Valkyrie just received approval from the SEC for another bitcoin exchange traded fund (ETF). Just a few month’s after the first ever listing of a bitcoin ETF back in October. Bitcoin is continuing to find itself in many people’s portfolios every day. Until the first bitcoin ETFs were released, most people gave themselves “exposure” by buying shares of Microstrategy (MSTR) and the Grayscale Bitcoin Investment Trust (GBTC).
Bitcoin ETFs are great for investors to get involved into the digital asset space and gain exposure. The simplicity of investing that comes with ETFs is a major win and has helped support retail investors and simplify the world of investing. Outside of crypto, popular ETFs like the SPY, VTI, and QQQ have become building blocks to retail investors portfolios for years.
So, what is an ETF?
“An exchange-traded fund (ETF) s a type of pooled investment security that operates much like a mutual fund. Typically, ETFs will track a particular index, sector, commodity, or other asset, but unlike mutual funds, ETFs can be purchased or sold on a stock exchange the same way that a regular stock can. An ETF can be structured to track anything from the price of an individual commodity to a large and diverse collection of securities. ETFs can even be structured to track specific investment strategies.”Investopedia
Valkyrie originally launched their Valkyrie Bitcoin Strategy ETF (BTF), a Bitcoin futures ETF on October 22 on the NASDAQ. The very first bitcoin ETF launch was from ProShares for their bitcoin futures ETF (BITO) on October 18 on the NYSE, Valkyrie launched BTF the following Friday, and VanEck launched their ETF (XBTF) on November 16 on the CBOE.
Valkyrie is an investment firm headquartered in Nashville, TN concentrated on the growing and emerging digital asset space lead by their CEO Leah Wald. Valkyrie has 3 Bitcoin funds, BTF, VBB, and now WGMI. WGMI is their newest tool for investors to gain Bitcoin exposure through the traditional financial system.
WGMI is an actively managed ETF available through Nasdaq that invests in public companies in the bitcoin mining industry. Companies are screened based on their usage of renewable energy.Valkyrie
Why Bitcoin Mining?
Bitcoin mining is very profitable, but difficult and highly competitive. The way bitcoin mining works is like this. The Bitcoin network is a blockchain, and all the transactions that occur on the network are bundled into blocks. The newest block is attached onto the last block that was added. In order to “prove” that requires energy and computational power.
New transactions from wallets are added into the bitcoin network, constantly. Node validate these transactions within the bitcoin consensus “rules”. Bitcoin mining will create new bitcoin, and also secure the entire network. The transactions waiting to be added into the next block are arranged by “transaction fees”. These can be based upon the size of the transaction, the fees can also be set based upon urgency and user choice.
The mining reward is comprised of both new bitcoin and transaction fees. The miner only collects the reward if it validates all the transactions and operates within consensus. Consensus is used to provide security and deny malicious transactions and irregular/crooked transactions.
“Mining creates new bitcoin in each block, almost like a central bank printing new money. The amount of BTC issued in each block is limited and diminishes with time, following a fixed issuance schedule”Andreas M. Antonopoulos
Valkyrie explaining bitcoin mining and the WGMI ETF:
“Bitcoin miners earn revenue generating bitcoin transactions by solving cryptographic puzzles that secure the blockchain network. The first miner to solve the puzzle in each ten minute period publishes the next block of verified transactions and earns the current reward of 6.25 bitcoins, which is over $300,000. With 900 bitcoin awarded to miners every day, assuming a price of $50,000 per bitcoin, the global mining community can earn $45 million per day.”Valkyrie
Imagine bitcoin mining like an arcade game where the game restarts each time the game ends by someone “winning”. As well as the difficulty of the game adjusting based on the previous game. Every ~10 mins mining computers compete against other similar computers across the globe in an all out race to the finish to complete the “puzzle” or the “game” to earn the “reward”. Also it is good to remember, every 4 years the mining reward halves. Currently we’re about halfway to the next bitcoin halving event currently estimated for late Spring 2024.
The Bitcoin Miners ETF
The purpose for the fund by Valkyrie is highlighted on their homepage:
Gain exposure to the emerging bitcoin economy.
Access through a traditional actively managed exchange traded fund.
Invest through a regulated exchange.
Managed by a digital asset investment firm.
Providing retail with an alternative and easy option to invest in bitcoin mining companies gives them an opportunity to diversify as they see fit. Options to invest in companies that hold Bitcoin like Block and Tesla provide a different form of exposure, much like Microstrategy and their BTC holding strategy.
A major aspect to the WGMI fund is the sustainability these companies offer to bitcoin mining. Across the holdings the focus on “green energy” is emphasized, as it has been a point of contention as of late.
The bitcoin miners in the WGMI portfolio use approximately 77% renewable energy. These mining companies utilize sources like solar and hydropower. Some miners are very creative, seeking to generate electricity from areas with volcanic energy or even locating mining rigs in oil fields to use natural gas that would otherwise be flared. Valkyrie believes these firms are leading in corporate sustainability efforts, positioning them for further success.– Valkyrie
The energy debate has been debunked many times now. The majority of mining operations are already using renewable energy resources because of the reduction in operation costs. However, since it’s being publicly listed this kind of stuff, optics, matter. The more sustainable the operation the higher the return on the mining operation makes it an important aspect to the ETF.
The fund itself is comprised of the following companies, organized by weight. As you can see, 5 of these company’s renewable energy usage is 100%.
BTC or ETF
The biggest question is, why not directly own BTC and put it in cold storage? That is the smarter decision. You want to own the keys to your coins, as well as be able use it. The point of owning BTC is self-custody of it and utilizing it.
Some people will prefer to gain exposure to bitcoin through bitcoin mining ETFs like WGMI. Understandably as some people don’t understand bitcoin and crypto yet, the idea of diversifying into a new asset class can be confusing and these seem like good options for people who are new to it. GBTC is still a popular option for traders even though GBTC trades at premiums and discounts relative to the price of BTC. Investment firms still use traditional vehicles to provide their clients access to crypto, even though all you need to access crypto is an internet connection.
Another problem is the unnecessary exposure to fees in the traditional markets. You aren’t subjected to that by owning BTC and using a hardware wallet. No storage fees, or any kind of fees like there are in the traditional markets. Even owning MSTR shares, or owning shares in the future BTC spot ETF to be listed in the US, the best option is always going to be to buy BTC and own it yourself.
“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”
The ETF competition has been extremely hot. ProShares, Valkyrie, and VanEck are currently the only Bitcoin futures ETFs available in the US at the moment. The biggest wait is of course for a bitcoin spot based ETF that tracks the asset directly. The SEC rejected Valkyrie, VanEck, and Kryptoin’s spot ETF applications at the end of 2021. Gensler the Chairman of the SEC has been citing the reason for delay as “investor protection”.
There is a lot of clarity needed from a regulatory stance this year for crypto. Much of what is being said so far has been positive. There is a lot more to come for the fastest growing industry in 2022.