Crypto-Product Pipeline Goes Bust as Survival Questioned

Even before the collapse of the FTX exchange brought the crypto industry to heel, the boom in virtual-currency exchange-traded products was deflating. 

Launches worldwide for ETPs focused on digital assets have dwindled to a trickle, from 58 in the first half of the year to 14 in the third quarter, with just one debut in October, according to data compiled by Bloomberg. None have come to market so far in November, a month that’s seen the implosion of a number of once-supreme crypto firms. 

Meanwhile, there’s been an uptick in liquidations, with seven vehicles shuttering, according to a tally by James Seyffart at Bloomberg Intelligence. Cosmos Asset Management in Australia recently closed its Purpose Bitcoin Access ETF and its Purpose Ethereum Access ETF, while issuer 21Shares closed its ETP that tracked the FTX token. 

“I’m expecting a wave of crypto-related ETF liquidations over the next year,” said Nate Geraci, president of The ETF Store, an advisory firm. “There are simply too many crypto-related ETFs and not nearly enough investor demand to support them -- especially during a ruthless crypto winter where some are questioning the entire viability of the space moving forward. There will certainly be some longer-term survivors here, but it’s going to be a complete bloodbath between now and then.” 

The crypto market has been beset by the disintegration of some of its most high-profile participants. FTX filed for bankruptcy amid a liquidity crunch, with revelations of its inner workings during its last days slowly trickling out in a dramatic way through court filings. The blowup pushed the price of Bitcoin below $17,000, down from its record of near $69,000 last year. The coin on Friday traded around $16,600. Other crypto firms and asset-managers have become ensnared by the pullback that followed FTX’s collapse.

Assets Plummet

Assets in crypto-focused products have plunged almost 72%, hovering around $22 billion as of mid-November, down from a peak of $78 billion in October of 2021. 

“Until we find the various crypto-related firm collapses like FTX in the rearview mirror, investors are unlikely to jump back into crypto-related products in the near term,” said Sylvia Jablonski, chief investment officer at Defiance ETFs. “There is a sense of instability in the crypto ecosystem, and it comes at a time when investors have been risk-off, pessimistic and generally avoiding any kind of growth-related products.”

ETP is the catch-all term that refers to exchange-traded funds, notes and commodities. Crypto vehicles globally use all these structures but are often colloquially referred to as ETFs.

Just last year, the crypto-funds pipeline produced products with great success amid a historic boom for the digital-assets market, when Bitcoin added 60% in value on top of a 305% gain the year prior. Last year also saw the roll-out of the first Bitcoin futures funds in the US, which received a wild reception.

“Typically there are at least a few months in lag time between the planning of a launch and the actual launch of an ETF, so it makes sense that there was a launching frenzy around April and May, which is five to six months after the crypto market peaked and seemed euphoric,” said Seyffart at BI.

Matt Hougan, chief investment officer at crypto-focused Bitwise Asset Management, says that the 2020-2021 bull market attracted a lot of “tourist companies” to the space. Those companies are being winnowed in the current bear market, he said on Bloomberg’s “What Goes Up” podcast.

Listen: Life in Crypto After FTX (Podcast)

Still, “I suspect there’ll be more crypto ETFs in five years than there are today,” he said, adding that “long term, ETFs are going to be one of the primary ways that investors gain access to crypto, and I suspect long term, you’ll see significant flows into the space.”