What the US can learn from Sweden about how to launch a bitcoin fund

Many Americans are tired of hearing about how Scandinavian societies have figured out how to do everything better than us, but here’s one more: how to launch a bitcoin fund.

The Securities and Exchange Commission and ETF companies can’t agree on how to bring a bitcoin exchange-traded fund to market. Just last week four prospective bitcoin ETF issuers withdrew their filings for new funds tracking the digital currency after the SEC shot them down, citing concerns about trading liquidity and valuation of underlying bitcoin futures.

But a Swedish company has proved how it can be done. It has successfully run a bitcoin exchange-traded product for the last two years that can be accessed by European investors in multiple countries, and the products have attracted more than $1 billion.

Stockholm-based XBT Providers launched its CoinShares series in 2015. The XBT Bitcoin Tracker One (COINXBT) trades in Swedish krona, while the XBT Bitcoin Tracker Euro (COINXBE) — they launched on the Nasdaq Stockholm in 2015. XBT also issued versions in Denmark, Finland, Estonia and Latvia. In the Swedish krona version, 200 shares equal the price of one bitcoin, and in the euro version 20 shares equal the price of one bitcoin.

The big difference between the successful Swedish launch and the impasse in the United States is the type of exchange-traded product: the XBT portfolios are exchange-traded notes (ETN), not exchange-traded funds.

An ETN is an unsecured debt instrument that promises to pay the pattern of returns of the bitcoin price. Ironically, despite being an unsecure instrument, the XBT product tracks the spot price of bitcoin by holding the actual currency and forward contracts in case of a liquidity shortfall.

“At that point in time, the ETN structure was the best route to bring the products to market,” said Laurent Kssis, chief executive officer of XBT Provider. “As a result of using this structure to bring the product to market, investors have been able to gain exposure to the price movement of bitcoin since 2015. This stands opposed to the U.S., where most investors are still waiting for access to bitcoin exposure via their normal brokerage account.”

There are three ways to construct a bitcoin portfolio

There are three different ways in which a firm could create a bitcoin exchange-traded product. It could create an exchange-traded fund that owns and stores actual bitcoins, similar to the SPDR Gold Shares ETF (GLD). GLD tracks the spot price of gold by holding physical gold bricks in bank vaults in London. The second way is a bitcoin futures ETF, which approximates the price of bitcoin by owning bitcoin futures products. That’s been the dominant paradigm for SEC filings, including the ones recently pulled, due to the recent uptick in bitcoin futures contracts offered by major U.S. exchanges and securities firms.

“I think using the ETN structure to launch a bitcoin product was a good fit,” said Arlene Reyes, chief operating officer of Exchangetradedfunds.com, a website that reports on global ETFs. “ETNs are unsecured instruments backed by the credit of the issuer, and it tracks the performance of the underlying asset. … XBT Provider holds bitcoins equal to the value of ETN shares issued and tracks the performance of the price of bitcoin. I can see how this structure would be attractive to regulators.”

“I don’t know why an ETN hasn’t been done yet. We know other people are in discussions to make one, but it’s not us. We know it’s being talked about.” -Garrett Stevens, chief executive officer of Exchange Traded Concepts

This past October, XBT came out with two more ETPs to track the second most highly used cryptocurrency, ether, in both Swedish krona and euros: Ether Tracker One (COINETH) and Ether Tracker euro (COINETHE). These also are listed on the Nasdaq Stockholm for European investors.

One of the ETF companies that filed for a bitcoin ETF has looked at the ETN route and says others have been talking about it as well.

“We have considered notes with regards to bitcoin, but we have not had the opportunity,” said Garrett Stevens, the chief executive officer of Exchange Traded Concepts, which worked with REX ETF on a rejected bitcoin futures fund. “But we are a white-label company and we do what someone else wants. That’s what the REX guys wanted, so that’s what we created. I don’t know why an ETN hasn’t been done yet. We know other people are in discussions to make one, but it’s not us. We know it’s being talked about.”

There is one product that currently gives U.S. investors access to the bitcoin market — the Bitcoin Investment Trust (GBTC), managed by Grayscale Investments. However, GBTC is not an ETF, despite press reports. It’s not SEC-registered, and it trades on the Nasdaq over-the-counter markets. It’s highly volatile and can trade at an extreme premium to the price of bitcoin. Some brokers, including Merrill Lynch, are refusing to sell GBTC and other bitcoin-related securities to their clients.

Because they trade on an exchange, products like ETFs and ETNs are not only priced using a net asset value (NAV) — the value of securities held minus liabilities and divided by shares outstanding — that is calculated at the end of each day and by intraday NAV (iNAV) throughout the day. They also have a current market price, which can be more (a premium) or less (a discount) to actual value. The more volatile a market, the more likely there is to be a premium/discount issue.

“The [XBT] products are very well designed for what they do. They deliver, unlike GBTC,” said Matt Hougan, the chief executive of Inside ETFs, an ETF education company. “They give exposure to the returns of bitcoin and ether pretty well. I think they were well executed and they’ve done their job.”

But Michael Sonnenshein, managing director of Grayscale Investments, remains positive. “We are thrilled about the response of the market to the Bitcoin Investment Trust since it became publicly quoted in 2015,” he said. “My team is looking forward to bringing our second vehicle, the Ethereum Classic Investment Trust, to the OTCQX market in second quarter of 2018.”

Some ETF experts believe the chances remain good for a bitcoin ETF to be approved this year.

Before the crash, ETNs were more popular in the US

ETNs were once among regular exchange-traded product launches in the United States, though never at the level of exchange-traded funds in number of portfolios or assets raised. They were more popular with banks as issuers — which had the existing debt businesses to structure the credit side of the investment — than with standalone asset-management companies.

Before the financial crash, there were dozens of ETNs that covered commodities sectors, and many still exist today. But ETNs became less popular after the financial crash, based on the theoretical risk that a failure like Lehman Brothers could expose ETN investors to severe credit risk. While the theoretical risks did not play out, ETNs waned in popularity among new launches.

At the end of 2008, near the depths of the fiscal crisis, there were 74 ETNs, totaling $3.6 billion in assets under management. By the end of 2017, there were 204 ETNs, with combined assets of $24.9 billion, according to ETF.com

ETF companies that have filed for bitcoin ETFs, including REX, Proshares, Van Eck and Direxion declined to comment. Gemini, the investment company of the Winklevoss twins, did not respond to a request for comment.

Like the U.S.-based GBTC, the XBT bitcoin ETNs typically trade at a premium or discount to the actual price of bitcoin, but the range has been much smaller than in the case of GBTC, between 1 percent and 3 percent.

According to Bloomberg, the 52-week average percent premium is 0.46 percent, but it has been as high as 21 percent and as low as negative 16 percent. Still that’s a far cry from the 65 percent premium seen on GBTC.

“What Laurent has proven is the ETN structure has worked and been able to deliver that pattern of returns that’s different from the two paradigms filed with the SEC, which is the physical and the bitcoin futures products,” Hougan said. He also thinks the premium/discount issue is being handled fairly well in the case of XBT’s bitcoin portfolios.

“Bitcoin is an expensive product to trade, custody, store and service at this point. So I don’t think a 3 percent premium in the ETN is absurd,” he said. “That makes the ETN a viable approach.”

Currently, the two Bitcoin Trackers combined (krona and euro) have total assets of $900.8 million, and the two Ether Trackers have total assets of $439.3 million.

—By Lawrence Carrel, special to CNBC.com

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ETF Trading Volume Falls With Stocks

Despite the S&P 500 Index’s 4.4% rally in January, the second best month for stocks over the past year, the actual volume of shares traded fell sharply, reports Reuters. Daily volume dropped 15% year-over-year in January, and plunged 26% from a high in January 2009.

Stock market technicians consider volume an essential ingredient for long-term moves. The low volume typically means the recent gains are not sustainable.

Many attribute the low volume to the low volatility in the market, which led hedge funds and other high-frequency traders to sit on the sidelines. Reuters then says strategists think the low volatility will bring in large institutional investors and small retail investors, who will push the market higher as they put some of the cash they’ve been afraid to invest back to work.

No surprise then that the trading volumes in ETFs fell as well, according to J.P. Morgan. And not just ETFs holding stocks, but across all asset classes. ETFs that track stocks, bonds and commodities saw a 36% drop in trading volumes in January compared to the average daily volume in the second half of 2011.

This makes sense if you believe that hedge funds, frequent users of ETFs, have been sitting out the rally.

CNBC’s Bob Pisani then sets a up a straw man by asking if ETFs are responsible for the lower trading volume on the stock market? He knocks down the straw man, with a no that should be obvious to anyone who understands ETFs.

What’s really sad is that some of the traders Pisani talks to think this is the case. But then again, few traders are rocket scientists. A friend of mine, an Ivy-league educated trader, couldn’t even explain the basics of supply and demand even though that was the entire basis of his occupation. Of course, after the screw-up with the focal point on the lenses of the Hubble Telescope it appears even America’s rocket scientists aren’t rocket scientists.

CNBC Says It Might Be Time for Index Funds

With just one in four fund managers beating their benchmarks this year, CNBC.com says it might be time for investors to ditch actively-managed mutual funds and just buy index funds. While CNBC didn’t say buy ETFs, anyone worth their salt knows the cheapest, most tax-efficient, most flexible index funds come in the form of ETFs.

CNBC.com reports that “only 23% of large-cap managers beat the S&P 500 and 27% outdid the Russell 1000, according to Bank of America Merrill Lynch.” While the fund managers interviewed for the piece make it seem like this was an unusual year, the actual numbers aren’t that shocking. Scads of research show that the indexes annually beat 70% to 80% of all active funds.

Since 2008, many investors have been wondering what they are getting for the high fees they pay to active mutual fund managers, especially in a down market. While it may be difficult to beat the index on the upside, if active managers can’t protect your assets on the downside, what’s the point of going active?

And it doesn’t look like things are getting better anytime soon. Philippe Gijsels, the head of research at BNP Paribas Fortis, thinks that not only won’t we see a Santa Claus rally, but in fact, the September/October rally was just a respite from an end-of-year decline and long-term move to the downside. Gijsels says the longer the European Central Bank fails to find a solution the worse it will get for the equity markets here and abroad. If this French banker doesn’t believe a solution is near, it’s time to worry.

In another corner of Bank of America Merrill Lynch, technical research analyst Mary Ann Bartels says the sell-off will continue and may not hit a bottom until the first quarter of 2012. She predicts the S&P 500 could test the October low of 1074, a 14% drop from today’s close of 1244.

Stocks Appear to Ignore Good News From Libya

At Friday’s close of 10817.65, the Dow Jones Industrial Average is down 16% from its high of 12928.45 on May 2. My friend, Lewy Katorz, an angel investor, predicts a 30% drop, which means we are going down to about 9050. That seems about right to me.

Libyan rebels moved into Tripoli on Sunday and captured two of Col. Moammar Gadhafi’s sons. Even though this should push the price of oil lower, stock futures Sunday night were still in the red.

CNBC’s Rick Santelli uses some extremely wacky logic to determine the bond rally will end on Monday. But, I’ll stick with the Wall Street Journal’s in depth report of the obvious, bond ETFs rally when stocks sink.

WSJ offers a nice chart showing the performance of the long-term bond ETFs. Ironically, the fund with the biggest advance this year through Aug. 4, the Pimco 25+ Year Zero Coupon U.S. Treasury (ZROZ), up 18.8%, actually saw net outflows of $16 million.

CNBC:11 Stocks That Will Rock in 2011

Here is the link to my appearance on CNBC yesterday.

11 Stocks That Will Rock in 2011 – CNBC.com.

I was supposed to talk about six, but they cut me off after four. For the full list either check out this slide show or go to Kiplinger.com for the full article of 11 Stocks Poised for Gains in 2011 and Beyond.

I Will Be Discussing Stocks on CNBC

I will be on CNBC’s “The Call” Monday, Dec. 20. For about 5 minutes, sometime between 11:30 a.m. and 11:45 a.m., I will discuss my latest article: 11 Stocks Poised for Gains in 2011 and Beyond. It’s my first appearance on CNBC.

Stewart Pummels Cramer and It’s My Fault

Cramer, I’m sorry, man. I didn’t mean to bring a whole media circus upon your head. And now some guy named Stewart is involved and making a mockery of what you do and your network’s credibility. This has really gotten out of hand.

The whole thing started a month ago when I pretty much said Jim Cramer, the host of CNBC’s Mad Money program, didn’t know what the hell he was talking about with respect to ETFs. In particular, Cramer was calling for the SEC to ban the ProShares UltraShort Financials ETF (SKF). He said this was a dangerous vehicle for investors. I said Cramer was out of line and that people should read the prospectus before buying something like this. Then I, well, I wasn’t very nice and pointed out he told people to hold Bear Stearns just days before it went out of business.

IndexUniverse.com picked up on this and decided to interview me about my views on Cramer and SKF. I tried to be nice, but basically said Cramer was wrong. Well, from there it just picked up steam. I was watching The Daily Show with Jon Stewart on Monday, which is my wont to do, and lo and behold, he has CNBC’s financial news commentary in his crosshairs of satire. Stewart pretty much lambasted the entire CNBC network for not telling the American people we were heading into a crisis and for sucking up to the CEOs that caused this crisis. Cramer took offense and started biting back. Originally started as an attack on CNBC commentator Rick Santelli, Cramer became the face of the debate as he became more vocal about Stewart’s attack. Stewart continued for the next three days, culminating with Cramer coming onto the Daily Show. The interview nearly lasted for the whole show. Stewart pulled the cartoon trick of ripping out Cramer’s heart and eating it in front of him before letting him die.

It wasn’t very funny and it wasn’t really satire. But it was intense and vicious. Stewart was unrelenting in his criticism of CNBC. He blamed the network for failing to inform investors and instead acting as cheerleaders for Wall Street. All the country’s anger at Wall Street came through Stewart in an accusation that was compelling the way a big car accident is compelling. And Jon was right, the media, with a few notable exceptions, did cheer this on.

The problem Stewart said was the “gap between what CNBC advertises itself as and what it is.” The sad thing is most people know that CNBC is a cheerleader for the market. One just needs to look at the way they chastised Congress for not passing the TARP fast enough in September and their refusal to look deeper at, let alone attack, Treasury Secretary Henry Paulson’s blatant attempt at a power grab with now government oversight.

Stewart was brilliant. The upsetting thing for me was that he, a satirist, commentator and comedian, was asking harder hitting questions than most of the mainstream media, of which I am a member, has over the past 10 years. Essentially, is showed that most of the financial media hadn’t learned anything from the cheerleading that led to the Internet bubble of 1999.

“I know you want to make finance entertaining, but finance isn’t a … game,” said Steward. “You think it’s a sin of omission, but it’s a sin of commission. … You knew what the banks were doing and you touted it for months. So to say it’s a crazy once in a lifetime tsunami is disingenuous at best and criminal at best.”

Surprisingly, unlike many of the commentators out there on both the left and right, Stewart is very polite with those he doesn’t agree with. He never screams at guests he doesn’t agree with and never interrupts them. Still, he can be brutal and vicious.
I give Cramer a lot of credit for taking on Stewart on Jon’s home court. Stewart is like a football team that never loses at home. And he uses the old “60 Minutes” trick of pulling out videos of people contradicting themselves. Tim Russert was a master of this and one of the few in the mainstream media to use it.

I can’t decide what I think of Cramer’s performance. A lot of people say he should have been as stubborn and feisty as he is on his show and defended CNBC more. Maybe he realized it was indefensible and maybe CNBC realized this was a way for the network to acknowledge they screwed up and to make a mea culpa to the public. Since Cramer has no problem apologizing for his mistakes, and since he is one of the network’s biggest personalities, he seemed a perfect choice to become the point man on this.

Cause in the end, as Stewart asked, “Whose side are you on?”

All in all it was incredible television, compelling, entertaining, enlightening, educational and as bloody as a talk show can get from two men sitting at a desk wearing ties.

This is only the pinnacle of why many people get their news from The Daily Show. While a lot of the show can be sophomoric, it is also one of the most intelligent shows on TV. Especially because it is one of the only shows on TV that talks to authors of serious books on topics of national and international importance. It’s a comedy show? Who else on TV talks about books besides Oprah and Brian Lamb on Cspan? And Oprah doesn’t deal with nonfiction too much. Sure plenty of people interview authors, but hardly ever for 8 minutes about the subject of the book.

So, Jon, or whoever on your staff who reads this blog, thanks. And if you are looking for another book, check out ETFs for the Long Run.

Apparently, I Stole the Show

This isn’t an ETF entry, but I went to this journalism event at BusinessWeek last month. Steve Liesman of CNBC, FLoyd Norris of the New York Times, William Holstein the author of “Why GM Matters” and a guy from Credit Suisse.

Orla O’Sullivan of Bank Systems & Technology seemed to find my question about banker bonuses much more interesting than what the panelists were saying considering she put me in the lead of her story.

The markets may not have been too impressed with Treasury Secretary Geithner’s plan to deal with banks bad loans, but the audience at a recent Columbia University discussion BS&T attended on the economy loved the suggestion of one of the attendees. “Why not give the toxic assets to investment bankers as their bonuses?” financial journalist Lawrence Carrel rhetorically asked a panel partly composed of Pulitzer Prize winners.

After all, the now troubled assets were “their idea,” Carrel said of the I. Bankers. “They’d be taking on the risks but there’s the potential to make money too,” said Carrel, who wrote a recently published book on exchange traded funds, ‘ETFs For The Long Haul’.

And I like the way she adulterated the title of my book. LOL.

Maybe this toxic asset thing is a topic worth pursuing.

Cramer Wants SEC to Ban SKF

James Cramer, the host of CNBC’s Mad Money and my former boss at TheStreet.com, was ranting and raving about the UltraShort Financials ProShares ETF (SKF). He says it doesn’t work, doesn’t help shareholders and hurts the market as a whole. He says the ETF only helps the brokers and hurts the market.

SKF is a highly risky investment and isn’t a long-term bet. It isn’t necessarily living up to its hype. But what’s wrong with having a product for traders? No one who reads the prospectus see ProShares recommending this for long-term investors.

Cramer hasn’t been doing very well by his viewers over the past year. As the market continued to crash he kept telling people to buy stocks instead of telling people to sell and go to cash or recommending bear funds. He also told people to hold Bear Stearns the week before it went under. He quotes a guy from Goldman who says it sucks. Well, let’s see, maybe that’s because every time people buy SKF it forces shares of Goldman lower.

Cramer says the SEC has to listen to him. You mean like the people who listened to him when he told them to hold Bear Stearns? I’m not putting to much faith into his opinion.

Northern Trust Launches 17th Fund

Northern Trust launched its 17th addition to its ETF family, the Northern Exchange Trades Shares, or NETS, last week with the NETS FTSE CNBC Global 300 Index Fund ETF (MYG). The ETF seeks to return the price and yield of publicly traded securities in the aggregate global market as represented by the FTSE CNBC Global 300 Index. The index comprises the largest 15 stocks by market capitalization from each of the FTSE”s 18 industry classification benchmark supersectors. It also takes the 30 largest emerging makret stocks from the FTSE Emerging All Cap Index.