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The arrival of cryptocurrencies has sparked much discussion among regulatory authorities. While some see cryptocurrencies like bitcoin to be the future of money, others do not express much interest in these digital currencies.
Discussions around the creation of a Bitcoin Exchange Traded Fund (ETF) appeared last year and has since ignited arguments and counterarguments. The SEC’s rejection of bitcoin ETFs like ProShares, Winklevoss, GraniteShare, and Direxion, and the postponement of the SolidX ETF all sent signals to the cryptocurrency community of how the regulator sees bitcoin and altcoins. But what are ETFs and what impact would they have on cryptocurrencies like bitcoin?
What is an ETF?
An ETF or exchange-traded fund is a passive investment tool that tracks essential benchmark indexes, bonds, commodities, and portfolios of assets and then duplicates their performances. ETFs could be traded on exchanges like common stocks, merging the various holdings of a fund with the liquidity and fractional price of a share.
Exchange-traded fund shares are controlled using a system called creation and redemption, which enables ETFs to either dodge or reduce the distribution of capital gains, ultimately making them tax-efficient. They go through day-trading and intra-day price fluctuations, have minimal working expenses, and do not normally come with sales loads or minimum investments.
What is a Bitcoin ETF?
Like the traditional ETF, a bitcoin ETF is a financial instrument that will monitor the benchmark index of the cryptocurrency and track its daily performance. It allows traders who have brokerage accounts to invest in bitcoin without having to worry about purchasing, storing, and keeping their bitcoins safe. Thus, people who fear price fluctuations in crypto would be able to buy and trade in bitcoin without the risks that come with direct investment in the crypto space. To qualify as a financial tool, bitcoin ETFs have to receive approval from the Securities and Exchange Commission (SEC).
Bitcoin ETF and the Crypto Market
“ETFs will bring a LOT more capital to bitcoin,” according to Eric Ross, chief investment strategist for Cascend Securities.
Technically, the introduction of bitcoin ETFs will allow the cryptocurrency to become an exchange-traded product. Investors who would like to get into crypto would, therefore, be able to use their fidelity accounts and purchase bitcoin or other cryptocurrencies without worrying about knowing the ins and outs of crypto exchanges like Coinbase or Binance, and without having to suffer from long strings of private keys.
The move will also legitimize bitcoin, and make the cryptocurrency enticing for not just Wall Street, but also for the average Joe. It will signal a green-light for traditional investors to get into crypto, big money will enter the ecosystem, and prices will, of course, go up, and will put cryptos on a path to become the future of money as many envisage. But that’s not the whole picture.
Bitcoin ETF Could Be a Bad Idea for the Market
According to CEO and Co-Founder of BankToTheFuture Simon Dixon, an ETF is a “very bad way to hold Bitcoin.” For Dixon, in a bid to push bitcoin into an investment tool, more regulations will be enacted and in the long term, reduce protection for the ordinary consumer. Thus, bitcoin holders are glad to see an ETF because the move will increase the cryptocurrency’s price for the short term and give them the chance to sell at a higher price. However, according to the CEO of Block.one, more money coming into bitcoin means that the cryptocurrency might be hoarded, removing huge amounts of bitcoin from circulation. It would make bitcoin scarce for ordinary people to buy – which in the end, will open the market to only institutional investors.
The non-approval of the bitcoin ETF, therefore, means that all investors, be it individuals or institutions, will have no choice but to resort to bitcoin as the way it is and intended to be used, reducing risks and making the crypto available to all.
Another bitcoin and cryptocurrency evangelist, Andreas M. Antonopoulosmade it clear that a bitcoin ETF is a terrible idea for both bitcoin and the cryptosphere. While Dixon is more concerned about adoption and use of bitcoin by the ordinary person, Andreas, author of Mastering Bitcoin and The Internet of Money is worried about issues of governance and, arrangement, and ownership.
He believes that a bitcoin ETF will have a significant share of bitcoin and would, therefore, be able to make decisions as to where to buy or sell and also whether to pick up forked coins or not. This, according to Andreas, will shake up the very fundamental principles of the bitcoin blockchain and give bitcoin ETF an unnecessary “voting” power over certain decisions on the network.
Another reason why Andreas believes bitcoin ETFs are a bad idea is the issue of centralization. Thus, ETF fund managers will become central or office-based custodians and influence how the network is governed. Though Andreas reassures that this won’t break bitcoin as a technology, he is worried about other subsequent issues, including price manipulation and the function bitcoin will play in the future. He adds that with bitcoin not immune from a future fork, a bitcoin ETF could create a “corpocoin,” which will represent a corporate version of bitcoin, stifling the market and causing future troubles for the cryptocurrency.
On this very topic, the co-founder of Ethereum, Vitalik Buterin thinks that too much attention is being placed on bitcoin ETFs instead of looking at how the entire crypto market could enable an environment where people can buy smaller amounts of bitcoin. He expressed his opinion in a tweet saying:
“I think there’s too much emphasis on BTC/ETH/whatever ETFs and not enough emphasis on making it easier for people to buy $5 to $100 in cryptocurrency via cards at corner stores. The former is better for pumping price, but the latter is much better for actual adoption.”
Bitcoin ETFs, going by what many experts believe, will increase the short-term prices of bitcoin and reward those who buy the cryptocurrency for the sake of holding and selling at a higher price. But on a broader and long-term perspective, it will not be so good for the market.
As these experts point out, bitcoin ETFs will give more power to fund managers who own a lot of the cryptocurrency. It would also allow a select few to influence governance and issues like forks on the Bitcoin network. For many, cryptocurrencies were not created to be regulated in the first place and should be allowed to undergo self-regulatory hurdles to cement itself in the market. And though the SEC has not made any tangible decision concerning bitcoin ETFs, the future looks bright for cryptocurrencies.
Beware of Blockchain ETFs – Conclusion
Like bitcoin ETFs, blockchain ETFs allow investors to put their money into a basket of blockchain-based entities that are leveraging the distributed ledger technology to create workable solutions or investors in the blockchain ecosystem. Investors get two main benefits from engaging in a Blockchain ETF. The first benefit is gained from day-trading in those assets, similar to stock trading in the traditional market. The second is that they can pool investments for the common good, similar to mutual funds.
The Amplify Transformational Data Sharing ETF (BLOK) and the Reality Shares Nasdaq NexGen Economy ETF (BLCN) are some of the most popular blockchain ETFs in existence. With blockchain ETFs, investors take the risk of staking their money on blockchain-based startups, which are mostly in testing phases. However, on a long-run, these ETFs normally encompass globally recognized brands and help monitor the performance indexes of these startups, which ultimately measure ETF’s performance.