If you’re familiar with some trading basics, you may have heard about exchange-traded funds (ETFs) – and, if you follow cryptocurrency news, you might also be aware that’s there’s been lots of discussion around the prospect of Bitcoin ETFs.
In this blog post, we’ll take a look at what ETFs are, why they’re being talked about in the same sentence as Bitcoin - and what the future might hold for Bitcoin ETF trading.
Remember, this information is only an overview; the team here at cryptomonster do not provide investment advice. If you plan to make any kind of investment, you should seek professional guidance – and never invest money that you cannot afford to lose.
Before we explore how the world of ETFs and cryptocurrency might come together, it’s worth taking a quick overview of what an ETF is.
It’s useful to think of an ETF as a kind of collective fund. A brokerage will use its incredible buying power to purchase underlying assets that will be used to create the fund. The types of asset that underpin the fund can be enormously varied – from domestic stocks, bonds and commodities futures, to portfolios of foreign stocks, currencies – and so on.
As an ETF buyer, you don’t hold any direct investment in the underlying assets, instead, you take ownership of a share in those assets. This indirect-ownership means ETF shareholders are entitled to a proportion of any profit that the fund attracts.
There is much debate – as well as a list of pros and cons – that relate to ETFs and their more traditional counterpart, Mutual funds. The topic is too dense for us to provide a detailed exploration here – but analysts often cite the biggest advantage of ETFs as being their flexibility; because ETFs are traded like stocks – you can buy or sell any time of day and create a variety of orders, much like you can with cryptocurrency trading platforms.
So why all the detail about ETFs? Well, a number of ETFs underpinned by cryptocurrencies have been proposed to the U.S. Securities and Exchange Commission (SEC).
To create an ETF, a sponsor or manager will design and develop the fund. When the concept is finalised, a detailed plan is presented to the SEC – and they have the final say in whether an ETF is created. The first Bitcoin ETF was proposed back in 2013 – and was denied in early-2017.
Since then, two significant proposals have arisen. The first was created by VanEck, a New York Investment Management company worth somewhere in the region of £36 billion ($47 billion). VanEck partnered with SolidX, a significant blockchain tech firm – and proposed a physically backed fund (requiring the fund manager to hold an enormous amount of Bitcoin).
The second proposal came from Direxion – another huge U.S. based ETF investment management company. Direxion have actually proposed five Bitcoin ETFs – one that will mirror the currency’s price – and four others that will amplify the price, either up or down.
As this is being typed, both these proposals sit on a desk in an SEC office.
The SEC certainly can’t be accused of being fickle with their decisions around Bitcoin and cryptocurrency-based ETFs – they’ve rejected every proposal thus far – and, there’s a community feeling that the outlook for both the VanEck and Direxion ETFs also looks dim – with SEC decisions postponed until late-September.
A crypto-based ETF has the potential to massively boost Bitcoin’s value – with a strong possibility that this would drive other crypto values skyward too. On the flip side, rejections have hurt Bitcoin – although interestingly, not for long.
News of rejections and postponements from the SEC saw Bitcoin’s value drop from around $7,100 to around $6,500 quite quickly – although within days, the value had recovered – and is continuing to grow. It’s likely that this recovery is due, in part, to how significantly ETFs divide opinion in the cryptocurrency world.
Since a Bitcoin ETF is likely to see prices significantly increase, acceptance is a good thing? Right?
Well, that’s a major talking point in the crypto community. On one side of the fence are the people who say an ETF would help mainstream traders get involved with crypto without the intricacies of additional exchanges, wallets and other crypto-specific processes. This could see billions of dollars of investment flood into cryptocurrencies – with ticker prices rising accordingly.
On the other side of the argument, there’s a suggestion that an ETF introduces ‘counterparty risk’ into cryptocurrency – the idea that a highly volatile product could leave either trader or fund manager short of their contractual obligations. There’s also a suggestion that a ‘physically’ backed ETF (holding a huge amount of Bitcoin) could shake currency stability by removing a significant number of coins from circulation.
The buzz among crypto traders suggests the last week in September as being the likely time that the SEC will announce their postponed decision on the latest round of ETF proposals.
In the meantime, the SEC will be working through a strict set of criteria and considering whether any Bitcoin ETF proposal fits the bill. Points of investigation include:
While crypto communities and informed outsiders are quick to get behind the principles and execution of decentralised currency – many mainstream financial experts are still wary; a fact that’s not helped by recent volatility and on-going FBI investigations into Bitcoin manipulation.
While there’s no certainty relating to the SEC’s decision, there are significant moves toward remedying many of the issues relating to the above questions. Processes are becoming more streamlined, storage is becoming more robust, liquidity is constantly improving.
The outlook for ETF proposals is looking increasingly positive for those who want to see them implemented – but that said, the outlook has seemed positive for all the previously rejected plans too.
As is often that case in the still young world of cryptocurrency – there are no certainties that any particular course of action will result in any specific or predictable outcome.
Is a Bitcoin ETF inevitable? Would an ETF be a good thing for Bitcoin? Are ETFs the key to the hallowed $50,000 BTC valuation that’s so often talked about?
For now, the crypto community stands divided – with nothing much more than a host of complex questions and a SEC decision circling overhead. Is now the right time for a crypto ETF? Or does the market need to mature a little more before the blockchain hits the bigtime? The SEC will be sure to make their feelings known soon...