Bitcoin ETFs have been a subject of interest to most of the investors in the crypto space for a while. Why all this hype? Let’s find out. Starting with the basics, an ETF is an investment vehicle that mimics the price of a certain commodity, stocks, index funds, etc. These ETFs are then traded on the stock exchange, making it easier to access for most people. Unlike mutual funds, ETFs can be traded at any time of the day, hence the liquidity is phenomenal.
Most ETFs focus on shadowing the valuations of weighted averages of a set of stocks, but much like the ETF of Gold, the ETF of BTC would be 100% Bitcoin. Again, much like the ETF of Gold, the price of a Bitcoin ETF would be pegged to the price of Bitcoin.
Buying Bitcoin is quite a complex process for many at the moment, making a wallet, transactions, buying, etc. The BTC ETF would automatically bring ease for people by putting it on the stock exchange, resultantly increasing exposure to masses. Not only is this preferable for institutions, but retail investors would also flood into the market by this act.
By bringing in mass adoption rates, increased liquidity, and surging public interest the ETF would automatically help bring in huge institutional investments, increasing the price of Bitcoin, and as a result, bring up the whole market cap. A lot of retail investors have their investments held with hope high relating to regulations and ETF approval, but the SEC has been pretty skeptical relating to the matter. In their opinion, the fraudulent and manipulative activities in crypto are the reason they cannot be brought out to the general public on a stock exchange. The SEC also believes that the unregulated nature of cryptos makes them untrustworthy and hence the ETF decisions are being delayed. According to the venture capitalist, David Gold, of FIO foundation,
There is more at stake for the SEC than simply if bitcoin markets can be manipulated or not. Decentralized value threatens regulators in a variety of ways. So, approval of a Bitcoin ETF which would further solidify the future of decentralized value is not in regulators’ interest. I suspect that other countries will approve ETF and mutual fund like vehicles for crypto before the U.S. and only later will the U.S. get on board so as to not be left behind.
The fact that Bitcoin cannot be put under surveillance or be tracked, is the reason why people reverted to BTC from the conventional economy in the first place, but one of the concerns put forward by the SEC conflict with the foundation of Bitcoin, which is, that they want the currency to be regulated and tracked. It is said that the economic institutions might not let the ETFs be approved and won’t let regulations take place around the world because of the natural threat cryptos pose to the conventional centralized economy, but it is still hoped that the economic vehicles like ETF that crypto requires to achieve mass adoption are welcomed to the crypto space soon.
Exchange-traded funds, as the name implies, are funds that are traded on an exchange. Funds basically are pools of money gathered by a fund manager or a company which is then used to invest in different areas of the market. The return of these investments can be paid to the buyers either in the form of dividends or by the increase in value per share, which can be sold afterward for profit.
ETFs mostly are meant to shadow the actual valuation of a certain commodity, a collection of stocks, or maybe a full sector (For example Healthcare)
ETFs for commodities:
Imagine that you have $500, and you want to invest your money in Gold. Realistically, that little amount of money wouldn’t get you an ounce of Gold, this is where ETFs slide in. The Exchange-traded funds of Gold replicate the original value of Gold, and instead of buying us real gold, it gives the buyer shares to invest in, which replicate Gold’s value.
Market indices are a collective representation of the performance of multiple stocks. There are multiple indices in the market that signal the progress of the collection of a number of stocks. Some of the famous market indices contain S&P 500, Dow Jones industrial average, Nasdaq composite, etc. The issue with investing in these indices is that you’ll have to invest individually in all of the companies, for example: For S&P 500, you’ll have to invest in the 500 companies that the index represents to enjoy the fruit of the overall index. ETFs provide a better alternative in this domain too. Instead of a need to invest in the 500 companies, S&P’s ETF allows buyers to buy single shares that replicate the performance of the whole index, instead of having to buy all the stocks.
Another use case for ETFs is the investments in the whole sector. For example, You believe that instead of investing in companies, you now want to invest in a whole sector, let’s say health care. There are ETFs that allow buyers to invest in whole sectors and gain returns based on the market of the sector.
The main reasons why ETFs have taken over a lot of other investment options, especially for new investors are as follows:
- Liquidity: The ETFs can be bought and sold at any time of day, unlike mutual funds. The shares are very readily available and can be sold at will.
- Low price: As mentioned earlier, ETFs give scaled-down investment opportunities for investors, so the monetary demands are very small.
At this point in time, the crypto world has sailed slightly forward towards regulations and their importance. Regulations would come once the authorities are comfortable with the idea of crypto, which would, as a result, increase the chance of an accepted ETF proposal exponentially.
CEO of the crypto investment firm BKCM and CNBC’s analyst Brian Kelly was also of the view that ETFs might not be the requirement of the hour, instead, we should look for regulations. He was also positive about the regulations as the authorities have shown a lot of motion regarding this subject lately. He stated in an interview:
You have companies like Fidelity and TD Ameritrade starting to push into this space. So ultimately you’re going to be able to buy Bitcoin in a regular brokerage account, or it’s going to look like a regular brokerage account. So I’m less concerned that you need a bitcoin ETF at this point in time.