Globally, many institutions are pushing their respective regulators to allow them to start up Bitcoin ETF's or "Exchange Traded Funds". I see it as the start of a trend to many more cryptocurrency based ETF's that will cater to perceived investor demand.
Here's a quick reminder on what they are and some pros and cons about the existence of a Bitcoin ETF.
What's an ETF?
- Exchange Traded Funds (ETF) are investment vehicles that are traded on public stock exchanges. They pool investor money (who become unit holders) to buy and hold an underlying asset (in this case, Bitcoin) and in doing so, track the performance of that asset.
- ETF's were invented to offer investors an easy way to access exposure to a basket of shares (assets) with a single transaction and not have to worry about tracking multiple transactions and holdings.
- The promoters of the fund collect management fees for running the fund, managing the assets and processing transactions.
Why do we need a Bitcoin (cryptocurrency) ETF?
- Access - Offers access to exposure to Bitcoin (or any other cryptocurrency) to investors that use public exchanges to deploy capital.
- Diversification - Allows easy diversification for investors seeking exposure to an asset class otherwise difficult to trade and hold within their own rules.
- Convenience - Avoids the need to go through cryptocurrency exchanges where that might be a hassle or problematic for the investor's investing rules.
- Outsourced risk - Outsources the risks and work involved in securing and managing the individual cryptocurrency holdings.
- Compliance - Maintains compliance with the investors' tax and regulatory requirements in using an exchange traded product.
- Expert Management - Accesses expert managers who are paid and incentivised to maintain best practice in securing the assets and minimising risks.
- Liquidity & Familiarity - Perceived improved liquidity for investors and familiarity in trading on public stock exchanges
- Reduce Outage risks - There's less expectation for an outage on public exchanges which reduces the risk of being unable to access an investor's funds or buying more of the ETF at the time of choosing.
- Leverage potential - An ETF in a regulated exchange would allow existing financial institutions to potentially lend and borrow against the asset and allow leveraged investments and hedging.
Optimistically on a macro level, more capital being deployed into the Bitcoin space would be good for the ecosystem and the price of Bitcoin itself as it would smooth out volatility over time and more players would limit the ability of any one large holder of Bitcoin to manipulate the market.
What are some disadvantages in investing in a Bitcoin ETF?
- Management Fees - the ETF will charge a regular fee to use this investment vehicle as opposed to buying and holding Bitcoin directly.
- Trading Times - ETF's can only be traded during the times the public stock exchanges are open whilst the underlying assets are traded continuously. This can lead to volatility in pricing where an investor is unable to react by buying more or selling down their ETF holding.
- Trust - not only do you need to pay the fund managers but you need to trust they'll do the job well. Buy and Sell at market prices and manage the underlying assets securely and efficiently and comply with all the relevant regulations.
- Anonymity - less relevant now with the increasing government requirements for Know-Your-Customer (KYC) and Anti-Money Laundering (AML) checks by the cryptocurrency exchanges. There are still ways to conduct peer-to-peer trading of Bitcoin relatively anonymously whilst this would be difficult on any public stock exchange.
- Slippage - ETF's claim to track the underlying asset but during times of high volatility, it's common to see differences in the expected trading price and the executed price. The Buy-Sell spread on the exchange itself may well not reflect the equivalent spread of the underlying asset being traded.
- "Not your Keys. Not your Coin." - some of us buy cryptocurrency such as Bitcoin because it's a hedge against the uncontrollable actions and volatility of the central banks and their fiat currencies. Bitcoin can only offer its benefits of decentralised control and privacy if an investor holds it directly and not within a vehicle that is regulated by the government in a marketplace regulated by the central authorities.
Thanks for reading and let me know if I've missed anything!