With the recent creation of the first first Bitcoin exchange traded fund (ETF) authorized to trade on US platforms, history was made. The price of Bitcoin and other crypto assets rose in tandem with the hype and excitement surrounding this prospective (and now verified) acceptance.
The People’s Bank of China (PBoC) has once again banned Bitcoin and other crypto mining and trading operations in China, and this resurgence has been particularly optimistic. Bitcoin hit all-time highs almost immediately after the launch of this ETF product, and it continues to attract institutional interest and investment in the United States and throughout the world.
For digital currencies, this is a significant step forward
The approval of the first-ever Bitcoin ETF in the United States is noteworthy for a number of reasons. To begin with, this is the conclusion of years of work by blockchain and crypto industry supporters to make the crypto asset sector more democratic and egalitarian.
Second, approving an ETF product makes crypto intelligible and accessible to a much larger pool of investors, i.e., having crypto available in an ETF “wrapper” ensures that it will attract and reflect investor interest, as evidenced by the billions of dollars inflows into the product since debut.
Finally, and probably most critically, the acceptance of this first ETF product signals a shift in regulatory tone and, potentially, a smoother route for the other ETF options that have been submitted to the Securities and Exchange Commission for evaluation (SEC).
Given the legislative uncertainty around blockchain and crypto assets, this is a huge step forward in terms of adoption and implementation. However, there are a few things that potential investors should keep in mind before putting their money into this investment program.
There are advantages and disadvantages to any new financial instrument, and all of them should be considered before investing. Let’s take a look at a few things that every potential investor should keep in mind in the future.
The ETF does not track Bitcoin
While market participants should applaud the creation of the first ever US-based Bitcoin ETF, it is crucial to emphasize that this product does not track Bitcoin. This ETF, on the other hand, is connected to and follows Bitcoin futures.
This may appear to be a little distinction, but it has significant ramifications for potential investors in terms of current and future profits. The causes of these disparities are intertwined. The first is the price differential between Bitcoin spot and Bitcoin futures, and the second is the fact that the futures underlying this ETF must be rolled forward on a regular basis.
Again, this seemingly technical difference might result in disparities in investor returns over time, which should be fully appreciated before making any investment decisions.
ETFs are easier to understand
The onslaught of bad news that can so frequently dominate debates around crypto exchanges and other organizations working in the area is something that many blockchain and crypto enthusiasts overlook. Every investor, whether individual or institutional, has surely heard about the recent hacks, breaches, and thefts in the industry.
Furthermore, many non-expert investors may be hesitant to use technology apps such as hot wallets or entrust their invested wealth to newcomers like as Coinbase or Binance.
ETFs are issued and managed by established broker-dealers and exchanges, and they may be bought and sold using standard brokerage accounts, removing what could otherwise be a significant barrier to entry. To put it another way, making crypto an everyday investing option has necessitated working with established financial institutions.
ETFs add liquidity to the marketplace
Although crypto assets are a worldwide sector, one recurring difficulty that arises during moments of market volatility – both positive and negative – is that trading becomes difficult. To put it another way, when investors seek to acquire or exit market positions, the infrastructure of the still-developing crypto asset sector might stymie them.
Adding ETF products to the crypto asset market can help with broader market adoption and implementation in yet another way.
ETFs are traded as if they were equity securities, hence increasing the liquidity of various crypto assets.
There is also the benefit of having all investments, taxes, and reporting duties contained with one service provider — for investors who do not want to add further complication to investing.
The development of cryptocurrency and Bitcoin ETFs, as well as other crypto products, has been a long process involving input from private sector actors, policymakers, and trade organisations.
Developing crypto-specific products and solutions for investors of all sizes will undoubtedly enable a larger and more diverse pool of investors to engage in the wealth generation process enabled by crypto. That said, like with any novel notion or concept, it’s critical to grasp what’s being discussed, what these concepts mean, and how to incorporate them into current frameworks.
As crypto becomes more mainstream, this breakthrough can and should be recognized as an example of how such innovation can be expanded upon. Dr. Sean Smith is a regular contributor to Euronews Next and a strategic advisor at The Central Bank Digital Currency Think Tank.