysis for Wed, Oct 27, 2021

Valkyrie Investments Partners with Nasdaq in Bitcoin Futures ETF  

Giang Bui photo    Giang Bui
Head of U.S. Exchange Traded Products, Nasdaq

Global demand for cryptocurrency products is soaring. Like most jurisdictions, the U.S. is still working on sensible rules and regulations that ensure investor protection without stunting innovation in this asset class.

But change is in the wind. Not long after SEC Chairman Gary Gensler indicated he’s amenable to considering filings limited to CME-traded bitcoin futures, the first bitcoin futures ETFs were launched. Valkyrie Bitcoin Strategy ETF (Nasdaq: BTF) was among the first allowed by the SEC to come to market.

Investors can now gain exposure to bitcoin through the efficient and transparent ETF structure. As investor demand to access crypto markets through ETFs increases, issuers will continue to seek regulatory approval for products that solve investors’ needs.

A New Milestone

Investor appetite for bitcoin and other cryptocurrency products has been increasing throughout the world, and the entire market is now valued at about $2 trillion. For some time, US investors have been able to buy and sell cryptocurrencies through cryptocurrency brokers and exchanges and set up a wallet for storage and safekeeping.

Some accredited investors have also gained exposure through investment funds offered by certain asset managers. Although they can directly invest in an offered product, they’re restricted and subject to significant limitations on resale and transferability. Investors may also buy eligible shares in some OTC products, which have been deemed freely tradeable under SEC Rule 144 and aren’t subject to restrictions on resale or transferability.

But ETFs are a much more compelling vehicle for getting cost-effective and convenient exposure to this asset class. Europe, Dubai, and Canada have already launched cryptocurrency ETFs in their markets, and now the U.S. has gotten a few products across the finish line.

Nasdaq and its partner, Valkyrie Investments, were among first to market with a bitcoin futures ETF. This is a milestone in terms of product innovation and working with regulators, issuers, market makers, and the broader ETF industry, to bring this type of offering to US investors.
A Walk Down Memory Lane

Back in 2013, the first attempt was made to bring a bitcoin ETF to the US market. The original proposal was for the ETF to hold bitcoins, and the investment objective was for the shares to reflect the performance of a weighted average price of bitcoins, less the trust’s expenses.

However, the SEC rejected such proposals several times over the years, citing concerns over the ETFs’ ability to protect investors from potential market manipulation.

Since the first bitcoin ETF proposal eight years ago, the cryptocurrency industry has matured significantly, driven by heightened interest from retail and institutional investors. Over the years, issuers have never stopped trying to be the first past the post and deliver the first cryptocurrency ETF to the market. Issuers have submitted a slew of ETF filings to the SEC, and the pace of filings has only picked up during 2021. Proposals include “physically-backed” bitcoin and ether products as well as cryptocurrency futures-based products.

There is also a filing from Victory Capital for a multi-coin ETF tracking the Nasdaq Crypto Index (NCI), Nasdaq’s first digital asset index offering, which was launched in February 2021 to expand the boundaries of investible crypto-related products. The key components of the NCI include bitcoin, ether, litecoin, chainlink, bitcoin cash, uniswap, stellar lumens and filecoin, making it a representative benchmark of the institutionally investable crypto asset market.

A glimmer of hope appeared when SEC Chairman Gensler recently commented that he was looking forward to reviewing proposals for ETFs backed specifically by CME bitcoin futures contracts under the Investment Company Act of 1940. The CME launched its first bitcoin futures contract in 2017, its bitcoin options contract in 2020, and its micro bitcoin futures contract in 2021 – all of which are cash-settled. And as an established, regulated exchange, the CME has a strong market surveillance program in place to detect signs of market abuse – a factor that could soothe the SEC’s nerves.

Soon after these comments, on October 22, Valkyrie Investments launched the Valkyrie Bitcoin Strategy ETF (Nasdaq: BTF) on Nasdaq. The product primarily invests in CME bitcoin futures contracts and is registered under the Investment Company Act of 1940.

There was a lot of collaboration across the industry to get BTF across the finish line, and Nasdaq is excited to have been Valkyrie’s partner throughout the journey. Importantly, Nasdaq’s new Designated Liquidity Provider program is helping ETF issuers like Valkyrie by giving market makers new incentives to provide liquidity and facilitate efficient trading in the ETF from day one.

Not Our First Crypto Rodeo

Nasdaq is well versed in bringing crypto-related products to market. In fact, Nasdaq Nordic was the first exchange in the world to list a cryptocurrency-related tracker certificate in October 2015, when XBT Provider launched Bitcoin Tracker EUR, a bitcoin-based security denominated in euro.

In April 2021, crypto-focused asset manager Hashdex debuted the first crypto index ETF, the Hashdex Nasdaq Crypto Index Fund, on Brazil’s B3 exchange. The ETF seeks to track the NCI.

Finally, in August 2021, Victory Capital Management launched the Victory Hashdex Nasdaq Crypto Index Fund, a private fund for accredited investors that tracks the NCI. Additionally, the company has filed an initial registration statement with the SEC to offer the strategy in an ETF vehicle on Nasdaq.

Kudos to the Issuers

It’s taken a long time for a bitcoin-related ETF to come to the US market, so the launch of the Valkyrie Bitcoin Strategy ETF is a big feat for the entire industry. Kudos to all issuers for developing exciting new ETFs and navigating the regulatory process so investors can diversify their portfolios and save for the future.

Cryptocurrencies are technology-driven products. As the home of innovation for technology firms, Nasdaq looks forward to partnering with issuers and market makers to bring ETFs based on this and other emerging asset classes to the public markets.

Giang Bui is Head of U.S. Exchange Traded Products at Nasdaq, where she is responsible for developing and executing the strategic vision for Nasdaq’s ETP business. Prior to joining Nasdaq, she was a Director of Listings at Cboe Global Markets, where she was focused on ETF business development, liquidity programs, and strategic initiatives. Prior to joining Cboe, Giang played a key role in developing and marketing new indexes at the New York Stock Exchange. She began her career as a business analyst for NYSE’s global index and exchange-traded products group.