Bitcoin ETF (Exchange Traded Fund) is increasingly making noise in the market for cryptocurrency exchanges. For anyone remotely associated with cryptocurrency and involved in its developments, cryptocurrency ETFs are becoming a hot topic to discuss and animating most developments regarding its rise to fame. Here are the questions this article will answer:
- What is an exchange-traded fund? How will it increase investment?
- Can cryptocurrencies have ETFs?
- Why has it been so hard to get an SEC-approved ETF?
- What are recent developments with the Bitcoin ETF?
- How will cryptocurrency ETFs affect the market?
- What are the future prospects? How long do we need to wait?
What is an ETF
An exchange traded fund (ETF) is a marketable security that overlays any underlying assets and divides that into shares for people to buy and sell on the market. This means that ETFs are basically a vehicle for the trading of assets, much like stocks, but instead, they may be used as security vehicles for a variety of assets. Shareholders do not have a direct claim to the assets that an ETF represents, rather they indirectly own such assets and can buy and sell their indirect ownership in the market. The ownership of an ETF can easily be bought, sold or traded on the market and owners are entitled to a proportion of the profits, such as dividends. You can probably already figure out what a Bitcoin ETF is.
What is a Cryptocurrency ETF
A cryptocurrency ETF is, then, very similar to the ETF of any other asset. Except, while other assets have inherent value (such as machinery, stocks, or a bar of gold), cryptocurrencies do not have any inherent value unless they are backed by assets themselves. A cryptocurrency ETF is essentially security or a portfolio of cryptocurrencies traded through a token on the securities market.
A Bitcoin ETF, for example, will track the bitcoin benchmark index and replicate its daily performance, allowing people with a brokerage account to invest in the cryptocurrency without having to worry about the challenges of buying, storing, and safekeeping it. For example, you can still trade on the market when you think the BTC price will increase, but you will not have to worry about issues such as converting this money to legal tender or storing a bitcoin.
Issues with a Cryptocurrency ETF
As per the requirements of the Securities and Exchange Commission, however, any ETF must be approved by the SEC before it can be listed on the market. This means several things; the first is that the SEC must be confident about four things: the security of a cryptocurrency ETF, its vulnerability to manipulation, and its valuation. While a Bitcoin ETF may be a good way to ensure that the BTC price in USD can be tracked, the SEC worries about whether it is entirely beneficial to the public interest.
Since any and all cryptocurrencies are digital, they are subject to malicious acts such as hacking. There is evidence to believe that cryptocurrencies can and will be subject to malice, given the fact that they have been hacked previously. The blockchain, while an extremely secure and safe way of ensuring that a cryptocurrency is not tampered with, is not impregnable and so there are naturally questions as to whether the SEC should approve a cryptocurrency ETF in the interest of the public.
As the ease with which supercomputers are developed and used increase, and as the digital environment continues to increase in vulnerability, the SEC did raise serious questions as to whether or not a Bitcoin ETF is safe for the public. With the enormous increase in BTC prices over the past year or so, there is great incentive to compromise the system for personal gain.
One of the biggest problems of cryptocurrency, especially Bitcoin or cryptocurrency that is not backed by an asset, is that it is subject to extreme price fluctuations. This is essential because Bitcoin is not backed by an asset, and so its price depends exclusively on the forces of demand and supply on the market.
The very fact that its price fluctuation a monumental $10,000 in six months is a testament to the risks of manipulation Bitcoin has. If a financial analyst askes people to sell BTC to buy XRP, what happens to the price of bitcoin? The SEC is rightly concerned by such threats, and so it initially raised serious questions as to whether the Bitcoin can be a stable ETF on the securities market.
Appropriate valuation is important because, among other things, it determines fund performance, what investors pay for mutual funds and what authorized participants to pay for ETFs (and what they receive when they redeem or sell). With a digitally backed asset, there are questions as to whether such an asset can be appropriately and adequately valued at the end of each business day, especially given the high degree of fluctuation and arbitrary nature of its value. While it may be easier to value bitcoin, it may be even harder to value new and upcoming cryptocurrencies that are self-regulating such as Dashcoin.
Several Bitcoin traders and investment enthusiasts have recently required the Securities and Exchange Commission (SEC) to approve a Bitcoin-based ETF so that it can be traded on the market with ease. Reports suggest that the ETF has become so popular that all other cryptocurrency-related approvals have been pushed to September. Created by an organization called CBOE, the ETF will allow people to buy shares in a ‘Bitcoin Trust’. This has also impacted the demand for other cryptocurrencies, as people have begun to opt away from investments such as buying a dash.
Many believe that this ETF may be the key to reaching the $100,000 mark since a listed ETF approved by the SEC would add great confidence in the stability of the cryptocurrency, and since it will be listed as an ETF, the very nature on investments into the cryptocurrency will add more stability. Many people have been left traumatized by the cryptocurrency’s massive drop in price at the start of 2018, and measures taken to address this volatility will increase the fame, demand, and trust of Bitcoin.
ETF’s and the cryptocurrency market
As mentioned previously, ETFs are an iteration of the cryptocurrency market, in that, they are being pursued because they establish an easier, more stable, and more accessible platform for cryptocurrencies to be traded. Just like you would trade a gold ETF or an ETF for a physical asset, an ETF for a cryptocurrency will float on the market, and its price and performance will depend on the different variables that affect other ETFs on the market. Just as you would buy digital currency if you are looking for a profitable investment, you will now buy digital currency ETFs.
Cryptocurrency ETFs and vs. regular ETFs
There is no great difference between a cryptocurrency ETF and a regular ETF once it is established as an acceptable ETF by the SEC. In fact, many people believe that a cryptocurrency ETF would perform much better than any other ETF on the market because while many people are willing and able to invest into cryptocurrencies, the major issue that they face is a lack of trust in the cryptocurrency market itself, given the uncertainties about price fluctuations and market valuations.
Many also believe that the Bitcoin price prediction of $50,000 per BTC price will become a viable option with the ETF listing, because it would become a major source of increasing the trust and confidence people have in the cryptocurrency.
ETF and future prospects
There are several discussions ongoing with various cryptocurrency CEOs and the SEC regarding ETF listings, especially given the fact that the SEO is increasingly becoming amenable to considering approving ETF listings. Many forerunners in the world of cryptocurrencies, such as Ali Hassan of Crescent Crypto, have made inroads into developing mechanisms to ensure that issues with Bitcoin volatility and security are addressed. Ali Hassan has claimed that he expects to see an SEC-approved Bitcoin ETF within the next two years, promising that since several different asset management funds are working on the project together, a solution is bound to come in the near future.
Additionally, the SEC has also shown that it is not averse to a Bitcoin ETF as long as its fears are allayed. While the Winklevoss Bitcoin ETF was rejected twice, the SEC claims that this was only because Winklevoss could not adequately show how the ETF addresses concerns of safety, volatility, and valuation.
Given the increasing focus on listing a Bitcoin ETF on the market, many predict that Hassan’s promise will soon be fulfilled.
Buying a cryptocurrency ETF is just like buying any other stock or security on the market; if you have a securities account or are in contact with a broker, you should have no issues with buying cryptocurrency ETFs once they begin to list on the market. Be careful, though; many companies are finding innovative ways to make sure that the Bitcoin ETF gets registered. While these ways may make sure that the cryptocurrency is registered on the exchange market, there may not be similar guarantees regarding whether the public will trust to invest in them.
ETFs and regulations
ETFs are one of the key financial innovations that the market has seen, and so the SEC is yet to devise a comprehensive regulatory framework to govern the use and trade of ETFs. At the moment, their primary focus is on ensuring that ETFs listed on the market are not unstable, and therefore do not pose a threat to the stability of the market. Their main concerns, as mentioned before, are whether an ETF is secure, stable and whether it can be effectively valued at the end of each day. Apart from that, there is not much that the SEC regulates when it comes to ETFs.
What’s the point?
If it is really so difficult to get an SEC-approved ETF on the market, what is the point of going through such a hassle to get one approved? The most important benefit of an SEC-approved cryptocurrency ETF is that such an ETF will greatly increase the confidence people have in the power of cryptocurrencies; while many people continue to invest in cryptocurrencies, many more will want to invest in them once they are on the exchange market.
Any ETF on the exchange market will be monumentally safer and more reliable than buying cryptocurrencies and selling them on a cryptocurrency marketplace, meaning that investment in, and profits of, cryptocurrencies will increase.
Many experts have predicted that Bitcoin will soon hit its idealized $100,000 mark, and many believe that an SEC-approved Bitcoin ETF is the route to that valuation.
There are primarily two types of cryptocurrency ETFs. The first are funds that invest in companies that then create cryptocurrencies or offer ICO, or they are funds that track the performance of different cryptocurrencies by holding underlying crypto-assets. While most ETFs that are upcoming or preparing to bid for SEC-approval are ETFs that innovatively track the performance of Bitcoin, others are also on the rise. ETFs for other cryptocurrencies, however, are generally in their infancy, especially because there is yet to be a comprehensive mechanism that can prove that they meet all the requirements that the SEC has for listing.
While there is great demand for a Bitcoin ETF, it remains to be seen whether the SEC approves it, and whether or not investing in such an ETF continues to be profitable. Rest assured, you are guaranteed that there will be hundreds of developments regarding cryptocurrency ETFs, especially with new and more innovative cryptocurrencies entering the market.