Regulation and Compliance Federal Regulation SEC

New ETF Invests in Grayscale Bitcoin Trust

News May 25, 2021 at 03:01 PM
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Simplify Asset Management Inc. announced Tuesday the launch of the Simplify U.S. Equity PLUS GBTC ETF.

The fund, filed with the Securities and Exchange Commission on May 23, will invest at least 80% of its net assets in U.S. equity securities, and expects to invest up to 15% of net assets in Bitcoin via the Grayscale Bitcoin Trust.

"Cryptocurrency markets now exceed $2 trillion in value and account for more than 1% of the overall global market portfolio," Paul Kim, Simplify's CEO, said Tuesday in a statement.

"In addition, recent research has shown how uncorrelated crypto assets are to equity and fixed income markets, making them a possibly compelling part of a well-diversified portfolio. But allocating to crypto assets is difficult since over-the-counter offerings can present a host of challenges for investors and advisors, managing direct crypto exposure can be incredibly time consuming and onerous, and there remains no ETF on the market providing direct exposure to crypto itself," Kim said.

Simplify is "very pleased to be launching SPBC, as a means of solving these challenges, providing a liquid, scalable way to add Bitcoin exposure to a portfolio," Kim added.

Nicolas Morgan, a partner at global defense firm Paul Hastings, told ThinkAdvisor Tuesday in an email that the Grayscale Bitcoin Trust "is a closed-end fund that invests in Bitcoin (rather than an ETF that invests directly in Bitcoin)."

As noted in the SEC's recent warning to mutual funds that own Bitcoin futures, "the SEC has not prohibited the closed-end funds invested in Bitcoin (like Grayscale), and this ETF will simply invest in that permissible instrument," said Morgan, a former SEC trial attorney. "Clever."

The May 11 statement issued by the SEC's Division of Investment Management was "a warning," Morgan said. "A warning to investors about the possible risks, but also a warning to mutual fund advisors that [the SEC exam division] will be conducting very, very thorough examinations of funds that make such investments."

ETF market prices, Morgan explained, "can deviate from the [net asset value] NAV of the ETF's portfolio. That issue should not arise in the mutual fund context because mutual fund transactions are 'forward priced' — all orders placed during the day execute at that day's NAV once it's calculated."

In other words, Morgan continued, "I can buy an ETF share directly in the market today at the market price, the underlying crypto asset's value could fluctuate wildly between the time of my purchase and the end of the day when the ETF's NAV is calculated. By contrast, if I put in purchase order for some mutual fund shares, I won't know specifically what I own until the mutual calculates its NAV at the end of the day and executes my order."

He added: "So that might explain why the SEC has not permitted a Bitcoin ETF but also hasn't shut down mutual fund investments in Bitcoin futures."

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