Following the recent news of the US Securities and Exchange Commission's (SEC) historical approval of the first Bitcoin spot exchange-traded funds (ETFs), there has been a wave of global interest and speculation about whether these crypto investment vehicles will be readily available elsewhere; including in the UK.However, despite the significant progress made in the United States, there is currently no equivalent to the SEC's newly regulated spot Bitcoin ETFs, and this has left many UK investors uncertain as to what is legal under current regulations, and whether they can access comparable financial instruments in their own market.
To address this uncertainty, and provide further clarity on the investment landscape in the UK, we will explore the available UK crypto and blockchain ETFs in 2024. As shall be shown, although there is no current equivalent to what is available in the US, the UK market offers several alternative avenues for investors seeking to engage with this dynamic sector; albeit with a distinct set of regulations and available offerings.So without further ado, let's get right into it!
An ETF (exchange-traded fund) is a type of investment fund that trades on stock exchanges, and is similar to a stock. An ETF can comprise of stocks, commodities, or bonds, and functions with an arbitrage method that is designed to keep it trading close to its net asset value. An ETF provides investors with a way of getting exposure to various asset classes, and has recently been expanded to include the volatile crypto market. Here, a bridge between traditional finance and digital assets has become available through the first bitcoin ETFs.
There are different types of ETFs. For example, index-based ETFs copy the performance of a cryptocurrency index. Actively managed ETFs aim to outperform the market standard, whereby managers make the investment decisions. Bitcoin spot ETFs are another type, where the fund invests directly in Bitcoin, which offers the underlying exposure to the value of the cryptocurrency.
How these funds operate differs, in that index-based ETFs track market indices passively, whilst ETFs that are managed actively are always adapting to the movements of the market. Bitcoin spot ETFs hold cryptocurrency, and futures ETFs invest in futures contracts. They also have their subtleties.
For investors in the UK who are considering crypto and blockchain ETFs, there are advantages to these types of funds. These include: a simple way of investing in crypto (without having to buy or sell), less security risk than if the investor had self custody of the asset, and often lower costs than if they were directly participating in the market. All in all, index-based ETFs can provide diversified exposure to the crypto market while at the same time reducing the risk entailed with picking individual investments.
However, ETFs do carry their own risks. Tracking errors can take place, whereby the ETF diverges from the performance of the underlying asset, plus there can be high expense ratios in the case of actively-managed ETFs. Regulatory uncertainty is another factor to consider, and finally, it must be borne in mind by the investor that past performance does not necessarily indicate future success.
So, having outlined what crypto and blockchain ETFs are, it's a good idea to ask if these kinds of financial instruments are available in the UK.
With the US financial watchdog, the SEC (Securities and Exchange Commission), having recently approved several Spot Bitcoin ETFs, many investors in the UK are perhaps wondering whether there are similar crypto and blockchain ETFs available to them in the UK investment market. As it stands, the UK financial watchdog, the FCA (Financial Conduct Authority), has not approved any Spot Bitcoin ETFs, nor any other crypto ETFs for the UK investing public. US ETFs are not eligible in the UK either, primarily due to a lack of Key Investor Documents. Therefore, fund groups that would like to offer such products would need to tailor them specifically for the European and UK markets.
Whilst the FCA in the UK has been cautious on ETFs, European nations such as Switzerland, Germany, and France, have gone ahead with more permissive regulations, and the first European Spot Bitcoin ETF was launched in Amsterdam last year. The caution on the part of the UK regulatory authorities arises from the volatility found in cryptocurrencies such as Bitcoin, and the potential for significant retail investor losses.
However, both UK and European investors are able to access 'related' crypto and blockchain ETFs, which offer indirect exposure to companies and technologies that are working with the crypto and blockchain sectors. What these ETFs offer is exposure to crypto-related assets without the direct exposure risk of an extremely volatile crypto market.
Let's have a look at what is currently on offer in the UK.
Given that UK investors are unable to directly invest in crypto ETFs due to the regulatory constraints of the FCA, alternatives have become available in the UK market. The exciting, though highly volatile crypto market can be indirectly accessed through ETFs that comprise companies involved in the development of blockchain technology and cryptocurrency applications. These ETFs comply with the Undertakings for the Collective Investment in Transferable Securities (UCITS) directive, which comes under a European regulatory framework for the management of collective investment schemes.
Let's have a look at a few of these crypto and blockchain-related ETFS.
The VanEck Crypto and Blockchain Innovators UCITS ETF provides investment into several companies actively engaged with crypto and blockchain. It closely tracks the MVIS Global Digital Assets Equity Index, and predominantly invests in the stocks of companies involved in crypto activities such as digital asset exchanges, crypto mining, hardware, and technology. This ETF does not confine itself to the UK market, and includes a diverse mix of international holdings.
The Amplify Transformational Data Sharing ETF is known for being the first concentrative effort towards investing in blockchain technology via an ETF. This actively managed fund prioritises companies that engage in the research and development of blockchain technology, alongside crypto mining and application development.
Invesco CoinShares Global Blockchain UCITS ETF takes a focused approach, investing in companies that stand at the forefront of blockchain innovation. By providing broad exposure to a curated list of companies active in the blockchain sector—from start-ups to established players—the fund aims for growth along with market acceptance of blockchain technologies.
As can be seen, these investment vehicles serve as proxies for direct exposure to crypto-assets, navigating the complex landscape of regulatory compliance while still offering UK investors a taste of the burgeoning crypto and blockchain sectors. Given the nature of this market, investors may also consider crypto strategies which often encompass a broader spectrum of digital assets, potentially offering a more diversified investment approach to those looking for involvement in this cutting-edge market.
ICONOMI is an FCA-registered crypto investment platform that provides unique investing approaches through its crypto strategies, and ones with transparency and control distinct from traditional crypto ETFs.
UK investors seeking alternatives may find the platform's offerings appealing, especially those who prefer strategies based upon performance, and easily-accessible with just a few clicks.
The Blockchain Index Strategy at ICONOMI is a passive investment approach, focusing on established blockchain projects displaying active beta components. In a fluctuating crypto market, this strategy provides a market-cap weighted investment in Bitcoin and Ethereum, while also eyeing emerging projects poised to impact the distributed economy.
In terms of its allocation percentages, it heavily favours Bitcoin (40.79%) and Ethereum (31.53%), with other allocations including Binance Coin (6.51%), Solana (5.50%), and Cardano (2.44%).
The strategy has showcased a notable annualised return of 63.27% and manages the inherent volatility, which is evidenced through its 2.27% volatility rate over the past year. Despite a maximum drawdown of -92.35%, the strategy maintains attractiveness with a 1 year return of +44.61%.
At this time of writing, assets under this strategy exceed €12 million, with more than 4,500 copiers, exemplifying its popularity.
The Bitcoin Ether Risk-adjusted Index is an automated strategy that focuses primarily on Bitcoin and Ethereum. This strategy is designed for UK investors who are looking to capitalise on the two leading cryptocurrencies in a way that seeks to minimise risk. By adjusting allocations dynamically, the strategy aims for optimal performance whilst simultaneously taking the prevailing market conditions into account.
In terms of the allocation percentages, this strategy fund is heavily weighted towards Bitcoin (78.75%) and Ethereum (21.25%).
In terms of its performance, it has an impressive annualised return of 54.01%, and a volatility rate of 2.24%. Despite experiencing a maximum drawdown of -30.92%, the strategy boasts a compelling return of +60.45% over the past year, highlighting its resilience and potential for high returns in a volatile market.
As of this moment, €159,398 assets are under this Strategy, and this is made up of 15 individual copiers.
But please note, that although both the aforementioned strategies aim to be as prudent as possible, these are still speculative investment vehicles, and therefore unexpected losses can be made depending on an array of different factors.
For now, UK investors will have to wait for the approval of a crypto or Bitcoin ETF. But as has been shown in this article, there are still alternative avenues in which to gain exposure to various different cryptocurrencies and blockchain technology companies — all without the complexities of direct ownership. Like ETFs, these financial instruments track the performance of related companies/technologies, or a basket of digital assets, and simplify the entire investment process.
However, investors should be aware that investing into any kind of financial instrument like blockchain-related ETFs or crypto strategies, still carries a great deal of risk. Therefore, it's crucial to highlight that no investment approach is a foolproof way to guarantee returns, and past performance should not be seen as an indicator of future performance either. Therefore, it is recommended to only invest what you can afford to lose, and to be aware that these investment vehicles are still speculative in nature.
In the meantime, those in the UK market can investigate into the current alternative on offer, and keep up-to-date with regulatory updates to see when a crypto ETF will be legally approved.