We’ve certainly seen a fair amount of news emerge from the cryptocurrency sector in recent times…
From the rise, fall and subsequent rise of Bitcoin (BTC) to less-than-glamorous characters such as Sam Bankman-Fried being booted from the entire trading ecosystem thanks to the collapse of FTX, the industry is rife with movement.
One of the most recent (and long-awaited) stories to have entered into the marketplace involves the relationship between Bitcoin and Ethereum and the world of exchange-traded funds (ETFs). This has served to buoy the crypto marketplace and naturally, investors are interested to learn about what may be in store.
What might this signify for the average cryptocurrency trader as well as the entire industry? How could an ETF listing transform the ways in which major crypto assets are traded? Why might such a paradigm shift occur sooner as opposed to later?
As always, the team at Crypto Lists aims to keep our readers informed and the information outlined below should provide a much-needed edge. Let’s begin by highlighting the basics before discussing future possibilities.
Go directly to
- 1 What Exactly is an ETF and What are the Associated Benefits?
- 2 ETFs: Pros and Cons
- 3 What’s the Deal with ETFs and Cryptocurrencies?
- 4 Trader’s Paradise?
- 5 Spot Versus Future ETFs: What are the Implications?
- 6 Might There be Any Downsides with Bitcoin and Ethereum ETFs?
- 7 Are Bitcoin and Ethereum ETFs Here to Stay?
What Exactly is an ETF and What are the Associated Benefits?
Some readers might not be entirely familiar with how an ETF functions. Exchange-traded funds are essentially a conglomeration of a group of securities used to follow the movements of an underlying commodity, index or asset. For the sake of this article, we’ll be referring to cryptocurrencies as the relevant assets. Sounds a bit like a traditional mutual fund, right? Well, not exactly.
There is a major difference between exchange-traded funds and mutual funds. Mutual funds are only able to be traded after investment hours. ETFs can instead be traded on a 24-hour basis (in relation to the relevant market). This essentially signifies that investors are able to proactively monitor their position around the clock.
Another point to mention is that mutual funds are often tracked by fund managers; resulting in higher customer fees. ETFs are instead considered to be passively managed vehicles; resulting in lower overall costs and easily calculable returns.
ETFs: Pros and Cons
ETFs can be traded much in the same way as an average stock position. Prices will fluctuate throughout the day; enabling investors to capitalize upon sudden movements in relation to their ongoing position. Having said this, most ETFs are associated with a number of underlying assets as opposed to a single asset (like a traditional stock). Traders often like this feature, as it offers a greater degree of diversification and therefore, stability in the event that a pear-shaped market begins to emerge.
Once again, here are some of the main takeaway points and benefits associated with ETFs:
- As opposed to mutual funds, ETF trading is much more flexible.
- ETF fees and commissions are lower thanks to their passively managed nature.
- ETFs can track a single asset or include multiple positions.
- The diverse nature of ETFs tends to provide greater stability during unpredictable times.
The first ETF was introduced in 1993 and thanks to the features mentioned above, their popularity has grown exponentially ever since. In fact, the amount of money invested in the ETF marketplace has grown by a staggering 10% per annum since 2010. It’s clear that they’e doing something right!
What’s the Deal with ETFs and Cryptocurrencies?
Now that we’ve wrapped our heads around the basic principles of an ETF, it’s important to ask why these vehicles may be set to transform the cryptocurrency sector. There are actually several important practical advantages to mention.
One of the most well-known involves the fact that the crypto ecosystem has come under increased scrutiny for its apparent lack of oversight. To be clear, many of these complaints arise from entities who have vested interests elsewhere (such as governments keen to obtain a profit-infused slice of the crypto “pie” through tightened regulations).
However, this lack of centralization is exactly what has appealed to investors for well over a decade. There are still those who believe that an ETF listing will provide major cryptocurrencies such as Bitcoin and Ethereum with more transparency and stability; opening up investment opportunities for any entirely new class of traders.
Speaking of traders, it’s likely that many individuals who come on board in the event that spot ETF trading becomes commonplace (more on this a bit later) will be those with little prior experience with cryptocurrencies. Due to the open-market nature of ETFs, these investors won’t be forced to learn about the intricacies of the crypto ecosystem or employ third-party cryptocurrency wallets in order to buy or sell a position. This helps to take much of the guesswork out of the equation.
Finally, it’s believed that the acceptance of Bitcoin and Ethereum ETF trading will provide the cryptocurrency markets with more capital and increased levels of liquidity. This should likewise attract a greater number of institutional investors; helping to cut back on the instability that has plagued the crypto markets from time to time.
To recap, here are some of the reasons why BTC and ETH exchange-traded funds could represent a massive opportunity:
- These ETFs will provide an additional level of transparency to the crypto marketplace.
- As a result, more investors could become active.
- A greater number of investors should lead to increased stability and help to avoid massive price fluctuations.
- Little prior experience will be needed before becoming involved with a BTC or ETH ETF.
- Increased market liquidity offers more flexibility in terms of opening and closing a position.
However, there is yet another aspect of Bitcoin and Ethereum ETFs to mention in order to get a better idea of what’s in store.
Spot Versus Future ETFs: What are the Implications?
Exchange-traded funds are generally grouped into two categories:
- Spot ETFs
- Futures ETFs
As you might’ve guessed, a spot position (such as a Bitcoin or Ethereum ETF) tracks the real-time price of a holding. In other words, the fund in question actually owns a certain amount of BTC or ETH. Individuals can therefore buy or sell a position at a moment’s notice. While convenient, we need to remember that spot ETFs in general are subject to price volatility and therefore, sudden movements that could lead to substantial losses.
On the other hand, futures are contracts intended to be fulfilled at a later date. For example, a future Bitcoin or Ethereum ETF is essentially an agreement to buy or sell a certain amount at a predetermined future date or time. While the fund itself doesn’t actually own the underlying asset, investors won’t be burdened with issues associated with spot trades such as extremely volatility, expirations and the sheer effort involved with actively tracking the price itself.
Might There be Any Downsides with Bitcoin and Ethereum ETFs?
Crypto Lists always strives to present our readers with a fair and balanced perspective when discussing any topic. This is just as true in terms of how ETFs could impact Bitcoin and Ethereum. So, what concerns have some investors cited?
It’s wise to begin by mentioning the very nature of an exchange-traded fund. As we pointed out earlier, many ETFs track a number of assets at any given time. So, a BTC position might actually be comprised to other related holdings somewhat outside of the crypto “sphere”. As a result, a sudden rise or fall in the price of BTC might not be adequately reflected in the value of the ETF itself.
Another possible pitfall involves regulators who’ve (for lack of a better term) been dragging their feet. Large governmental bodies such as the Securities and Exchange Commission (SEC) have voiced concerns over issues such as price manipulation, investor protection and fraud; especially in terms of spot BTC or ETH ETFs. Simply stated, the SEC feels as if the crypto ecosystem as a whole hasn’t yet “matured” enough to safeguard investors.
Are Bitcoin and Ethereum ETFs Here to Stay?
We should now address a final question that’s meant to tie all of the information mentioned above together. Will Bitcoin and Ethereum exchange-traded funds become a permanent addition to the investment marketplace? Many feel that this is an inevitability due to the sheer rise in the popularity of cryptocurrencies as a whole. However, let’s not get ahead of ourselves.
There are still plenty of regulatory hurdles which need to be overcome; especially those already put in place by the Securities and Exchange Commission.
However, even those who aren’t entirely bullish on the notion of BTC and ETH exchange-traded funds can’t deny their appeal to institutional investors and private individuals alike. Not only will such positions almost certainly provide the ecosystem with a great deal of liquidity, but enhanced levels of transparency and oversight should attract those who might’ve otherwise remained “on the fence”.
Exchange-traded funds have been extremely popular since their inception and their inherent principles should entice even more crypto investors. Might we witness a day when the majority of trades are backed by ETFs? We’ll leave the answer to this question in the hands of the reader.