In today’s edition, Miguel Kudry from L1 Advisors details the contrast between direct ownership of cryptocurrencies and exchange-traded funds (ETFs), alongside predictions for their evolution by 2025.
Then, Crews Enochs from Index Coop provides insights in the Ask an Expert segment.
The Lines Between Spot Crypto ETFs and Direct Ownership Will Blur in 2025
The year 2024 was significant for cryptocurrency, marked by the introduction of Bitcoin and ether spot ETFs, quickly becoming among the fastest-growing ETFs. Reports indicated that by November 2024, global crypto ETPs gathered over $134 billion in assets under management (AUM), gaining popularity even with the SEC’s cash-only restrictions during approvals. Changes are expected in the 2025 landscape regarding redemption methods.
The Shift to In-Kind Redemptions
In 2024, the SEC prohibited in-kind redemptions, allowing only cash transactions when buying or selling ETF units. However, the forecast for 2025 hints at a shift, as regulatory bodies may introduce in-kind transactions for spot crypto ETFs. BlackRock has initiated a rule change request to facilitate in-kind redemptions for its Bitcoin ETF, a move that could foster a new liquidity connection between traditional finance (TradFi) and decentralized finance (DeFi) systems.
Impact on Investors
The cash-only structure previously sidelined billions in crypto assets, deterring crypto-native investors from converting their holdings into ETFs due to high tax liabilities. With potential in-kind redemptions, these investors can transition portions of their crypto holdings into ETFs without immediate taxation, accessing a broader spectrum of traditional financial services, including uncollateralized loans and mortgages.
Conversely, traditional investors who have ventured into cryptocurrencies via ETFs might find in-kind redemptions as an opportunity to deepen their involvement in the crypto sphere. With significant surges in their ETF values—Bitcoin was approximately $46,800 at the ETF launch in January 2024, and ether around $3,422 by July 2024—they can now swap ETF shares for direct crypto assets, stepping into DeFi without raising new funds or facing tax hurdles.
Catalysts for Change
The recent withdrawal of Staff Accounting Bulletin No. 21 (SAB-21) is another pivotal development, permitting financial entities to refrain from listing digital assets as liabilities, encouraging banks and brokerages to delve into crypto custody and develop native financial products. An example of this momentum is Coinbase’s recent launch of a bitcoin-backed lending tool through Morpho Labs, leveraging DeFi for financing via Bitcoin. We expect a surge of traditional financial businesses pursuing this avenue.
Simultaneously, a faction of investors prefers self-custody, managing their assets independently to tap into crypto-native offerings without intermediaries, emphasizing the need for reliable self-custody solutions in a changing crypto environment.
The Convergence of TradFi and DeFi
As 2025 approaches, the lines between traditional and decentralized finance are anticipated to blur further. With innovations like in-kind transactions and favorable regulations, investors are likely to interact with crypto-native platforms in a more integrated manner, potentially enhancing inflows and creating a more connected and liquid market.
In conclusion, the shift from ETFs to crypto ownership not only offers new investment choices but also alters investor behavior and market dynamics. With in-kind redemptions on the horizon, alongside regulatory changes like the withdrawal of SAB-21, 2025 heralds a crucial period for the integration of cryptocurrencies into mainstream finance.
