Bitcoin needs a safe space for redditors to play

Exchange-traded funds are ideal vehicles for testing investment hypotheses, including cryptocurrencies

Fervent demand for the Purpose Bitcoin exchange-traded fund launched in Canada last week is no surprise. But it does highlight that the Securities and Exchange Commission looks increasingly anachronistic in blocking similar products in its domestic market. The regulator should relax and let a thousand cryptocurrency products bloom in the US.

With Bitcoin almost doubling this year to trade well above $50,000 in recent days, regulators are understandably reluctant to be perceived to be legitimizing one of the most volatile securities the world has ever seen. Sunlight, though, is always and everywhere the best disinfectant. The ETF market is an ideal playpen for Bitcoin to either thrive as it gains mainstream acceptance, or wither as its critics are proven correct in their skepticism about its worth as a store of value or its transactional utility. The sector is ruthlessly Darwinistic, with thematic products arriving and exiting depending on whether the zeitgeist they seek to capture arouses sufficient buying interest from investors.

Take, for example, the Innovation Global Alpha ETF launched in June. By focusing on companies with strong intellectual property rights, it was aimed at investors seeking to insulate their returns from looming international trade battles. It closed six months later as concern about the rise of protectionism faded. An ETF traded under the ticker symbol SLIM, which targeted companies poised to benefit from catering to the obese and overweight, lasted a bit less than four years before Janus Henderson Group Plc liquidated the product early last year.

Other thematic securities have fared better. The $120 million Inspire Global Hope Large Cap ETF invests "based on biblical values and ESG score criterion," and is about to celebrate its fourth anniversary. A similarly themed Catholic Values ETF, "designed for those who don't want to breach religious norms," is almost five years old and has $480 million of assets. Tapping a newer trend, the $40 million US Vegan Climate ETF, which shuns companies "whose activities directly contribute to animal suffering," has been investing for about a year and a half.

ETFs are the ideal vehicle to test the viability - or otherwise - of investment theses. Some ideas come even around a second time. US fund manager Van Eck Associates Corp. has filed with the SEC to launch an ETF based on an index that uses natural language processing algorithms to track which stocks are high on the radar of social media platforms.

A previous attempt to monetize the Buzz NexGen AI US Sentiment Leaders index by Canada's Sprott Asset Management LP lasted about three years, with its Social Media Insights ETF getting pulled in March 2019 after gathering about $9 million, according to the Financial Times. But amid the recent surge of Reddit-inspired trading activity, the 75-stock index has gained 20 per cent this year, outpacing gains of about 6 per cent from the Nasdaq Composite Index and the 4 per cent delivered by the S&P 500 Index.

Where virtual currencies are concerned, it's not just Canada that's stolen a march on the US in developing exchange-traded avenues for investors to speculate. In Europe, various flavors of exchange-traded securities have attracted more than $6.5 billion. They include the Bitcoin Tracker exchange-traded note listed in Sweden by XBT Provider AB, now worth about $2 billion, and an exchange-traded commodity issued by HANetf and listed in Germany that just surpassed $1 billion in assets.

My Bloomberg Intelligence colleague Eric Balchunas last month laid out five reasons why the SEC should approve a Bitcoin ETF, including the premium investors have to pay on existing US investment trusts, the high volatility of already approved ETFs and the success of similar products in Europe. Last week's launch of a Bitcoin ETF on its northern doorstep should finally galvanize the US regulator into action. (Bloomberg)