The launch of Bitcoin exchange-traded funds (ETFs) in the U.S. has been nothing short of a phenomenal success. In just over a year, Bitcoin ETFs have amassed an impressive $120 billion in assets under management (AUM), with the iShares Bitcoin Trust (IBIT) breaking records as the fastest-growing ETF in history. But according to industry experts, this is just the beginning. A new wave of innovation could soon propel the crypto ETF market to even greater heights.

The Rise of Index-Based Crypto ETFs

Matt Hougan, Chief Investment Officer at Bitwise Asset Management, predicts that the largest exchange-traded product (ETP) of the next decade has yet to be launched—and it may not be a Bitcoin-only fund. Instead, he envisions a shift toward diversified index-based products, akin to traditional stock market ETFs that track a range of assets.

This vision is already beginning to materialize. The recent launch of the Hashdex Nasdaq Crypto Index US ETF (NCIQ), which holds both Bitcoin and Ethereum, signals a move toward multi-asset crypto funds. However, regulatory hurdles remain a key obstacle to further diversification.

Regulatory Barriers: A Potential Turning Point?

Currently, the U.S. Securities and Exchange Commission (SEC) classifies Bitcoin and Ethereum as commodities, allowing them to be included in ETFs with relative ease. However, many other digital assets are categorized as securities, subjecting them to stricter regulations under the 1940 Investment Company Act. This classification makes it difficult for fund providers to create ETFs that include tokens like Solana, XRP, and Litecoin.

The upcoming U.S. presidential election could shift the regulatory landscape. If a new administration brings a more crypto-friendly SEC chair, some experts believe that regulatory definitions may be reassessed, unlocking the potential for a broader range of crypto ETFs.

Since November, there has been a surge in ETF filings for various cryptocurrencies and basket-based products, including proposals from firms like Grayscale. Hougan argues that resolving the security vs. commodity debate could open the floodgates for innovation in the sector.

“Until we get clear definitions, it will hold the market back. But once we do, I believe we will see an explosion of products in the U.S.,” he stated at the recent Digital Assets Forum in London.

New Strategies: Beyond Simple Holdings

Looking ahead, industry players anticipate a more sophisticated range of crypto ETFs, including derivatives-based strategies. Eric Pollackov, Global Head of ETF Capital Markets at Invesco ETFs, suggested that crypto ETFs could soon resemble their equity counterparts, incorporating features like covered call strategies for enhanced income generation.

“We are going to be having covered calls, everything we have for equities,” Pollackov noted, emphasizing the need for clearer distinctions between commodities and securities.

A Global Perspective: How Other Markets Are Leading the Way

While the U.S. awaits regulatory clarity, other jurisdictions have already introduced diversified crypto index ETPs. Europe, for example, offers 37 different crypto basket products from 18 providers, though adoption has been slow. The largest, the Hashdex Nasdaq Crypto Index ETP (HASH), holds just $430 million in AUM—a fraction of what single-asset Bitcoin ETFs manage.

Brazil has also emerged as a pioneer in diversified crypto investment products, with Hashdex operating a multi-token ETP that includes assets like Ripple, Solana, and Cardano alongside Bitcoin and Ethereum.

The Future of Crypto ETFs: A Shift Toward Institutional Investors

Despite the current dominance of retail investors in the crypto space, Hougan believes that institutional investors will increasingly allocate capital to crypto ETFs over the next decade. Historically, professional investors favor index-based approaches, and he sees no reason why crypto should be any different.

“I suspect it’s going to be normal to allocate 2-5% to crypto,” he said. “A lot of people will just want to buy a basket because they won’t want to pick individual coins.”

Will 2024 Be Even Bigger for Bitcoin ETFs?

Even as diversified crypto ETFs gain traction, pure Bitcoin ETFs are expected to continue their upward trajectory. Hougan suggests that despite 2023’s record-breaking inflows, 2024 could see even greater adoption.

“When you look at ETF history, the first year is never the biggest. Even if no one else bought Bitcoin apart from those who already hold it, I think flows this year will be much higher than they were last year,” he concluded.

With evolving regulations, new product structures, and a growing institutional appetite, the crypto ETF market is poised for a transformative decade. Whether through diversified index funds, derivative-based strategies, or continued Bitcoin ETF growth, one thing is certain: innovation is just getting started.