Reality Shares — a branch of Blockforce Capital — has recently filed a new ETF prospectus with the SEC with NYSE Arca. The new ETF proposal is unique and an effort by Reality Shares — who has already submitted another ETF proposal — to incorporate cash settlement of Bitcoin futures contracts among a host of other fiat currencies.
The fund would potentially invest up to 15 percent in the Bitcoin futures, reducing investor exposure to the legacy cryptocurrency within the overall ETF. The fund will include sovereign debt instruments for the British Pound, Swiss Franc, and the US Dollar.
New ETF Method for Seeking SEC Approval
The SEC has already denied numerous Bitcoin ETF proposals, and the Reality Shares/NYSE Arca proposal is an effort to launch a limited exposure ETF instead of a full-blown Bitcoin ETF.
The proposal describes the principal investment strategy as:
The Fund is an actively managed exchange-traded fund (“ETF”) that is designed to provide investment exposure to global currencies, both fiat and virtual currencies, that have been widely adopted for use (e.g., as store-of-value, international remittance, foreign-exchange trading) throughout the world (“Significant Global Currencies”).
The idea is to reduce the overall exposure of the fund to the volatility of Bitcoin by integrating future contracts through CBOE and CME with money market mutual funds and sovereign debt instruments. The proposal details the portfolio as:
The Adviser initially constructs the Fund’s portfolio by investing approximately (i) an equal-weight of 15% of the Fund’s net assets in Fixed Income Securities denominated in each Fiat Significant Global Currency; (ii) 15% of the Fund’s net assets representing notional exposure in Bitcoin Futures and (iii) 10% of the Fund’s net assets in Money Market Instruments for margin and/or cash management purposes, each as measured at the time of purchase (the “Target Portfolio”).
By using Bitcoin futures with cash settlement, the fund will not directly invest in Bitcoin. Importantly, other outstanding proposals such as the VanEck-SolidX plan do not include sovereign debt instruments and focus on comprehensive Bitcoin ETFs.
The SEC is currently inundated with policy initiatives regarding the status of many digital assets and the pending decisions regarding several ETF proposals following the extended government shutdown. Reality Shares’ proposal may provide a useful compromise for the SEC who is still wary of approving pure Bitcoin ETFs introduced by other groups.
However, the SEC’s previous citation of immature Bitcoin futures markets as a primary reason for declining numerous ETF proposals still hovers over Reality Shares’ motion — which cites the risk of Bitcoin futures markets explicitly.
The market for Bitcoin Futures has limited trading history and operational experience and may be riskier, less liquid, more volatile and more vulnerable to economic, market and industry changes than more established futures markets.
How the SEC approaches a Bitcoin ETF with reduced exposure that incorporates other, traditional financial assets will be very indicative of their sentiment towards Bitcoin ETFs moving forward in 2019.