It seems inevitable that two of the hottest areas of the investment world would meet up sooner or later. For cryptocurrency enthusiasts and investors looking to capitalize on the growing popularity of exchange-traded funds (ETFs), the possibility of an ETF that tracks bitcoin is the best opportunity for this type of connection. However, there have been growing pains and problems in trying to launch the first bitcoin ETFs. The reason is that bitcoin, the largest cryptocurrency in the world by market capitalization, remains largely unregulated, and the U.S. Securities and Exchange Commission (SEC) is hesitant to allow an ETF focused on the new and largely untested cryptocurrency market to make its way to the public.
An ETF is an investment vehicle that tracks the performance of a particular asset or group of assets. ETFs allow investors to diversify their investments without actually owning the assets tracked by an ETF. For those individuals looking to focus only on gains and losses, ETFs provide a simpler alternative to buying and selling individual assets. Further, because many traditional ETFs target larger baskets of names with something in common (a focus on sustainability, for instance, or stocks representing the video game industry and related businesses), they allow investors to easily diversify their holdings.
A bitcoin ETF is one that mimics the price of the most popular digital currency in the world. This allows investors to buy into the ETF without going through the complicated process of trading bitcoin itself. Moreover, because holders of the ETF won’t be directly invested in bitcoin itself, they will not have to worry about the complex storage and security procedures required of cryptocurrency investors.
If a bitcoin ETF merely mirrors the price of the cryptocurrency itself, why bother with the middle man? Why not just invest in bitcoin directly? There are several reasons for this. First, as indicated above, investors don’t have to bother with the security procedures associated with holding bitcoin and other cryptocurrencies. Further, there is no need to deal with cryptocurrency exchanges in the process; investors can just buy and sell the ETF through traditional exchanges and markets.
There is another crucial benefit to focusing on bitcoin ETFs rather than on bitcoin itself. Because a ETF is an investment vehicle, investors would be able to short sell shares of the ETF if they believe that the price of bitcoin will go down in the future. This is not something that can be done in the traditional cryptocurrency market.
Perhaps most importantly, though, ETFs are much better understood across the investment world than cryptocurrencies, even as digital coins and tokens have become increasingly popular in recent years. An investor looking to get involved in the digital currency space but without the time necessary to learn about all of the ins and outs could focus on trading a vehicle he or she is likely to have a better understanding of already.
Although the SEC has so far not approved any digital currency ETFs, investors remain broadly optimistic. A source at the Commodities Futures Trading Commission explained that the chance of a bitcoin ETF being approved in 2018 is “90% at this point.” The reason for the shift may have something to do with the fact that “the crypto markets have moderated and regulators have watched the lack of drama surrounding bitcoin futures across several global exchanges.”
The SEC has also opened up applications for bitcoin ETFs to public comments, with the vast majority of commenters voicing their approval for the new product. If and when the first bitcoin ETFs are launched, it’s likely that they will see early success, as both cryptocurrency enthusiasts and traditional investors take part. In turn, the rise of bitcoin ETFs could also help to fuel gains in bitcoin as well, and, because many other digital currencies are closely tied to the performance of bitcoin, gains across the cryptocurrency market.
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