How does the ‘world’s first’ Bitcoin ETF work?

The first exchange traded fund (ETF) approved for trade in North America saw the bell ring for the first time on Thursday February 18, 2021. According to Bloomberg data it was a “raging success” with over US$200 million trading hands on the first day alone.

The Toronto Stock Exchange (TSX) said in a media release: “Purpose Bitcoin ETF, began trading under the symbols TSX:BTCC.B (Canadian dollar denominated ETF non-currency hedged units) and TSX:BTCC.U (U.S. dollar denominated ETF non-currency hedged units).”

However, the ETF seems to be only Canadian in name as most of its partnering stakeholders are US-based financial institutions. For example, the “sub-custodian” of the physical Bitcoin will be Gemini Exchange, and liquidity providers will include Coinbase exchange and the TSX-listed Galaxy Digital.

How the ETF works

According to the Purpose Investments prospectus, the BTCC ETF “invests in and holds substantially all of its assets in long-term holdings of Bitcoin.” Aside from those assets, the fund will also hold Canadian and US currency for hedging purposes.

By comparing this setup to something like SPY’s SPX, which tracks the performance of the top 500 companies across US markets, this instrument will provide much greater exposure to Bitcoin than the SPX would to any one stock.

What this means is that the ETF is something of a hybrid ETF. It’s likely that the ETF will have a strong correlation with the price of Bitcoin, if not mirroring the premiums to stock common with that of Grayscale investments.

Purpose Bitcoin Vs. Grayscale Investments

One difference is that investment in Grayscale will purchase stock as opposed to ETF units when investing in Purpose Bitcoin. For example, when buying Grayscale Investments stock over-the-counter (OTC) that entitles the holder to shares in the company. However, when buying BTCC this gives the investor units in the ETF.

In terms of business model and investment strategy, Purpose Investments is not entirely different to Grayscale Investments. Both investments will be sensitive to the price of Bitcoin, and both companies are investing in Bitcoin for a long term duration.

One key difference though is that most, if not all, OTC purchases into Grayscale are then transferred into the underlying asset. With the Purpose Bitcoin ETF it’s unclear if the total amount of units in the ETF will match a certain amount of Bitcoin held in custody or whether capital raisings and OTC purchases will help to inflate the total Bitcoin held by Purpose Investments.

Essentially, both offerings will have a shared destiny with Bitcoin price movements. With the ETF being traded on the TSX, exposure to Bitcoin will be much more accessible than it had been with Grayscale investments running an almost exclusively OTC investment offering.

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