Friday, 27 July 2018 05:44

Bitcoin ETFs: Exchange-traded Fund Explained

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This week we take a closer look at Bitcoin ETFs, to shed some light on what it is and the affect it might have on the overall market going forward.

ETF refers to an “exchange traded fund”, which is a passive investment tool that can track the underlying benchmark indexes. These are able to be traded just like common stocks on exchanges. When you are talking about Bitcoin ETFs, you are talking about a tool that tracks the Bitcoin bench index. It can replicate the daily performance and allow people who have these brokerage accounts to invest in the cryptocurrency without the concerns of storing, buying, and securing it. Before becoming available, it needs to be approved by the Securities and Exchange Commission (SEC). This is a very slow process that has yet to be accomplished at this time.

There are a few Bitcoin ETF applications that are currently in this process. One is the Winklevoss Bitcoin ETF, which has been awaiting approval since 2013. What makes Bitcoin ETFs so interesting to financial experts is not only does it have a high amount of daily liquidity but it also doesn’t have extreme charges involved in the process. Currently Bitcoin hasn’t been a part of the “institutional capital”, something that will completely change should these Bitcoin ETFs be allowed by the SEC. Some experts estimate that should these be allowed, at least $300 million would make its way into the fund just in the first week, and this would have a major impact on the price.

One concern is that the liquidity will dry up very quickly. Speculation is that this is because nobody will want to sell into this market. People might prefer to hold onto their Bitcoins to see how things go with the first ETF that gets approved by the SEC. A major upside to this is that getting SEC approval will help to change how people view Bitcoin. A currency that was at one point perceived by some to only be for criminal activities, now becomes legitimized by the SEC.

Ultimately, Bitcoin ETFs could have a significant impact on the market especially in light of the recent mini bull run. The combination of the higher prices, an improvement in the perceptions of Bitcoins, and a decline in the regulatory risk could possibly all have a positive impact on the market. There is however little hope that it will happen this year (SEC has the right to defer a decision for up to 90 days) especially since the ruling by the SEC on the Winklevoss Bitcoin ETF was just pushed back even further. There is furthermore much to still figure out, including what regulations would be in place on Bitcoin ETFs even if they are approved by the SEC.

Only time will truly tell the impact these will have on the market.

"An exchange-traded fund (ETF) is an investment fund traded on stock exchanges, much like stocks.[1][2] An ETF holds assets such as stocks, commodities, or bonds and generally operates with an arbitrage mechanism designed to keep it trading close to its net asset value,[3] although deviations can occasionally occur. Most ETFs track an index, such as a stock index or bond index. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features.[4][5] By 2013, ETFs had become the most popular type of exchange-traded product.[citation needed]" Source: Wikipedia

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