The first Bitcoin EU regulated fund is set to launch in France. This type of fund will track the movements of Bitcoin and allow investors to be able to access the returns that you would experience if you held bitcoin.
This launch will be one of the first times investors who can only trade equities will access cryptocurrency movements through a mutual fund. A French regulator has received approval to launch an exchange-traded fund (ETF) that complies with EU standards. The way the fund will track the movements of cryptocurrencies is by purchasing other assets that are correlated to the movements of Bitcoin.
The mutual fund will not hold any cryptocurrency. Instead, it will rely on the historical movements of the assets it needs to purchase to keep the mathematic relationship constant.
Ucits Set to Launch Fund
Ucits funds are offered across the European Union, Asia, and Latin American. The funds are seen as highly regarded as regulated funds. Many of the rules in effect were created more than 30 years ago and do not discuss crypto trading.
French fund manager Melanion Capital will control the assets in the fund. The company in August received EU-regulatory approval to launch an exchange-traded fund (ETF) that will track the returns of bitcoin. The French and other EU regulators restrict holding cryptocurrencies directly in an ETF. As of mid-2021, there were no U.S. funds that received approval to create an ETF that tracks the movement of Bitcoin.
To offer investors returns similar to Bitcoin, the fund will hold a basket of 30 stocks in multiple cryptocurrency sectors. These stocks include companies involved in cryptocurrency mining and companies that are handlers of blockchain technology.
The fund claims that the basket of stocks is 90% correlated with the price of Bitcoin. Since Ucits funds will not be holding Bitcoin, the interpretation is that regulators will shy away from regulating funds that have cryptocurrencies.
What is Correlation?
Correlation is a mathematical statistic that describes how the returns of two or more assets move in tandem with one another. The range of the correlation coefficient is from negative one to positive one.
A correlation of one means that the returns of two assets are perfectly correlated. Perfect correlation (which is a correlation of one) means that the returns of investment A move in direct tandem with the movements and returns of asset B. A correlation coefficient of negative one means that the two assets have returns that are opposite. For example, if investment A moves up by 5%, asset B will decline 5%.
A correlation of zero means that two assets do not have an observable movement that shows a relationship. A correlation coefficient of 90% means that 90% of the time the two assets move in tandem. According to Ucits funds, the basket of assets used in the fund launched in France will have a 90% correlation with Bitcoin.
Is Using Baskets an Issue?
One of the issues with using a basket of assets to track the movements of a completely different asset is that the correlation between the two assets can break down. Bitcoin was created in 2009, but it has only been actively traded since 2016.
This amount of time might provide some comfort of correlation, but the statistic measure of the returns could break down, leaving an investor with a basket of products that do not accurately match the movements of Bitcoin. In many instances, the way other exchange-traded funds match the movements of an asset is by holding derivatives that track the movements of that underlying asset.
For example, the United States Oil Fund USO ETF holds futures contracts, as its objective is to match the movements of oil prices. By using a derivative to track the movements of an underlying asset, you are ensuring that the correlation remains elevated.
The Bottom Line
The first EU-regulated ETF that tracks the movements of Bitcoin has been approved. French fund manager Melanion Capital will control the assets and use Ucits funds to provide the financial instrument. The fund will be a basket of stocks that move in tandem with the returns of Bitcoin.
According to the fund, the basket of stocks in the ETF has a correlation coefficient of 90% with Bitcoin. This means that the movements are nearly in tandem all the time. The risk is that the basket and Bitcoin returns become less correlated in the future.
EU-regulated funds are not allowed to own Bitcoin, and therefore, they need to use a mechanism like a basket of stocks to provide returns similar to Bitcoin. Historically, funds have used derivatives of a product, such as oil futures or gold futures, to track the movements of an underlying commodity.