By Susan McGee
(Reuters) – Bitcoin exchange-traded funds (ETFs) are expected to attract $55 billion in assets in the first five years, Matthew Hogan told an industry panel in October.
By late August of this year, about eight months after their debut, the 10 new funds approved by U.S. regulators had combined assets of more than $52 billion, according to data from TrackInsight.
“I was clearly not optimistic enough,” Hogan, CEO of cryptocurrency investment firm Bitwise Investments, said sarcastically. “This is going to be a region that we measure in the hundreds of billions of dollars.”
But that’s still unclear. These products track the price of Bitcoin, which has seen frequent fluctuations since its birth 16 years ago, heralding the beginning of the crypto era. Some market players say Bitcoin is inherently speculative, more like art or fine wine than gold or commodities, which leads to volatility and risk.
The road to mainstream acceptance as a mainstream asset can be slow and complicated. One notable milestone came in August. That’s when Morgan Stanley decided to allow its 15,000-strong network of financial advisors to actively recommend at least two new bitcoin funds — the iShares Trust and the Fidelity Wise Origin Bitcoin Fund — to clients.
“It’s unacceptable now not to do the due diligence and understand these products,” said John Hoffman, head of distribution and partnerships at Grayscale Funds, whose Grayscale Bitcoin Trust was not part of the first wave of products added to the Morgan Stanley platform.
“The risks have somewhat flipped for the wealth management channel to the risk of not going forward.”
Individual investors have dominated investment flows into the new ETFs, and only a handful of large institutions, such as the Wisconsin Investment Board and a number of hedge funds, have publicly disclosed their positions in regulatory filings.
“The first $50 billion came from people who understood bitcoin very well,” said Sui Chong, CEO of CF Benchmarks, which developed the bitcoin index that underpins many ETFs.
“And now we are seeing the next phase: where people on the Morgan Stanley risk committee are being dragged, under pressure and yelled at, into this decision when advisors can no longer say ‘no’ to their clients.”
But the fact that entrepreneurs like Morgan Stanley are getting so much attention indicates how much ground crypto ETFs have to cover to become part of the investing mainstream.
“They are being hailed as pioneers in doing this, which reminds us that by being early adopters they are also seen as risky,” said Andrew Lum, a lawyer at Norton Rose Fulbright whose practice includes fintech.
The real test of whether the new ETFs will become mainstream, Lum says, will be not just their size but their liquidity. “We may have already reached that point,” he says. “At some point, people start thinking and talking about them as part of the normal investment universe, and then you see the MPTs start thinking about what their allocation should be.”
Here comes the next test: whether model portfolios, the all-in-one investment products that financial advisors increasingly rely on when making asset allocation decisions, will add them to the mix. Even some of bitcoin’s most ardent adherents admit that’s at least six to 12 months away.
What about Ether ETFs?
If Bitcoin ETFs are at least on their way to emerging as part of the investment mainstream, the future is more uncertain for spot Ethereum ETFs.
A month after its launch on July 23, the ether pool had nearly $7 billion in total assets, according to TrackInsight. BlackRock’s (NYSE:) iShares Trust had $900 million in assets, outpacing ETF launches as a whole, but it struggled compared to BlackRock’s own bitcoin product, which hit $1 billion in its first four days of trading.
“A lot of people were excited leading up to the launch, and then it turned into a kind of ‘sell the news,’” said Adrian Fritz, head of research at 21Shares, one of the companies that launched the Ether spot ETF in late July. “With more education and time, you’ll see more excitement around ether as well.”
Others remain more cautious, pointing out that ether is not just a smaller cryptocurrency, but a completely different currency.
“If Bitcoin is digital gold, then ether is digital oil,” said Chong of CF Benchmarks. “The reason ether is so valuable is that people may need it to transfer assets across the digital network, just like people use oil to make the real world work.”
He and others say this hybrid nature also requires regulators and investors to do more research and due diligence.
“The sale process will be longer and more complicated,” Chung added.
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