In the wake of recent delays by the Securities and Exchange Commission in ruling on exchange-traded product proposals, a little-known asset manager thinks it may have figured out a way for big investors to tap into ...
In the wake of recent delays by the Securities and Exchange Commission in ruling on exchange-traded product proposals, a little-known asset manager thinks it may have figured out a way for big investors to tap into bitcoin without the volatility.
The Wilshire Phoenix United States Bitcoin and Treasury Investment Trust filed an S-1 back in January, and submitted an amended proposal on May 21, proposing a new Exchange-Traded Product (ETP) model grouping Treasury bills (T-bills) with bitcoin to entice new investors into crypto. NYSE Arca has also filed a rule change with the SEC to list ETPs on its exchange.
SEC approval has been an ongoing roadblock for crypto Exchange-Traded Funds (ETFs) and ETPs, with recent ETF proposals from companies like VanEck and Bitwise seeing continued stalls from the SEC and calls for public comment, mostly due to security and volatility concerns. Wilshire Phoenix Founder and Managing Partner Bill Herrmann thinks his team has solved the problem.
How it works
The trust would use Coinbase Custody (insured up to $200 million), short-term treasuries and cash equivalents held by UMB Financial Corporation. The SEC has less than 45 days to rule on the proposal, and if approved, retail shares would be traded on the New York Stock Exchange Arca, introducing crypto to a wider market.
The success of the framework hinges on the use of short duration T-bills, grouping the high volatility of bitcoin with the low volatility of T-bills. The interest of the T-bill would fund the sponsor fees of the trust, with the remaining going to investors. Because the sponsor fees of the trust are substantially lower than the interest rate of T-bills, investors can expect a gain.
The fund uses formulas to determine where to allocate based on bitcoin price fluctuations. On days bitcoin is more volatile, the formulas indicate the allocation towards the coin should decrease, and vice versa on days that see more bitcoin stability. At the start of each month, the funds are reallocated in different proportions based on the previous month’s data.
When approval?
The method differs from most others that have made their way to the SEC since it hedges bitcoin against T-Bills. It operates like a mutual fund, but technically, it isn't. Rule changes for mutual funds are the purview of the 1940 Investment Company Act, under which sources say crypto funds are less likely to see approval. NYSE Arca filed for a rule change for the Wilshire trust as an ETP under the 1934 Securities Exchange Act, which sources say is a more promising route.
No company has gained 19(b)-4 approval for a crypto mutual fund, but Herrmann says he thinks the SEC might be more open to approving crypto exchange-traded products with more control over its native asset value (NAV), or the combined value of all the trust's holdings. This becomes possible thanks to the stability of T-Bills and continued reallocation of the fund.
“Volatility is certainly something the commission has noted as a concern in the past,” he said. “I think we successfully hit that.”
But with no real encouraging movement from the SEC on the crypto trade front, there are valid concerns that increasing stability will not be enough to garner approval. A source told The Block that at this time, the SEC may be loath to approve an ETP or ETF with any crypto allocation, no matter how small the percentage.
Herrmann could not speak to the current state of the proceedings since the process is in the “quiet period,” which limits the company from speaking speculatively, but said the team speaks often with the SEC.
Alternative to hedging + retail friendly
Herrmann said the method, which is patent-pending, also cuts costs for traders since it skirts the use of derivatives. Futures contracts lock the buyer into a certain price at a later date. They are used to hedge a long spot by shorting, or selling early to turn a profit and buy up contracts to hold a long spot. But Wilshire's method isn't a traditional hedge, since it doesn't buy derivatives.
“The use of derivatives can be extremely costly over time, and those costs are often borne to investors,” he said.
The re-allocation approach of changing the proportion of bitcoin to T-Bills in the trust based on volatility is more costly and onerous for the company, but gives greater control over the native asset value according to Herrmann. There are plans to bring the method to other asset classes as well.
There is also the investor base to consider – bitcoin investors are often looking for a payout commensurate with the risk. For traditional investors with an eye on crypto, decreasing the reward with the risk might not be an enticing trade off, according to Michael Moro, CEO of Genesis Trading.
“The folks who buy bitcoin, or want the exposure to bitcoin, are mostly today doing it purely for speculative reasons,” he said.
“They don’t look at it as ‘hey I want to do this, but I want to hedge my bet,’ and potentially buying in this may limit your downside risk, but it certainly caps your upside risk too because you’re not getting the full exposure to the bitcoin,” he said.
Playing it safe makes less sense for the existing base, according to Moro, but he said there could be a market for a new investor base looking for some exposure to bitcoin with limited downside.
“I always like to say, ‘hope is not a strategy,’ we didn’t go into this without doing any reasonable research into this space,” he said.
“There is a large investor base, institutional, retail, that does not want to or can’t bear the risk of holding the asset class as a standalone,” he said. “We felt that to be the first of anything, we needed to make this as a first entry into the space for some, and we see it that way.”
source https://www.tokentalk.co/The Block/wilshire-phoenix-thinks-it-could-crack-the-code-for-etp-approval-by-mitigating-bitcoin-volatility-5ceef0f12f9352851246b4cb
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