First crypto ETFs to launch in Australia underwhelm on debut

The culmination of a five-year battle to launch the first spot cryptocurrency exchange traded funds in the Asia-Pacific region has been greeted by muted demand.

Bitcoin and ether ETFs managed by Sydney-based ETF Securities, in conjunction with Switzerland’s 21Shares, started trading on Thursday on the Cboe Australia exchange. Fellow Sydneysiders Cosmos Asset Management’s bitcoin feeder ETF also launched the same day on the same exchange.

The listings mark the latest stage in the globalisation of exchange traded products investing in “physical” cryptocurrency, which have hitherto only been available in Canada, Brazil and a swath of European countries. US regulators have only permitted futures-based crypto ETFs so far, while the UK has not even done that.

The Australian launches come five years after ETF Securities first approached regulators with the idea of launching a crypto ETF in 2017.

However, the end of the lengthy gestation period comes just as digital currencies have fallen out of favour, with bitcoin falling below $30,000 for the first time since July this week — cementing a 50 per cent slide from November’s highs — and turbulence erupting in the market for so-called stablecoins such as Tether and TerraUSD.

ETFS 21Shares Bitcoin ETF (EBTC) saw total trading volume of A$1.4mn in its first two days and ETFS 21Shares Ethereum ETF (EETH) A$1.2mn, with the Cosmos Purpose Bitcoin Access ETF (CBTC) seeing volume of A$648,000.

“In our view, the lower-than-expected trading volumes owe to the state of the crypto market,” said Kanish Chugh, head of distribution at ETF Securities.

“The prices of cryptocurrencies have fallen sharply the past seven days. Stablecoins are under attack, with Terra imploding. This has sent ripples throughout the crypto industry.”

Chugh also pointed to the “unprecedentedly high” margin requirements for crypto ETFs set by clearing house ASX Clear, which “have made it very expensive for brokers and platforms to support trading”.

ASX Clear set the margin requirement for crypto ETFs of at least 40 per cent in order to cover settlement risks, due to the volatility of the cryptocurrency market.

“The lack of broker and platform connectivity has meant many Australian investors who want to buy bitcoin and ether ETFs cannot do so,” said Chugh. “We understand some influential brokers are pressuring the clearinghouse to change the margin requirements.”

Nevertheless Chugh remained upbeat, saying: “Australian investor interest in cryptocurrencies has not waned in recent months even as we have seen underperformance. And with bitcoin’s recent sell off as well, it may present an opportunity for investors who have been looking for attractive entry points into this new asset class”.

The single largest source of buying in early trading was Commsec, the largest self-directed trading platform in Australia, he noted.

ETFS and Cosmos will be hoping to secure “first-mover advantage” in the market, with New York-based VanEck expected to launch a rival product on the ASX, Australia’s primary exchange, in the coming weeks, and Canada’s 3iQ Digital Asset Management to debut another ETF on the Cboe Australia exchange.

Both ETFS and Cosmos had been planning to launch their funds two weeks ago, only for a last-minute problem to emerge with what 21Shares chief executive Hany Rashwan called a “downstream infrastructure provider”, believed to be a prime broker or clearer.

The products take different approaches. CBTC is a feeder fund that buys units in the $1.1bn Purpose Bitcoin ETF (BTCC), which listed in Toronto in February 2020.

In contrast, EBTC and EETH invest directly in the underlying securities. They have been built in partnership with 21Shares — the largest crypto ETP manager in the world with more than 30 products and $2.5bn of assets under management — which provides research and operational support. All three vehicles have annual fees of 1.25 per cent.

ETF Securities said the funds were a “major step in the mainstreaming of cryptocurrency ownership”, allowing investors to trade and own crypto in a “tightly regulated environment with government oversight”.

“Up until now, Australians wanting to buy bitcoin or ether have been forced onto unregulated crypto exchanges, which come with weaker investor protections,” it added.

For his part Rashwan saw the listing an “early entry point to the entire APAC region”, given Australia’s role as an Asia-Pacific investment hub.

Rashwan, who launched the first crypto ETP in the world in Zurich in 2019, added that 21Shares was “looking at several dozen countries around the world” in a quest to launch more such vehicles. “We are expanding beyond Europe,” he said.

Established North American crypto managers are also keen to muscle in on the Australian — and wider Asian — market even if they have been beaten to the punch timing wise.

The planned offerings from 3iQ, which claims to be Canada’s largest manager of digital assets, with $2bn, will also be feeder funds.

The 3iQ CoinShares Bitcoin Feeder ETF and the 3iQ CoinShares Ether Feeder ETF, also due to be listed on Cboe Australia, will purchase units in two existing ETFs listed on the Toronto Stock Exchange.

VanEck also has experience in the field, running a bitcoin futures ETF and private spot bitcoin fund in the US, and more than a dozen spot crypto exchange traded notes in Europe, alongside a wide range of other offerings.

Its proposed Australian ETF will invest directly in bitcoin and be listed on the ASX, which last week formally added digital assets to the list of eligible underlying assets for funds listed on the exchange.

Arian Neiron, chief executive of VanEck Asia Pacific, was unperturbed about rivals getting to market first.

“For something as commoditised as bitcoin, it will come down to the quality of the product and the price. The ASX was our choice of exchange and we’re confident that’s the way to go,” he said.

Because Australians primarily invest via superannuation schemes, Neiron said “they have a conservative disposition. They want a strong brand and a strong balance sheet that is global and [a fund] that is on the main board of the ASX.”