Bitcoin, other crypto ETFs face another hurdle in the U.S. with the 'Sunday effect'

Digital currency enthusiasts are anxiously awaiting a regulatory decision on crypto exchange-traded funds in the U.S.—but there’s a drawback American asset managers will face, regardless: market hours.

ETFs, by definition, trade on exchanges, which are subject to workweek-hour trading restrictions. Cryptocurrencies, on the other hand, can be bought and sold at all hours of the day, any day of the year.

Should the price of Bitcoin abruptly plummet on a Saturday, investors in a Bitcoin ETF would theoretically be trapped in that fund until the market opens on Monday. Should it spike, they’d have to wait to trade for a profit.

“The crypto market is 24/7, so there’s no role for an open-ended fund that you can’t get out of during the weekend,” argues Carol Alexander, a finance professor at the University of Sussex. She describes dramatic price differences between Bitcoin on Sundays and Mondays as the “Sunday effect,” because many U.S. asset managers take the day off.

This challenge hasn’t stopped a series of U.S. asset managers from gearing up for an ETF launch. WisdomTree Investments, Fidelity, and others have filed registration documents with the Securities and Exchange Commission, requesting approval to move forward with their respective proposals.

Canada is already one step ahead. It approved the first crypto ETF, Purpose Investments’ Purpose Bitcoin ETF (BTCC), in February. Launched Feb. 18, BTCC has experienced explosive growth, gathering $1 billion in Canadian dollars within its first two months of trading and showcasing widespread demand for the investment vehicle. (Given the crash in Bitcoin prices in mid-May, BTCC’s assets have dropped to around $900 million, according to Greg Taylor, chief investment officer of Purpose Investments.)

These asset managers are racing to give investors wider access to the crypto market by simplifying the means to entry. As of now, U.S. crypto investors have limited liquidity and tax efficiencies with current investment choices. Those options include purchasing cryptocurrency directly from others, on an exchange like Coinbase or Gemini, or through a private fund for accredited investors. These options can have high premiums or be difficult to incorporate into an overall portfolio.

“Each of those ways comes with pros and cons,” says Matt Hougan, chief investment officer of Bitwise Asset Management, which first applied for a Bitcoin ETF with the SEC in 2019.

There has yet to be a blessing from the SEC for a crypto ETF. Some of the regulatory hesitancy may stem from the issue of market hours, in addition to concerns over systemic risk and financial fragility, as well as uneasiness over the “gamification of financial trading,” as outlined earlier this year with GameStop.

“I think the SEC is perfectly right not to say yes,” says Alexander, who worries that investor class-action lawsuits would be inevitable were investors to be trapped in an ETF over a weekend during a crypto downturn.

But investors should know better when they choose to invest in an ETF, according to Taylor, who compared crypto funds to ETFs that invest in commodities like gold or oil that can also trade around the clock, though he admits they are significantly less volatile.

“Awareness is really key with that part—to make sure that these underlying investors who are in the ETF understand the limitations of an ETF,” Taylor says.

Bitwise’s Hougan emphasizes that an ETF isn’t going to be for every investor. “One of the tradeoffs you make is that you don’t have 24/7 liquidity.”

But the benefits of the ETF structure are immense for investors, Taylor and Hougan say.

An ETF is designed to closely track its underlying holdings and offer acute liquidity. Purpose works with Canadian market makers to track Bitcoin volatility throughout the day and keep the bid-ask spread (the difference between the asking versus the purchasing price) at one penny.

A crypto ETF would also be more widely available to investors through traditional brokerages, according to Hougan.

There have been a flurry of other cryptocurrency ETFs entering the Canadian market since Purpose’s debut, including Ethereum and additional Bitcoin funds launched by competitors such as CI Financial.

“We think this is a good step for getting crypto into the mainstream instead of a more niche investment,” Taylor says.

Whether the SEC agrees still needs to be determined.