Jointly produced by Tongzhengtong Research Institute × FENBUSHI DIGITAL

Jointly produced by Tongzhengtong Research Institute × FENBUSHI DIGITAL

Special Advisor: Shen Bo

ETF is a financial innovation that has attracted much attention in recent years. After more than 20 years of development, the total number has reached more than 4,000, and the fund management scale is nearly 4.8 trillion US dollars. Applications for BTC ETFs have been started since 2016, but why are the results always unsatisfactory?

Summary

An ETF is a fund that tracks changes in an "underlying index" and is traded on a stock exchange. Its essence is an open-end fund that can be freely purchased, redeemed, and traded in real time. It has the operating characteristics of both closed-end and open-end funds, and has the characteristics of diversifying investment risks, low transaction and management fees, and high transparency.

ETF is the product of hedging investment risks in financial markets. In 1993, the American Stock Exchange launched the Standard & Poor's Depository Receipt (SPDR S&P500), which was the first real ETF in the industry. After entering the 21st century, ETFs have entered a period of rapid development, innovative products have emerged one after another, and ETFs have achieved both growth in number and asset size.

In the past 20 years since the emergence of ETFs, the products have been continuously enriched, and the coverage has gradually expanded from traditional broad-based index ETFs to styles, industries, and themes. The current situation of the ETF market is that the degree of concentration is relatively high: From a regional perspective, the United States is the country with the highest number of ETFs and net assets. From the perspective of issuers, leading companies dominate in terms of the number of ETF products and the size of net assets.

BTC ETF is an investment fund that tracks the price of BTC as the target. It can be traded freely on the exchange and has the characteristics of ETF products. BTC ETF provides investors with a convenient channel to participate in the digital token economy. Once the BTC ETF is approved, it will bring new funds of 84 billion to 336 billion US dollars to the token market. Since the Winklevoss brothers in 2016, there have been more than a dozen BTC ETF applications submitted to the US SEC, but they have repeatedly failed.

Risk warning: policy regulation, hacker attack.

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1ETF concept analysis

1.1 ETF: an open-end fund

ETF (Exchange Traded Funds, domestically translated as: trading open-end index securities investment funds, exchange-traded funds, hereinafter collectively referred to as ETFs) is a fund that tracks changes in the "underlying index" and is listed and traded on the stock exchange.

ETF is an open-end fund that can be freely purchased, redeemed, and traded in real time. ETF has the operating characteristics of both closed-end and open-end funds. It can not only buy and sell ETF shares in the secondary market like closed-end funds, and realize real-time transactions on the same day, but also has the advantages of free subscription and redemption of open-end funds.

ETF has the characteristics of diversifying investment risks, low transaction and management fees, and high transparency. An ETF usually contains several investment targets, which can effectively diversify the investment risk of a single target and reduce the volatility of the investment portfolio. In terms of transaction costs, ETFs (≤0.3%) are on par with closed-end index funds, which are lower than open-end index funds (subscription fee rate 1.5%, redemption fee rate 0.5%); in terms of management fees, ETFs are 0.5% The management fee is also lower than the 0.5%~1.25% of open-end and closed-end index funds. At present, most ETFs passively track the index, and the fund holdings are transparent, and the IOPV (reference net value of fund shares) is updated every 15 seconds during the day for investors' reference.

1.2 ETF: originating from risk, flourishing in risk

ETF is the product of hedging investment risks in financial markets. The U.S. stock market crashed in 1987. On October 19, 500 billion U.S. dollars in assets evaporated instantly. The market urgently needed a trading mechanism that could effectively hedge the risk of stock portfolios. In 1989, Toronto Stock Exchange, Canada's largest stock exchange, launched Index Participation Shares (TIPs) that tracked the Toronto Stock Exchange 35 Index (TSE-35). TIPS-35 has attracted a large number of investors in the trading market and is recognized as the originator of ETF. In 1993, the American Stock Exchange (American Stock Exchange) launched an ETF tracking the S&P500 index - Standard & Poor's Depositary Receipts (SPDR S&P500), which was the first real ETF in the industry.

After entering the 21st century, ETFs have entered a period of rapid development, innovative products have emerged one after another, and ETFs have achieved both growth in number and asset size. In 2000, the first bond ETF product - iShares DEX was launched; in March 2003, the first commodity ETF - Physical Gold was produced in Australia; in July 2003, the first currency ETF - Goldman Sachs Liquid BeES was born; ETFs of different categories, such as ETFs, active management, and foreign exchange, have emerged one after another. According to ICI data, from 2003 to 2017, the number of global ETFs increased from 276 to 4,535, with an average annual growth rate of 22.13%. At the same time, the global ETF net assets also increased from 204.3 billion US dollars to 4,464.1 billion US dollars, with an average annual growth rate up to 24.65%.

2 ETF Development Status

2.1 Classification of ETFs: Wider Coverage, Gradually Deepening

In the past 20 years since the emergence of ETFs, the products have been continuously enriched, and the coverage has gradually expanded from traditional broad-based index ETFs to industries, styles and themes. At present, the types of ETF products are mainly divided into two categories: index-based ETFs and actively managed ETFs.

Most of the ETFs currently traded in the market are index-based ETFs, which can be divided into ETF products such as stocks, bonds, commodities, currencies, and foreign exchange according to different investment targets; according to market coverage, they can be divided into cross-market and cross-border ETFs; Leveraged ETF is a new category produced by different operation methods.

The biggest difference between actively managed ETFs (also known as enhanced ETFs) and index-based ETFs is that the portfolio of investment targets can be changed at any time to achieve the established investment goals.

2.2 ETF Market Status: High Concentration

At present, the ETF market is highly concentrated: From a regional perspective, the United States is the country with the highest number of ETFs and net assets. From the perspective of issuers, leading companies dominate in terms of the number of ETF products and the size of net assets.

As the origin of ETFs, the U.S. has accounted for 75.55% of the world's net assets since 2003. As of 2017, the United States is still the largest ETF market in the world, with 1,832 ETFs and net assets of 3.4 trillion US dollars, accounting for 41.04% and 76.19% of the global market respectively.

The Difficult Road for 3BTC ETFs

3.1 BTC ETF: The Golden Key to Open the Trillion Market

BTC ETF is an investment fund that tracks the price of BTC. It can be traded freely on the exchange and has the characteristics of ETF products.

BTC ETF enables ordinary and institutional investors to avoid the cumbersome process of acquiring, storing and exchanging BTC, and provides them with a convenient channel to participate in the digital economy and promotes the diversification of their investment targets. According to Michael Strutto, CEO of technology think tank IronWood, once the BTC ETF is approved, the token market will be officially opened to the world, which will bring new funds of 84 billion to 336 billion US dollars.

3.2 Good things come to an end: repeated defeats and hopeful stars

The idea of ​​BTC ETF has been started since 2013. The Winklevoss brothers made their first attempt in June 2016, and then there were more than a dozen BTC ETF applications submitted to the US SEC (Securities and Exchange Commission), but the results were not satisfactory.

VanEck SolidX Bitcoin Trust’s application in June 2018 was originally planned to reply on February 27, 2019, but due to the US government shutdown, it was withdrawn on January 23, and then on January 30, Cboe BZX according to BZX 14.11(e)(4), the listing and trading rules for the issuance of SolidX BTC shares by VanEck SolidX were amended, and the BTC ETF application based on commodities was submitted to the SEC again. This is the most promising BTC ETF recognized by the industry so far.

VanEck SolidX proposes that the investment objective of the BTC ETF is to make the trust reflect the price of BTC. To achieve this goal, the trust company invests most of its assets in BTC that is mainly traded in the over-the-counter (OTC) market. It is purchased and redeemed in units of 5 shares of 125 BTC. At the current price (March 6, 2019 ), which objectively excludes a large number of individual investors. In addition to following the necessary legal provisions, VanEck SolidX cites the Baltic Dry Index ETF (Baltic Dry Index Fund: BDRY), which was approved by the SEC in December 2017, as a precedent.

BDI is an authoritative index released by the London shipping market to measure international shipping conditions. It is composed of the freight rates of 21 major dry bulk shipping routes around the world according to their importance and proportion in the shipping market. In December 2017, the SEC approved NYSE Arca's application for BDI ETF - BDRY, which provides investors with exposure to daily price changes in dry bulk freight futures by tracking a specific portfolio. The combination consists of a series of three-month futures bands of index futures contracts that can measure dry bulk cargo shipments (a futures band is a financial derivative composed of futures contracts for consecutive months).

VanEck SolidX believes that the BTC ETF should be approved by comparing the trading methods, supervision, trading volume and volatility of BDRY (and BDI) with BTC.

First, BDRY transactions are mainly completed off-site through brokers using telephone and Internet instant messages. The role of the exchange is mostly a clearing tool, and the possibility of being manipulated is no lower than that of BTC futures, which has both on-site and off-site transactions. ; Second, BTC futures is an important market with a higher daily trading volume than BDRY. For example, the average daily trading volume of BTC futures in the third and fourth quarters of 2018 exceeded $150 million and $121 million, respectively, while BDRY is estimated at $50 million to $100 million. In addition, the transaction volume of BTC futures in 2018 was approximately US$44.1 billion. Even in the fourth quarter of the year when the price of BTC fell, the transaction volume exceeded US$7.7 billion; The reason for the high volatility is “a common industry metric for dry bulk freight rates,” while attributing BTC’s volatility to unregulated and price manipulation.

In addition, VanEck SolidX proposed MVBTCO (BTC price index) to track the price of BTC on Bitstamp, Coinbase, Gemini, itBit, bitFlyer and Kraken trading platforms, reduce the possibility of manipulation, improve price transparency, and use MVBTCO Gradually realize the sharing of comprehensive regulatory agreements among exchanges.

3.3 Difficult BTC ETFs: How to Solve Fraud, Manipulation and Opacity

There are already token-related ETF products on the market, but due to the small size of the exchange itself and insufficient market recognition, it has little impact. In July 2018, SIX Swiss Exchange launched the world's first ETP listed on a regulated exchange based on Amun's HODL5 index. Currently Amun Crypto Basket Index ETP, Amun Ethereum (AETH) ETP and Amun Bitcoin (ABTC) ETP are listed, the market maker is Flow Traders BV, denominated in US dollars, the composition of the index (data as of March 7, 2019) is updated monthly , the management fee is 2.5%.

Existing token ETFs do not solve the hidden market manipulation risks, liquidity risks, lack of market supervision and sharing mechanisms, and opaque information that BTC ETFs face on the road to application. This is also the main reason why BTC ETFs have been repeatedly rejected by the SEC. reason.

BTC and BTC markets have the potential to be manipulated. There are two main reasons. One is that the distribution of BTC is uneven, and a very small number of people hold a huge amount of BTC, which is easy to impact the market and cause liquidity risks, and the SEC believes that BTC that is too concentrated increases the possibility of manipulating the market; The second is the risk of hacker attacks and malicious control of the BTC network. In 2014, Mt.Gox, the world’s largest BTC exchange at that time, was hacked and lost more than 470 million US dollars.

Global monitoring and protocol sharing of BTC ETFs is difficult to achieve. At present, the scope of BTC transactions covers the whole world, and the regulation of transactions in different countries is quite different. When the SEC rejected Winklevoss' BTC ETF application, it was mentioned that the prerequisite for the BTC ETF to be approved is to have a worldwide mechanism for global monitoring and agreement sharing of BTC to prevent fraud and market manipulation. In fact, the realization of this requirement is quite difficult, and even in the current mature global market, similar "global monitoring and agreement sharing" has not yet appeared. Perhaps in the future, the SEC will replace the comprehensive "global monitoring and agreement sharing" with mainstream exchanges or major regions.

Information opacity is also a major obstacle to the approval of BTC ETF. Due to the unclear regulation of token exchanges around the world, many current BTC exchanges are not transparent enough. In the statement submitted by Bats BZX to the SEC, "no BTC exchange will provide the public with material information about its ownership structure, management team, company practice or regulatory compliance." Some material non-public information may It will have a big impact on the price of BTC, which will affect any ETF that uses BTC as the underlying asset.

Trading is suspended during market trading. At present, there is no plan to deal with the interruption of BTC basic market transactions. For example, in February 2014, the website of Mt.Gox, the largest BTC exchange at that time, was attacked by hackers with a DDOS attack, resulting in heavy losses, and finally declared bankruptcy; in addition, according to the SEC, the trading system of the Gemini exchange also went down at least twice. Such trading halts could lead to volatility in BTC prices, reducing confidence in any ETF that uses BTC as an underlying asset.

Due to some reasons, some nouns in this article are not very accurate, mainly such as: general certificate, digital certificate, digital currency, currency, token, crowdsale, etc. If readers have any questions, they can call or write to discuss together.

Note:

Due to some reasons, some nouns in this article are not very accurate, mainly such as: general certificate, digital certificate, digital currency, currency, token, crowdsale, etc. If readers have any questions, they can call or write to discuss together.

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