Key Takeaways
- Asset managers are looking to expand beyond vanilla crypto ETFs.
- The latest proposals incorporate advanced strategies based on staking and leverage.
- Ark Invest has also proposed Bitcoin ETFs with downside protections.
The first exchange-traded funds (ETFs) with crypto exposure relied on futures contracts. Then, in 2024, stock exchanges welcomed spot ETFs.
In the next wave of financial innovation, fund managers want to ramp up earning potential with staking and leverage.
Chasing Staked Crypto Exposure
Ever since the launch of the first spot Ether ETFs last year, the prospect that funds could stake assets to grow their holdings has been tantalizing.
Asset managers like Ark Invest, Fidelity, and 21Shares did initially propose the concept in early 2024, but staking proved to be a regulatory hurdle, and it was absent when the first Ethereum ETFs launched later that year.
This summer, ETF providers, including BlackRock, filed to amend their respective ETH funds to incorporate staking.
Many of the altcoin ETF applications currently awaiting approval also include language on staking.
But so far, none of these have received the regulatory greenlight.
Regulatory Issues
The problem ETF hopefuls face is that staking rewards complicate the view of cryptocurrencies as commodities currently sanctioned by the SEC.
Compared to holding static assets, staking delivers active returns, which could be perceived as an investment contract under the Howey Test.
However, VanEck’s latest ETF application could potentially get around this.
On Oct. 16, the fund manager filed an S-1 registration with the SEC for an ETF holding Lido Staked Ethereum (stETH).
With Lido, regards are baked into the stETH–ETH exchange rate. This means ETFs wouldn’t have to operate their own validators or rely on a third-party staking service.
Bringing Leverage to Crypto ETFs
Beyond staking, ETF issuers are exploring other opportunities outside of vanilla investment strategies.
On Oct. 16, 21Shares filed to list a HYPE fund with 2x long leverage.
Volatility Shares is also expanding into leveraged crypto ETFs, filing a series of applications for funds that would invest in BTC, ETH, SOL, and XRP margin contracts.
Leveraged crypto ETFs are intended to deliver higher returns to investors.
Contracts would settle on a daily basis. Because the proposed funds are heavily invested in the respective assets, if the market rises, investors will amplify their returns; however, if it falls, their losses will multiply.
Another approach to maximizing returns is seen in Ark Invest’s proposal for a “Bitcoin Yield” ETF. The fund would invest in BTC options and premiums, with Ark strategists employed to predict the market.
Ark has also filed for two “DIET” Bitcoin ETFs that would offer downside protection with earning potential based on BTC’s quarterly price movements.
