ETF analyst: 'Unlikely' to see spot-based bitcoin ETF come to market soon

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Todd Rosenbluth, CFRA Head of ETF and Mutual Fund Research, joins Yahoo Finance Live to detail the latest news surrounding bitcoin ETFs amid the current regulatory environment.

Video Transcript

We want to now turn our attention to the ETF sector. And it is now time for our ETF report brought to you by Invesco QQQ. Let’s bring in our guest, Todd Rosenbluth, CFRA Head of ETF and Mutual Fund Research. Thank you so much for being here. So–

TODD ROSENBLUTH: Hi.

Thank you. Interest in a futures ETF in BITO has sort of waned after the initial flurry of investment. Two others have come online. And sentiment seems to be a little bit down there. So why is that happening? And based on that, do we see a spot Bitcoin ETF come on the market anytime soon?

TODD ROSENBLUTH: You’re right. We saw BITO come to marketplace with guns blazing, over $1 billion in the first two days. And now it’s $1.4 billion. So as you’re right, we’ve seen the assets not continue to climb higher. Now Bitcoin has been volatile during that period of time. We also have two new products that have come to market from Valkyrie and from VanEck that have gathered some assets, but nowhere near to the same degree.

There’s just a limit of how much investor interest there’s going to be out of the gate for a futures based product. You’re also right that we are unlikely, in our opinion at CFRA, to see a spot based ETF come to market in the near future. We may not even see one into 2022. The SEC has cited concerns about fraud, about manipulation, as it relates to direct investment in Bitcoin through an ETF structure.

They just are more comfortable with the futures based wrapper. And that’s what investors have to deal with. And of course they can be able to use a range of different ETFs, thematic and otherwise, to get exposure to Bitcoin or blockchain related strategies.

Sorry about that, Todd. I was muted there. When it comes to the interest that we initially did see, though, when it comes to the futures Bitcoin ETF, was that amongst, in your opinion– did that bring new investors to the ETF marketplace, people that hadn’t necessarily been investing in ETFs before? And I guess what do you think that that did to potentially grow interest in this space?

TODD ROSENBLUTH: Well, the ETF market has been stronger than ever before. This has actually been record inflows for ETFs in 2021 that has already topped the inflows of 2020. We’re over $7 trillion in assets. We’re at almost $800 billion of net inflows. Some of the money that went into BITO is likely people who wanted exposure to Bitcoin, but through an ETF structure.

There’s other people who just wanted exposure to Bitcoin in a way that they could get into their brokerage account. And ETFs were an easy way of doing that. So that’s likely a net positive for the overall ETF marketplace because once you get exposed to the ETF market, the liquidity benefits, the tax efficiency that is typical of an ETF, the likelihood that you’re going to round out your portfolio with more traditional equity, fixed income, and commodity oriented ETFs.

And I want to ask you, sir, do you ever think that we will see a digital dollar? Is that something that will happen in the future? And is the Fed the right body to regulate something like that?

TODD ROSENBLUTH: Yeah, I’m sorry. That’s beyond the knowledge that I can be able to offer. I know what we’ll see through an ETF structure. I don’t think we’re going to see a Bitcoin spot product for a while. I think futures is what we have. But I don’t have an opinion on the other topic.

Hey, Todd, I wanted to ask you about the fact that most, as you point out, most ETFs, it’s passed through income. So there isn’t a capital gains tax consequence. Do most people who are purchasing ETFs, do we invest in a quantity that would make a capital gains tax even relevant? And going forward, is that a threat that we should be facing if we’re investing in ETFs, could we be facing?

TODD ROSENBLUTH: Well, investors that own a mutual fund typically pay a capital gain for any on a regular year, regardless of whether or not they sell throughout the year, because the money is passed on to them when selling takes place by other shareholders that lead to redemptions.

So the tax efficiency of an ETF takes an ETF like iShares Core S&P 500 or Vanguard total stock market, which you hold throughout the entire year, and you have not and will not have any tax impact.

There are investors that own tens of thousands of these ETFs that are holding that for the longer term for their investment goals that are getting the benefits of the ETF structure. And that’s, again, why we think we’re seeing continued money flowing in to ETFs and away from mutual funds, where investors in many cases are getting an unwanted present this holiday season.