Melanion Capital launches the world's first UCITS ETF linked to Bitcoin with the support of Societe Generale Securities Services
While the US market celebrates the launch of the ProShare and Valkyrie Bitcoin ETFs, financial Europe is more reluctant to embrace cryptocurrencies and still seems to be taking a wait-and-see approach: no identified issuer, convertibility risk in the event of redemption, technical risk on the return of assets… In this context, the initiatives of European asset managers have so far been confined to a few alternative funds that are reserved for experienced investors. So, the question remains: how to market Bitcoin funds to the general public?
Melanion Capital, a French management company regulated by the AMF1, has long been convinced of the strong potential of a Bitcoin ETF, provided it is labelled UCITS2. The UCITS label, the highest European standard in fund regulation, makes distribution to a broad public possible, and the ETF guarantees investors access to an envelope listed on a stock exchange with its very secure operating rules. As a result, the management company has worked extensively with the AMF to meet the double challenge of security and product strategy transparency.
To avoid holding cryptocurrencies, American Bitcoin ETFs are built on futures3 and forwards - the underlying of which is bitcoin - which are renewed before maturity. Some draw attention to the fact that this solution leads to higher costs and to high risks of reducing performance replication: indeed, long-term futures are trading at a premium compared to the spot price (the specialists speak of a negative impact of several dozen percentage points per year compared to the direct holding of Bitcoin), which weighs inevitably on the final performance.
Melanion Capital has created an entirely different and original model: their ETF, invested in listed companies in the Bitcoin industry, relies on Developed Markets Equities, with engineering work on the index methodology to replicate the performance of Bitcoin itself as best as possible. This investment strategy is therefore more secure, transparent and potentially far less costly than that of US ETFs, based on futures and forward contracts. Above all, this ETF also has the advantage of being subject to the protective specifications of UCITS regulations.
The “Melanion BTC Equities Universe UCITS ETF” was launched on Euronext (Bloomberg ticker4 BTC FP Equity) in the same week as its US counterparts on 22 October. It will likely help answer questions from many investors who are reluctant with regard to the economic fundamentals underlying cryptocurrency valuation and volatility.
The challenge for Melanion was all the greater since this player in alternative funds had no previous experience in UCITS ETFs. Therefore, which partners to associate with for the benchmark, market making and post-trade? How to work with Authorized Participants5? How to manage assets/liabilities to track the benchmark as closely as possible, which organisation to use with the fund administrator to produce the Net Asset Value before the opening of the market? How to produce the Portfolio Composition File or PCF6?...
To do this, Melanion Capital has entrusted its project to Cyril Sabbagh, who has more than 20 years of experience in market finance, and has designated Societe Generale Securities Services (SGSS), an experienced ETF services player with expertise and dedicated solutions, as its Depositary, Transfer Agent and Fund Administrator.
SGSS’ ETF and business experts have strongly supported Melanion Capital throughout its project over the past two years, confident in the success of this innovative product and committed to supporting them in the development of their product range. Because entering the ETF market is too great an investment for a mere marketing stunt. For a new entrant, the initial investment will only be amortised if its ETFs grow rapidly in order to attract investors, and if it expands its range to become a recognised market player.
On to the next challenge...!
1 AMF: Autorité des marchés financiers, the French regulator
2 Undertakings for Collective Investments in Transferable Securities
3 Futures are derivative financial contracts that obligate the parties to transact an asset at a predetermined future date and price. The buyer must purchase or the seller must sell the underlying asset at the set price, regardless of the current market price at the expiration date. Source: Investopedia
4 A Bloomberg ticker is a string of characters or numbers to identify a company or entity uniquely in Bloomberg – Source: https://libfaq.smu.edu.sg/faq/134763
5 An Authorized Participant is a financial institution authorized to create and redeem units of an ETF
6 Portfolio Composition File: Indicates the securities and weights that make up the basket of an ETF for the next trading day
Véronique Dang Vu - ETF expert, Societe Generale Securities Services
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