Crypto Markets: SEC Denies Bitwise Bitcoin ETF
With the rising popularity of bitcoin as a global cryptocurrency widely accepted, many companies and services have emerged. They emerged with the aim of taking bitcoin to the next level as the currency of the future. One of such services is the bitcoin ETF. We shall discuss it in its entirety below.
What Are Exchange-Traded Funds (ETFs)?
Exchange-traded Funds (ETF) are investment funds trades very much like a stock. Essentially, they are investment vehicles that allow investors to purchase assets without actually owning them. Portions of ETFs are owned by shareholders but they do not own the underlying assets.
ETFs trade on exchanges like stocks, bonds, and commodities. Most of them work by tracking the performance of their assets and selling shares to investors in funds. An ETF is an attractive investment because it is cheap (requires low cost), tax-efficient and stock like in nature. It is simplified and has a wide range of assets. The prices of ETFs can be tracked through unique ticker symbols.
It is important to know that ETF is different from stock exchange and mutual funds. The main difference between ETF and stock exchange is; stock exchange is a representative of one company while ETF represents a basket of assets. Although it is similar to mutual funds, ETF has lower fees and trades on common stocks and stock exchange.
What is a Bitcoin ETF?
Bitcoin ETFs are simply an ETF whose underlying asset s bitcoins. It mirrors the price of bitcoins. Bitcoin ETFs give investors the opportunity to purchase bitcoins through the stock market without actually possessing them.
Bitcoin ETFs eliminate the risks of actually owning or investing in bitcoins and its complexities because investors are not directly involved in trading them.it acts as a shield to investors from the unregulated bitcoin cryptocurrency world by exposing them to bitcoin trading in a regulated setting.
Types of Bitcoin ETFs
Actual bitcoins holding ETFs like VanEck and Solid X Bitcoin are derivative ETFs. Essentially, this means they do not physically own bitcoins but trade on its future options. For these types of Bitcoin ETFs, examples would Direxion ETF and Proshares ETF.
How Do Bitcoin ETFs Work?
Bitcoin ETFs, as we have established, provides ways for investors to invest in bitcoins with minimal risks. They work in the following ways funds are collected from investors to purchase shares that are linked to bitcoins (shares are bought by spending investors funds) by the prospective custodians (might be a bank, an assets management company or cryptocurrency exchange).
Assets are then distributed to ETF providers in exchange for fund shares (whose value is equivalent to the assets) by Authorized participants (parties in charge of buying ETF assets for EFT benefits). As a result of the above, without being owners of the underlying assets (bitcoin), investors become shareholders.
Bitcoins vs Bitcoins ETFs: Which Should Investors Choose?
Seeing how bitcoins ETF works you might get confused about which one to invest in. you might ask yourself ‘why not invest in bitcoins directly instead of going through the middleman process of ETFs. Well, there are several reasons to go fat bitcoin ETFs. They include;
Elimination of risks and burden: by investing in bitcoin ETFs, you can eliminate the risk and burden of trading in bitcoin itself. With bitcoin ETFs, you don’t have to manage a bitcoin wallet or lose your bitcoins should someone gets access to your private keys. This is due to the fact that you don’t actually own the bitcoins; you just have shares which you can sell in traditional stock exchange markets.
Ability to short-sell: when there is an anticipation or the possibility that the price of bitcoins will plummet in the future, investors can easily short-sell their shares of the ETFs. In the traditional cryptocurrency market, the possibility of this is nil.
Easy to understand: instead of getting caught up in the complicated process of trying to understand the bitcoin cryptocurrency, you can easily invest in a market you are familiar with.
Points of Advantage
Bitcoin ETF models have been proposed by its opponents to have some indispensable advantages:
- Popularization of bitcoin and other cryptocurrencies and validation of bitcoins from global financial markets.
- Provides investors with the opportunity of short-term, medium-term and long-term investments.
- Its regularization would help in the legalization of bitcoin as an asset.
- A means to restore bitcoin prices to what it was before it skyrocketed.
- Reduces the risk of investing in bitcoins directly.
Bitcoin Controversies
Although the bitcoin ETFs look promising and future-oriented, it is still controversial and yet to gain approval from the US Securities and Exchange Commission (SEC) because of the controversies and disadvantages they portray.
Third-party players: no matter how trusted a bitcoin ETF custodian is, since bitcoins are controlled by them, investors would have no say in deciding the future governance of bitcoins.
Risks of fraud and manipulations: this is one of the greatest, if not the greatest reasons why the US Securities and Exchange Commission has refused giving its approval to bitcoin ETFs. According to the SEC, they do not stop or circumvent fraudulent practices to which investors are exposed to.
Fear Bitcoins ETFs will make Bitcoin prices more expensive: one of the proposed advantages of bitcoin ETFs is that it would bring bitcoins back to its original price. But, there is a fear that it will do just the opposite because of the withdrawal of large bitcoins from circulation. This would, therefore, increase the scarcity of bitcoin as an asset.
Custodial system of Bitcoin ETFs: the operational system of bitcoin ETFs can deter users who want to have their cryptocurrencies from actually investing in them.
Differences between Bitcoin ETFs and Blockchain ETFs
Bitcoin ETFs should not be confused with blockchain ETFs. Bitcoin ETFs simply focuses on bitcoin as its underlying asset and blockchain as the underlying technology behind bitcoin. Blockchain ETFs, on the other hand, is focused on tracking prices of companies investing in blockchain technology with the view of utilizing it.