The Central Bank Digital Currency Think Tank explains the financial structure and implications of the newly launched ETF.
The views and opinions expressed in this article are those of the author.
History was made recently with the launch of the first ever Bitcoin exchange traded fund (ETF) authorised to begin trading on US exchanges. As the buzz and excitement around this potential (and now verified) approval grew, the price of Bitcoin and other crypto assets closely followed.
Subsequent to the banning – yet again – of Bitcoin and other crypto mining and trading activity in China by the People’s Bank of Chain (PBoC), this rebound has been particularly bullish.
Bitcoin, almost immediately following the launch of this ETF product, hit all-time-highs and continues to drive institutional interest and investment both in the US and internationally.
A step forward for digital currencies
The authorisation of this first-ever Bitcoin ETF product in the US is significant for several reasons. First, this is the culmination of years of efforts by blockchain and crypto industry advocates pushing to try and achieve more democratic and equitable access to the crypto asset sector.
Secondly, approving an ETF product makes crypto understandable and accessible to a much broader pool of investors, i.e. having crypto available in an ETF “wrapper” means that it will – as demonstrated by the billions of inflows into the product since launch – attract and reflect investor appetite.
Lastly, and perhaps most importantly, is that the approval of this first ETF product indicates a shift in regulatory tone and perhaps an easier path for the other ETF options that have been forward for review at the Securities and Exchange Commission (SEC).
Given the regulatory ambiguity that has surrounded blockchain and crypto assets, this is a tremendous step forward for broader adoption and implementation. That said, there are a few specific points that potential investors should keep in mind prior to allocating assets to this investment product.
Like any new financial product there are positives and negatives, all of which should be consulted prior to investing. Let’s take a look at a few considerations that every potential investor should be aware of going forward.
The ETF does not track Bitcoin
While the launching of the first ever US-based Bitcoin ETF has, and should be, celebrated by market participants, it is important to note that this instrument does not track Bitcoin. Instead, this ETF is linked to – and tracks – Bitcoin futures.
This might seem like a technical difference but has critical implications for potential investors in terms of potential returns for current and future investors.
The cause of these differences are related to both. First, the differences in price between the spot price of Bitcoin and Bitcoin futures and second, the fact that futures underlying this ETF have to be rolled forward on a continuous basis.
Again, this seemingly technical difference can lead to differences in returns over time for investors and this should be firmly understood prior to any investment decisions.
ETFs are easier to understand
Something that can oftentimes be overlooked by blockchain and crypto advocates is the barrage of negative headlines that can so often dominate conversations around crypto exchanges and other organisations operating in the space.
Every investor, be they individual or institutional in nature, has undoubtedly heard about the hacks, breaches, and thefts that have occurred in the sector.
On top of this, there are many non-expert investors that might not feel comfortable using technology applications such as hot wallets, or entrusting invested capital to new entrants like Coinbase or Binance.
Since ETFs are issued and managed by incumbent broker-dealers and exchanges, and can be accessed using traditional brokerage accounts, this removes what could otherwise be a substantial barrier to entry.
In other words, making crypto an everyday investment option has – paradoxically enough – required partnering with incumbent financial institutions.
ETFs add liquidity to the marketplace
Crypto assets may indeed be a global industry but a common issue that arises during periods of market volatility – both the upside and downside – is that trading can become difficult.
In other words, at the very moment that investors may want to enter or exist market positions the infrastructure of the still emerging crypto asset sector can hinder such transactions. This is another way in which that adding ETF products to the crypto asset marketplace can assist broader market adoption and implementation.
ETFs are traded as equivalent to equity securities, and therefore increase the liquidity surrounding different crypto assets. In addition, there is also the benefit of – for investors who might not want to add extra complexity to investing – having all investments, taxes, and reporting obligations contained with one service provider.
The evolution of crypto and Bitcoin ETFs, as well as other crypto products, has been a long journey that has involved feedback from private sector actors, policymakers, and trade associations.
Creating crypto specific products and offerings for investors of all sizes will, without a doubt, allow a broader and deeper pool of investors to participate in the wealth creation process that crypto allows.
That said, and as what occurs with every innovative idea or concept, it is important to understand what exactly is being discussed, what the implications of these ideas are, and how to integrate ideas into existing frameworks.
This development can, and should be celebrated, and an example for how such innovation can be expanded upon as crypto continues to become mainstream.
_Dr Sean Smith is a strategic advisor at The Central Bank Digital Currency Think Tank and a regular contributor to Euronews Next. _