Fidelity wants to launch physical spot Bitcoin ETF

Fidelity Investments this week becomes the largest asset manager to launch a cryptocurrency exchange-traded fund.

The Fidelity Advantage Bitcoin ETF (FBTC) is designed to invest in “physical” spot Bitcoin, a model that the U.S. Securities and Exchange Commission has so far rejected, rather than Bitcoin futures contracts that the U.S. Financial Regulatory Commission has approved.

However, the entry of the world's fourth-largest fund manager with assets of $4.2 trillion into the crypto market is seen as a further sign of the growing acceptance of digital currencies in the traditional investment world.

“This matters because the top-tier money managers tend to be fast followers,” said Todd Rosenbluth, head of ETF and mutual fund research at CFRA Research. “They tend to take a wait-and-see approach to investment trends, piggybacking on developments often created by smaller, more agile asset managers.”

However, the ETF will not be available to most existing customers of the US fund group due to its listing in Canada and will therefore be off-limits to US retail investors.

FBTC's planned launch on the Toronto Stock Exchange "on or about" Thursday, Fidelity said, along with a sister investment fund, comes more than eight months after it filed with the SEC to launch a similar spot Bitcoin ETF in its home market.

That filing is one of a dozen or more that have been put on indefinite hold due to the SEC's concerns about "fraudulent and manipulative acts and practices" in the markets where Bitcoin is traded and the need to "protect investors and the public interest."

The SEC's position was challenged in a letter from lawyers at the end of November, but the $32 billion investment in the asset itself was not addressed.

In contrast, the Canadian crypto ETF market is becoming increasingly crowded. Seven managers – Accelerate Financial Technologies, 3iQ, CI First Asset, Evolve ETFs, Horizon ETFs, Ninepoint Partners and Purpose Investments – already offer 23 funds, according to TrackInsight.

In total, the ETFs that invest in both Ether and Bitcoin have combined assets of $5.6 billion. The European jurisdictions of Sweden, Germany, Switzerland, Jersey and Liechtenstein have another 37 exchange-traded crypto products with another $11.4 billion in assets, according to TrackInsight.

The first launch in Australia is expected shortly, but while the US has so far only allowed futures-based ETPs, some jurisdictions such as the UK have not even allowed crypto assets “to be prepared to lose all their money”.

WisdomTree and VanEck, each managing around $75 billion in ETFs globally, are the biggest names to enter the European market but are dwarfed by Fidelity.

However, other big names are likely to follow suit. Ignites Europe, an independent news service of the Financial Times, recently reported that UBS and State Street Global Advisors, as well as Fidelity, are exploring the possibility of developing cryptocurrency products.

Invesco launched a spot Bitcoin ETF on Deutsche Börse last week, the Invesco Physical Bitcoin ETP (BTIC), although it recently withdrew its application for a US-listed Bitcoin futures ETF.

"Fidelity is the latest in a growing list of industry heavyweights looking to enter the fray. The launch of Invesco in Europe last week is the other notable example. Others may follow suit, particularly as retail interest continues to grow," an industry official said.

FBTC will charge an annual management fee of 40 basis points, less than most of its competitors, with the management expense ratio “estimated not to exceed 95 basis points.”

Cryptocurrencies are increasingly viewed by mainstream investment industries as assets that, when measured, can potentially improve the risk-return characteristics of broad-based portfolios.

Toby Sims of Fidelity International, the Boston-based group's foreign subsidiary, recently wrote that “an alternative asset whose performance is unlikely to reflect that of mainstream markets is attractive.

"Bitcoin now occupies a mantle previously reserved for alternative assets, particularly gold. Bitcoin's supply is limited, meaning it can retain its value even as central banks print infinitely more money. It is also easy to transact - not as easy as established currencies, but easier than gold. In times of uncertainty, that's a plus."

Sims added: "This is where a Bitcoin ETF makes sense. There is a market that recognizes the appeal of Bitcoin, but is fundamentally afraid of it. Some investors don't want to get into a loosely regulated online exchange - they want a nice and simple ETF that does the hard work for them."

Kelly Creelman, Senior Vice President, Products and Marketing at Fidelity Investment Canada, said: “We believe cryptocurrency is a valid asset class that we want to offer as an investment option to retail investors in Canada.

“This product provides investors with exposure to an emerging technology, and inclusion in a traditional retail and institutional portfolio of stocks and bonds can be beneficial from a portfolio diversification perspective.”

Rosenbluth believed that the Fidelity will likely "be successful because they can use it in their various portfolios. Fidelity does a good job of making their own products accessible and easy to understand for their brokerage clients."