ETF is something I became acquainted with, and I believe you have too, around 6 months ago. Back then, the firms whose business involved the cryptocurrencies for the first time have asked the Securities and Exchange Commission (SEC) to allow them the use of the instrument. But back then the crypto market was boiling so the applications as well as the replies towards them got lost in the vast information flow. But come the summer, and it turns out that these three magical letters is what will guide and determine the future of the whole crypto endeavour.
Let's figure out, what's really happening?
An Exchange Traded Fund is the one that can be freely traded on an exchange. In it, is a basket of stocks, currencies and other assets, a change in the price of which leads to a shift in the price of an ETF. The ability to trade an ETF on an exchange makes it one of several readily available options.
Investing in an ETF is not the most risky thing: it’s just a combination of assets.
Obviously that after getting used to the supernatural profits of 2017, the crypto investors send multiple applications to SEC. Moreover, the future development of the market is now being tied directly with an ETF. As if after therese are solved the mythical and mysterious institutional investors will pitch up and send the bitcoin not just to a rise but on its way to the moon. I believe the expectations placed upon an ETF are overrated. Indeed the creation of an exchange instrument with a crypto heart would be a big step, but not a miracle.
Why? Let’s take a look at several ETF’s.
For example, a rather popular ETF from Charles Schwab investment bank, the Schwab U.S. Broad Market (SCHB) is made up of stocks of big companies like Apple, Google, Facebook and a bit here and there, but in total the grand sum of the fund is $12 billion. The fund is rather diversified as well, since it does not just contain the internet giants. SCHB incorporated industries such as pharma, stocks of the financial firms, energy, real estate and… well, you get the idea. The fund is split up into a million pieces, each one of which is separately traded on NYSE Arca which belongs to Intercontinental Exchange which in turn operates several other exchanges. The current price of ETF SCHB is $69 with a proposed 15% annual growth. A little trick but that's just how the financial sector operates. Similar is the ETF PPH of VanEch investment bank which focuses mainly on the pharma industry and is traded on the NASDAQ exchange.
So will such a tool appear? Only the almighty U.S. SEC knows...
Among those closely anticipating, are the scandalously famous Winklevoss twins, that have turned their Winklevoss Bitcoin Trust into an ETF with a COIN ticker. Same goes for VanEck with it’s SolidX fund, the make up of which remains a secret.
So why is everyone waiting for the ETF and what does every piece of news coming out of SEC sends shockwaves through the market?
Setting our cryptoworld aside, to look at global financial markets, then the only way to buy bitcoins for a standard investor are the bitcoin futures at the Chicago Mercantile Exchange (CME). Futures is a difficult and expensive instrument since when it comes to buying and selling it, several parameters have to be identified, and a high commission is one of them. Therefore, if you are a ordinary investor, seeking to add cryptocurrencies to the portfolio, there are no options apart from CME and CBOE. In case if SEC does approve at least several ETF’s based on cryptocurrencies, it would give a large number of people to become acquainted with the world of bitcoin. ETF is simple, cheaper and comprehensible.
But that candy will attract not the institutional investors but a mass market - the one that is in one way or another is investing into securities.
ETF can become the only plausible legal offering on the market which is available not only to professionals but to you and me. The legal part of the the document is what makes this whole deal exciting for absolutely everybody. Those issuing an ETF must follow the law to a T, deliver on the transparency and liquidity of the funds. Those that make a purchase, are protected by the current laws of the financial regulations.
As soon as those derivatives appear, countless traders, brokers, funds and financial consultants will start offering the instrument to the clients to invest in. Will it meet the expectations?
If looking at the trading volumes at CME/CBOE, it turns out that although the future’s price is a big indicator, it’s not the main one. The market is not defined by the stock exchanges. The daily trade volume of bitcoin is $4 billion or 500 tokens. The OTC market of non exchange trading is three times the size. Money likes the calm waters, as most of the funds are being moved around as per a phone call, in quiet, without any type of an announcement.
Cryptocurrency investors that are used to constant background noise, to the most part have made a mountain out of a molehill. There are high hopes regarding the creation of a bitcoin ETF which are centered around an enlarged toolbox for the traditional investors. But the current figures suggest that to the most part, financial market participants are rather calm when it comes to bitcoin, even though they are rating the opportunity to profit from it.
Alongside that, other processes are also taking place. Multiple players are participating in forming the ETF market. Apart from those who are forming the market there are also the exchanges, auditors, and last but not least the regulators. Some are trying to formulate the requirements while others need to follow them while the rest are aiming to strengthen the technology. This suggest that the instrument could turn out reliable and safe and adhere to all the nborems.
The cryptocurrency market has been forming separately from the financial markets. It’s a parallel world. Relatively small in size when comparing it to it’s bigger peers. Appearance of an ETF is just one of the things that will start to link the two worlds. It’s not worth betting on the fact that a positive decision from SEC would mark a turnaround and lead to long awaited growth. The cryptocurrency market still has some childhood diseases that need to be overcome.
Will an ETF be accepted this August or not, we will see. It’s important that this project is already on the way, and following this is just a joy, right?