ETC Group said institutional investors are increasingly attracted to its physically backed crypto exchange-traded product as it has achieved a three-year track record, and as anticipation increases for the approval of spot bitcoin ETFs in the US.

The European fund manager of digital asset-backed securities launched BTCE, the world’s first centrally cleared bitcoin exchange-traded product, on Deutsche Börse XETRA in June 2020. BTCE is the largest physically backed crypto ETP in Europe with assets under management of more than $625m and is also Europe’s most heavily traded crypto ETP according to ETC Group.

Bradley Duke, founder and chief strategy officer at ETC Group, told Markets Media that the enthusiasm for bitcoin has certainly returned.

“I think that has a lot to do with the imminent approval of an ETF in the US,” he added.

CCData, the crypto research and data provider, agreed in a report that crypto market has been sensitive to ETF-related news, particularly after recent court rulings that have challenged the SEC’s rejections of spot crypto ETF applications, fuelling optimism for future approvals.

“The anticipation surrounding spot Bitcoin ETFs, particularly BlackRock’s proposal, is starting to have a direct impact on the market,” said CCData.

The report continued that rumours surrounding the approval of spot bitcoin ETFs have also led to significant growth of trading volumes on institutional crypto exchanges, such as LMAX and Cboe (ErisX), recording increases of 36.2% and 127.2% since September.

Duke explained that ETC listed ETPs because the European Union does not allow a Bitcoin ETF, due to concentration rules. BTCE listed more than three years ago and Duke said one of the lessons learnt is the importance of on-exchange liquidity, as daily trading volumes are between five to 10 times higher than the next competitor.

“The biggest surprise is that the institutional investor isn’t really there yet in Europe,” he added. “The significance of the approval of a bitcoin spot ETF in the US, especially from firms such as BlackRock, is that it will signal that the market is right for institutional investors.”

Duke continued that BTCE now has a track record of more than three years of daily volumes and performance, which is important for institutional investors.

“As a company we have around $1bn in assets under management and one thing we have learnt is that structure really matters,” he added. “Investors will gravitate towards the ones that feel more secure and offer greater transparency.”

ETC Group said in a statement that BTCE holds a record amount of 25,863 bitcoins and the firm’s total assets under management have surpassed $1bn for the first time since April 2022.

Tim Bevan, founder and chief executive at ETC Group, said in a statement: “Seeing BTCE reach record BTC holdings and our total AUM surpass the $1bn mark for the first time in over 18 months is a clear signal that this bear market is behind us. This new cycle will be the one where institutions truly begin to participate globally and our ability to capture almost 50% of all crypto ETP fund inflows in Europe year to date is a testament to the quality of our products.”

Index tracking products

In April this year ETC Group announced the listing of DA20, an exchange-traded product that tracks the performance of the MSCI Global Digital Assets Top 20 Capped Index on Deutsche Börse Xetra. The product was also listed on the Swiss stock exchange, BX Swiss, in October.

Duke said this is the only crypto ETP based on an MSCI index. The product was  built with institutions in mind and allows investors to get a broad exposure to the crypto market, with a quarterly rebalance. The MSCI index tracks the top 20 investable digital assets comprising approximately 85% of the crypto market.

“A suite of index products is definitely on our longer term product roadmap,” added Duke. “The tide has been moving towards more investment management type products.”

Christopher Day, founder of Days Global Advisors, said his firm has invested in Grayscale Investments’ bitcoin trust in the US and he would also love to invest in an index-based crypto product.

Grayscale Investments, the US digital currency asset manager, won a court case against the US Securities and Exchange Commission after the regulator denied the conversion of Grayscale Bitcoin Trust to an ETF, despite the SEC approving bitcoin futures ETFs.

The court ruling said the SEC failed to adequately explain why it approved the listing of bitcoin futures ETFs but not Grayscale’s proposed conversion. The court said: “In the absence of a coherent explanation, this unlike regulatory treatment of like products is unlawful.”

The SEC has to review the Grayscale application again, but market participants have said the ruling is a very promising development for Grayscale, and the numerous spot Bitcoin ETF applications that are pending.

Day said that converting the trust to an ETF means the fund will be more transparent and more liquid, and make it easier for asset managers to allocate to crypto in a dynamic way. He believes that Grayscale has opened the door to the approval of bitcoin ETF applications by winning its case, which will likely lead to more institutional flows into crypto.

“I think index funds would be the next evolution in crypto and then active ETFs,” Day added. “The roadmap is laid out.”