By Suzanne McGee
(Reuters) – Last October, Matthew Hougan told an industry panel he expected bitcoin spot exchange-traded funds (ETFs) to attract $55 billion in assets in their first five years.
By the end of August this year, roughly eight months after their debut, the 10 new funds approved by U.S. regulators collectively had more than $52 billion in assets, according to data from TrackInsight.
“Clearly I wasn’t optimistic enough,” Hougan, chief executive of cryptocurrency firm Bitwise Investments, mused wryly. “This will be an area we measure in hundreds of billions of dollars.”
That remains to be seen. These products track the price of bitcoin, which has seen constant swings since its birth 16 years ago, ushering in the cryptocurrency era. Some market players say bitcoin is inherently speculative, more akin to art or fine wine than gold and commodities, creating volatility and risk.
The road to broad acceptance as a mainstream asset can be slow and tortuous. One milestone came in August, when Morgan Stanley decided to allow its network of 15,000 financial advisors to actively recommend at least two of the new bitcoin ETFs to their clients: the iShares Trust and the Fidelity Wise Origin Bitcoin Fund.
“It's unacceptable now to not do the due diligence and work to understand these products,” said John Hoffman, head of distribution and partnerships at Grayscale Funds, whose firm Grayscale Bitcoin Trust was not part of the first wave of products added to Morgan Stanley's platform.
“The risk in the wealth management channel has shifted towards the risk of not moving forward.”
Retail investors have dominated flows into the new ETFs. Only a handful of large institutions, such as the Wisconsin state investment board and several hedge funds, have publicly disclosed their holdings in regulatory filings.
“The first $50 billion is from people who understand Bitcoin well,” said Sui Chung, CEO of CF Benchmarks, which developed the Bitcoin index that underpins several of the ETFs.
“Now we're seeing the next stage: people on Morgan Stanley's risk committee being dragged, kicking and screaming, into this decision when advisors can no longer say 'no' to their clients.”
But the fact that pioneers 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're hailed as innovators in this field, and it reminds us that being pioneers, they're also seen as risky,” said Andrew Lom, a lawyer at Norton Rose Fulbright whose practice includes financial technology.
For Lom, the real test of whether the new ETFs will achieve mainstream investment status will not just be their size, but also their liquidity. “We may already be there,” he said. “At some point, people will start thinking and talking about them as part of the normal investment universe, and then we will see modern portfolio theory experts start to consider how to allocate them.”
Then comes the next test: whether model portfolios, the comprehensive investment products that financial advisers increasingly rely on when making asset allocation decisions, will incorporate them into the mix. Even some of the staunchest Bitcoin proponents admit that will be at least six to 12 months away.
WHAT'S HAPPENING WITH ETHER ETFs?
While bitcoin ETFs are at least on track to emerge as part of the investing mainstream, the future is murkier for spot ethereum ETFs.
A month after its launch on July 23, the Ethereum pool’s assets totaled nearly $7 billion, according to TrackInsight. BlackRock’s (NYSE:) iShares Trust has reached $900 million in assets, outpacing ETF launches as a whole but suffering in comparison to BlackRock’s Bitcoin product, which hit $1 billion in its first four days of trading.
“A lot of people were excited up until the launch, and then it became kind of a ‘sell the news’ event,” said Adrian Fritz, head of research at 21Shares, one of the firms that launched a spot ether ETF in late July. “With more education and time, we will see more excitement around ether as well.”
Others are more cautious, pointing out that Ether is not just a smaller cryptocurrency but a very different one.
“If bitcoin is digital gold, ether is digital oil,” said CF Benchmarks' Chung. “The reason ethereum could increase in value is that people might need it to move assets around the digital network, the same way people use oil to make the real world work.”
That hybrid nature also requires both regulators and investors to do more research and due diligence, he and others say.
“The sales pitch will be longer and more complicated,” Chung said.
