Bitcoin and Ethereum ETFs Explained

Bitcoin ETFs as well as Ethereum ETFs, seem to be one of the hot topics lately in the world of cryptocurrencies. Players in the cryptocurrency economy seem excited and pumped about the prospects ETFs hold for upward value trajectory for the respective ETF currencies.

In the midst of the ETF excitement, there also abound quite much ignorance as such it is imperative that some education is brought to bear to help manage expectations in the space.

The Explanation;

First of all, ETF stands for Exchange-Traded Funds and they connote or represent a share in underlining assets, be it Gold, Silver, a portfolio of stocks or other such related asset classes.

It is also important to note that there are two different types authorized persons allowed to participate in ETFs. These authorized persons are to pass certain sets of laid down criteria before they can become players in the space (this is topic for another day).

ETFs are to an extent similar to Mutual Funds with arbitraging features. Whenever there is a price difference between the shares and underlining asset i.e Bitcoin, the authorized ETF participants will step out to buy or sell and redeem the shares for real Bitcoin so as to close the price gap so that the share price and real asset price closely track each other – this ETF dynamic sets it apart from other investment classes.

Types of ETFs

There are currently three types of ETFs available, the Regular, Leveraged and Inverse. Regular ETFs track the asset (bitcoin) prices directly. Leveraged uses a multiple asset prices tracking system i.e it tracks from two or more exchanges. Inverse ETF as the name connotes moves in the opposite direction as the asset prices goes.

Regular ETFs more or less directly hold the underlining asset (Bitcoin in this case). Leveraged makes use of derivatives, margins and futures contracts in their execution and inverse act similarly by also making use of derivatives and margins.

Regular ETFs require that investments are held for long term whiles leveraged and inverse are usually held for short term.

What this Means for the Market

Institutional investors will be more aligned and comfortable with ETFs as opposed to directly entering the cryptocurrency market as things stand. The prospects that ETF holds for the crypto market has seen many institutional investors in the United States flooding the Security and Exchange Commission’s (S.E.C) desks with ETF applications for approval.

At the moment, there are three main cryptocurrency ETF applications seeking approval from the SEC. They are the New York Stock Exchange (NYSE), the Chicago Board Options Exchange (CBOE) and that of the Winklevoss twins of Facebook fame and owners of the Gemini cryptocurrency exchange.

 

NYSE ETF

The NYSE has submitted 5 ETF applications with all being leveraged but two being inverse and they are based on futures contracts from entities like the CBOE and the CME. This should not excite the market that much as these are usually meant for short term speculative trades – the decision on this has been postponed to September, 2018.

 

CBOE ETF

This is arguably the most important of all the current existing ETFs. They have partnered with two other investment firms, namely VanEck and SOLIDX. This ETF has the most attention from the crypto community and this is evident from the over two hundred (mostly encouraging) comments they got in support of their ETF application with the SEC whiles the NYSE only had two comments.

This ETF will enable Over The Counter (OTC) purchase of Bitcoins and also have full insurance feature which will help guard against stolen and hacked Bitcoins – this is great for investors. It will also bring more liquidity into the market because any additional shares issued will mean the need to purchase Bitcoin in the OTC market.

The CBOE ETF will have the following impact on the market;

  • No direct impact on exchange prices since OTC transactions are done off exchanges.
  • Starting with 100 ETF shares
  • 1 share will be equal to 25 BTC. This more or less restricts it to only deep-pocketed investors or institutional investors – increased market liquidity.
  • They will start with only 2500 BTC – this is not enough to make a significant impact on the global market. However, as demand for the ETF increases, more BTC will have to be purchased. More BTC market purchase would likely mean price appreciation for the market. The earliest time for this decision is just a few days away on the 10th of August. But if precedence is anything to go by, there is a possibility that the SEC might postpones the decision date.

 

Winklevoss ETF

This ETF got rejected – this is the second time their ETF is being rejected. With their ETF, they are trying to make their Gemini cryptocurrency exchange have authorization to be a custodian platform. What this means is that they will get to secure and manage the underlining Bitcoin assets for institutional investors.

The rejection of the Winklevoss ETF does not have a direct effect on the approval or execution of the other ETFs. In fact, an SEC commissioner Hester Pierce has been vocal about her opposition to the SEC’s decision to reject the Winklevoss ETF. She believes that the SEC had no purview to reject it and believes that such moves might stifle innovation. To the crypto-enthusiast, this seems good for the future prospects of ETFs since a high SEC official seems to be against the organisations anti-ETF decisions.

Comments