Sunniva Kolostyak: Welcome to Morningstar. Last night, the US SEC approved 11 spot Bitcoin ETFs, which feels like a big moment for the cryptocurrency industry. But what does this mean for ETFs, and what does this mean for UK and European investors?
With me today is Monika Calay, Director of passive strategies research at Morningstar. Monica, thank you for being here. This feels like a big moment, like I said, but what is really the difference between this new spot Bitcoin ETF and the exchange traded products within crypto that already exist?
Monika Calay: Sure. So the primary difference between a spot ETF and other crypto ETFs lies in the assets they hold and how they attract their value. A spot ETF like the recently approved spot Bitcoin ETF primarily holds the actual cryptocurrency itself, such as Bitcoin, it physically owns and stores Bitcoin, and the ETF’s value is directly tied to the real-time market price of Bitcoin. So when you invest in a spot ETF, you're essentially owning a share of the cryptocurrency itself, and its performance closely mirrors the price movement of that cryptocurrency minus fees and trading costs. But this is not the only way investors can access exposure to the cryptocurrency market. For example, some crypto ETFs may invest in cryptocurrency-related products such as futures, contracts, options, or even shares of companies related to the cryptocurrency industry. But compared to these structures, spot Bitcoin ETFs are an immediate improvement in purity of Bitcoin exposure.
SK: So this story recently, it's been largely a regulatory one. So it's now been approved in the US, but what does it kind of look like in the UK and in Europe more widely. Is this something you think the regulators here are going to follow?
MC: Well, Europe has taken a significant lead in the crypto ETP market in countries like Switzerland, Germany and France, where regulatory frameworks have paved the way for crypto adoption. In fact, just last year, we witnessed the debut of the first EU spot Bitcoin ETF, the Jacobi FT Wilshire Bitcoin ETF, which listed on the Euronext Stock Exchange in Amsterdam. But it's important to know that regulatory approaches can vary across different European regions. In the UK for instance, the FCA implemented comprehensive regulations classifying Bitcoin and other cryptocurrencies as, so to speak, restricted mass market investments. So these regulations include restrictions on offering derivatives or exchange traded products tied to specific crypto assets to retail consumers. So while Europe is leading the way, the potential adoption of similar measures by the UK and other European nations remains a topic of interest and I think monitoring how these regions navigate the crypto investment landscape will be interesting in the following year.
SK: Who are these products really aimed at then – and for investors in in Europe, what sort of ETP should they be looking for?
MC: Investors eyeing crypto ETPs should be aware that crypto markets are known for their volatility. Our research has shown that crypto ETPs may not provide protection against equity market downturns and they're not reliable hedges against inflation. As always, we encourage our clients to exercise due diligence and to carefully evaluate the suitability of crypto ETPs within their investment portfolios. Caution and a clear understanding of risks are key.
SK: Thank you very much for joining today, Monika. For Morningstar. I'm Sunniva Kolostyak.
What is the difference between ETFs and ETPs? Read our explainer.
