The last two months have been a near constant cycle of news stories, opinion pieces, social media “noise” and coverage of all things Bitcoin ETF. Hailed by some as the necessary trigger for the next bull run in the crypto markets, the prospective ETF schedule also has its fair share of detractors and doubting spectators. But before we get into Bitcoin ETF details, let’s define just what an ETF is, to begin with.
What is an ETF?
At its most literal definition, an ETF is an Exchange Traded Fund. In fact, according to Investopedia:
“An ETF, or exchange-traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange. ETFs experience price changes throughout the day as they are bought and sold. ETFs typically have higher daily liquidity and lower fees than mutual fund shares, making them an attractive alternative for individual investors.
Because it trades like a stock, an ETF does not have its net asset value (NAV) calculated once at the end of every day like a mutual fund does.”
ETFs allow for individual investors to indirectly own shares assigned to confirmed assets. The daily trading process is similar to traditional stock exchange trading, with an easy access to individual investors.
The ongoing regulation of an ETF is such that only specific, approved, large investors are able to create and redeem shares of the ETF for the required assets. These investors are known as the Authorized Participants, or AP’s. These AP’s are consisting of institutional investors with large buying power, such as banks or investment conglomerates. The creation of ETF shares occurs when AP’s ensure that the portfolio of required assets exists, then turns them over to the fund for the ETF shares. This is known as a creation event. On the other hand, a redemption event is a process by which the AP’s turn over ETF shares, to be returned the appropriate portfolio of assets for the number of shares redeemed.
ETF’s as a whole are seen rather favorably within the investment markets as they allow for easy accessibility, favorable taxation as well as long/short leverage trading options. This diversification is just some of what many institutional and individual investors alike look for in an investment vehicle.
So now that we know what an ETF is, how or what does this apply to in the cryptocurrency space, more specifically to Bitcoin ETF? The biggest proponent for the positive nature of the ETF acceptance is the belief that an ETF will continue to bring more long-term, institutional investors into the exchange and market space. There are many lines of thought surrounding this, as already touched above, but including:
- Favorable taxation
- Easy accessibility
- Familiar trading model
- Diverse options and leverage trading
One cannot deny the favorable package that an ETF wraps Bitcoin up in, adding a tidy bow on top. With that said, however, many people have been blindly climbing the rooftops and screaming, “Bitcoin ETF’s!” while setting up an unsustainable hype of “do or die” mentality for the entire future of crypto as we know it.
This is simply not true.
Crypto has gone through many a rise and fall, through many a FUD or FOMO cycle and continued to come out unscathed, with slow, organic growth year over year. To link the outcome of one specific decision to the entirety of an industry market is in and of itself short-sighted at best. In fact, let’s look at some of the negative aspects that an ETF could bring as well.
As is the case with any investment model, the listing on high volume exchanges or opening the door to a larger, institutional investment set doesn’t necessarily immediately equate to a valuation increase. It DOES, however, open the door to one thing in particular: volatility.
High volume allows for an increased liquidity in ANY direction. This means that with further leveraged trading options, there will also be an increased incentive for larger swings in both directions. In an unregulated space, while decentralization reigns supreme, manipulation in turn also remains a confirmed and longstanding issue.
Extra Security Brings Extra Costs
As we all know, security of cryptocurrencies from exchanges and fund managers is no easy task and requires the utmost, ongoing dedication to proper security methods and procedure. In the case of an ETF, an investor mitigates all risk as they are trading shares of an asset that is managed by a custodian. While this is secure for the investor, it comes with an added price. In the case of some European BTC ETF’s, these inflationary costs can be as much as 30% more than the global market average.
Accurate Valuation Concerns
A valid concern of traditional investors is the built-in volatility of Bitcoin, and many other altcoins in general. This volatility creates a divide when attempting to establish a foundational valuation for creation, redemption and investor reports. While many innovative options exist and continue to be brought as an option, there is no denying that the volatility of Bitcoin remains higher than that of traditional investment vehicles.
Conclusion about Bitcoin ETF
With that said, it is the author’s opinion that Bitcoin ETF’s and the possibility they bring are as a whole favorable to the crypto markets in general. With that said, there are inherent risks and possible negative scenarios also brought forth with them should they be approved within the US by the SEC. I look forward to a diversification of investment models for both institutional and individual investors alike but urge users to at the very least educate themselves regarding the ongoing possibilities and opportunities as they develop.
Rather than blindly scream “BITCOIN ETF TO THE MOON”, one would be much better off educating themselves on the options it brings, the possibility for negative price movement enabled, as well as the long-term growth functions made available if approved.
It is, after all, just one more step in the greater goal of ongoing, daily use adoption by the general public regarding blockchain technologies and cryptocurrencies in daily life.
Get Better. Get Blox.
(Contributed by Kevin Steele, Head of Blox Ambassadors)
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