Exchange-traded fund (ETF) issuers are increasingly exploring creative and often higher-risk strategies to attract investor capital into the cryptocurrency space.
A wave of novel product filings reached the U.S. Securities and Exchange Commission (SEC) near the end of 2024. Among the proposed offerings is a ProShares ETF designed to track the S&P 500’s returns, but denominated in Bitcoin. Strive Asset Management and REX Shares have each filed for funds aiming to provide exposure to convertible bonds issued by companies that hold significant amounts of Bitcoin. Another firm, Volatility Shares, has plans for both leveraged and inverse Solana ETFs, alongside a fund that would track the sixth-largest digital asset, Solana, using futures contracts.
"This represents the continued evolution of crypto strategies within the ETF wrapper. We are going to see a lot of these products in 2025," stated Athanasios Psarofagis of Bloomberg Intelligence. "It's the hot thing—issuers love to strike when a theme is hot. We are going to see everything crypto."
In total, if these applications are approved, they would introduce over a dozen new crypto-centric funds to the market in 2025. This surge comes just one year after the launch of the first-ever U.S. spot Bitcoin ETFs.
A Landmark Year for Cryptocurrency
2024 proved to be a spectacular year for digital assets. Bitcoin, the world's largest cryptocurrency, surged over 120%, breaking through the $100,000 barrier. This remarkable growth was fueled in part by supportive rhetoric from former President Donald Trump towards the industry. Many market observers anticipate that a potential Trump administration's deregulatory stance could further accelerate the sector's expansion.
Data compiled by financial media shows that enthusiasm for a Trump victory helped the largest Bitcoin ETF, BlackRock's iShares Bitcoin Trust (IBIT), attract over $37 billion in inflows throughout the year, ranking it third among all funds for annual inflows.
Firms like MicroStrategy have pioneered strategies to gain exposure to Bitcoin, using a mix of equity issuance and convertible bond sales to fund their purchases. This has inspired other companies to explore similar paths and, in turn, inspired new financial products.
According to its filing, the proposed REX ETF intends to invest the majority of its assets in convertible bonds issued by companies that hold Bitcoin. Similarly, a filing from Strive last week outlined a fund that would use derivatives like swaps and options to gain exposure to convertible securities from MicroStrategy or other companies with analogous Bitcoin-focused strategies.
"The emergence of a new asset class for the mainstream investor is a rare event, and crypto is having that moment right now—Wall Street is always great at creating supply when there is demand," explained Todd Sohn, ETF strategist at Strategas. "So this is the evolution of the crypto ETF: futures-based, spot, thematic, and now converts, which are super niche products for MicroStrategy and others playing in that similar vein."
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The Stark Contrast: Persistent Outflows from Gold ETFs
This fervent activity in the crypto ETF space presents a stark contrast to the continued struggles of gold-backed ETFs. Investors sold off gold ETFs for the fourth consecutive year, even as the Federal Reserve shifted towards a more accommodative monetary policy.
While optimism about potential Fed rate cuts in 2024 had initially spurred a brief rebound for gold ETFs, the outcome of the U.S. presidential election brought that momentum to a halt. The U.S. dollar strengthened following Donald Trump's election victory, triggering a fresh wave of selling in these funds. The price of gold retreated from its historic highs as investors reallocated capital to other areas, particularly U.S. equities and Bitcoin.
Understanding the Shift in Safe-Haven Flows
Traditionally, investors turn to gold as a safe-haven asset during periods of political and economic uncertainty. They flocked to gold ETFs during the 2020 pandemic but began a sustained sell-off two years later when the Federal Reserve initiated a series of interest rate hikes to combat inflation.
Interestingly, ongoing geopolitical risks from conflicts in Ukraine and the Middle East have driven strong demand for physical gold. Emerging market central banks, Asian investors, and consumers have been buying physical bullion for portfolio diversification and as a hedge. However, this demand has not translated into support for paper gold products like ETFs, creating a significant divergence in the market.
Frequently Asked Questions
Why are investors selling gold ETFs?
Investors have been moving capital out of gold ETFs for four years due to several factors. Rising interest rates made yield-bearing assets more attractive, and a strong U.S. dollar put pressure on gold prices. More recently, capital has rotated towards high-performing assets like stocks and cryptocurrencies.
What are these new cryptocurrency ETFs?
The new proposals go beyond simple Bitcoin or Ethereum tracking. They include funds that offer leveraged bets on crypto assets, funds that track traditional index performance in Bitcoin terms, and even ETFs focused on the convertible debt of companies that hold large Bitcoin treasuries.
Is physical gold still in demand?
Yes, demand for physical gold remains robust from central banks, particularly in emerging markets, and from retail investors in Asia. This physical demand supports the gold price but is a separate market from the fund flows seen in gold-backed ETFs.
What is a convertible bond, and why is it used in crypto ETFs?
A convertible bond is a type of debt that can be converted into a predetermined number of the issuing company's shares. Some companies that hold Bitcoin use these instruments to raise money. New ETF proposals aim to give investors exposure to the potential value of these Bitcoin-holding companies through their convertible debt.
Will the SEC approve all these new crypto ETFs?
Not necessarily. The SEC reviews each application on its own merits. While some innovative products may be approved, others could be rejected or delayed due to concerns over their complexity, risk, or potential for market manipulation.
How does political policy affect cryptocurrency markets?
Political sentiment and anticipated regulatory changes can significantly impact crypto markets. Supportive statements from political figures can boost investor confidence and drive inflows, while the expectation of a stricter regulatory environment can have the opposite effect.