The Problem of a Bitcoin ETF

By NewAgeInvestor | New Age Investor | 5 Jul 2020


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I still recall that one of the major catalysts of the bitcoin price run in 2017 was the filing and development of a potential Exchange Traded Fund (ETF) for bitcoin. In the past, establishing ETFs for commodities and even other assets have proven to be a catalyst for the underlying asset price as it provides an easy gateway for investors to gain access to the asset. The easy access establishes demand for the asset and considering that commodities have supply constraints, it is easy to see why the price increased given the thought of seeing one ultimately being available.  

However, there have been many reasons why it has not become a reality as regulators have mostly denied this opportunity. One of the considerations is the concern on how unregulated commodities can be controlled in the markets that are not traditional. Other have suggested that the markets for cryptocurrencies like bitcoin are manipulated and will lead to losses for investors. Despite many of these considerations also being a reality for other commodities, the prejudice against many digital assets and their potential disruption to traditional financial markets have blocked the path for an ETF being possible in the short term.  

We have also recently seen how these financial instruments can implode as well. Last year, we saw how ETFs related to the volatility in markets were unexpectedly caught off-guard as the first spike in volatility made the underlying future contracts become uninvestable for a short time. This caused the insolvency of some of the ETFs actually betting against volatility which even caused concern to the underlying structure of the markets. We saw financial markets rocked due to this.  

Also, this year we saw how oil markets have been hit hard due to not only economic concerns but geopolitical as well. This caused a negative price for a commodity which is the first time that futures contracts actually were priced negative. When participants and market observers looked closer, it became known that the negative price action was mainly led to the fact that the Oil ETF was forced to liquidate it's positions on the front month contract before expiration as they were not built to take delivery on the underlying asset of oil. The fire sale was exaggerated as the size of the fund (assets under management) was a high percentage of the outstanding futures contracts. Therefore, in a weird sort of way, they became its own market.  

These learnings have led me to think that a bitcoin ETF is really not a positive catalyst for the cryptocurrency. While it would provide a great way for investors to participate in the asset class, it will only fuel the speculation of the price and not lead to what should truly be the goal for the Bitcoin ecosystem, adoption. Although many of the fund managers have suggested innovative ways to avoid the issues that we have seen in ETFs, I believe that the limited supply of bitcoin and the only modest liquidity currently available, will make it impossible for regulators to approve an ETF in the future. However, I stand by the thought that we do not need one for the Crypto asset class to remain relevant and continue its growth and adoption.  

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Investor | Crypto Enthusiast | Applying Modern Finance to Crypto Assets

New Age Investor
New Age Investor

Investor | Crypto Enthusiast | Applying Modern Finance to Crypto Assets

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