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Exchange-traded cryptocurrency funds could be on their way as hard-line financial watchdogs are moving closer to a more mainstream approach to digital currencies.
Exchange Traded Funds (ETFs) tend to follow an underlying index, such as the value of Bitcoin or other cryptocurrencies.
Investors buy and sell shares of publicly traded ETF funds rather than taking a stake in a cryptocurrency.
News of the change in attitude of U.S. Securities and Exchange Commission (SEC) regulators comes as Bitcoin and other cryptocurrencies rise in value in the wake of Joe Biden’s presidential election result and the disclosure of a possible COVID-19 vaccine.
How ETFs work
An ETF is a traded security that has a bid / ask spread on a stock exchange, just like a stock.
The price can fluctuate all day as traders buy and sell their holdings.
Thousands of ETFs are on the world stock markets. The security may include stocks, commodities or bonds linked to a single market or as international securities.
One popular ETF is the SPDR S & P500 ETF which tracks the US Standard & Poor’s 500 index of large public companies. ETF investors own shares of the fund rather than shares of the companies that make up the S & P500.
The ETF tracks the performance of the index and the price rises and falls in line with the movement of the index.
As ETFs trade continuously, investors find holdings in the fund easy to buy and sell.
ETFs in the United States are regulated by the SEC
An ETF also tends to be a cheap way to invest as the fund’s costs and management fees are low.
The investment watchdog talks about cryptocurrency
SEC President Jay Clayton says his team is working on regulations that will allow cryptocurrency ETFs to trade in the United States – a big step towards legitimizing Bitcoin and other digital currencies.
His concern is the Wild West frontier approach that some cryptocurrency stakeholders take in the market.
Clayton also revealed that the SEC is in talks with other US regulators like the Office of the Comptroller of the Currency and the Commodity Futures Trading Commission to decide who has authority over the cryptocurrency industry.
The news prompted several financial firms to take a closer look at the creation of cryptocurrency ETFS.
A handful of companies have started exploring the idea.
An innovator, Wisdom Tree praised the SEC’s new approach to cryptocurrencies.
CEO Jonathan Steinberg agrees that regulation is needed to turn cryptocurrencies into the mainstream.
“The SEC seems happy to commit, particularly if they are embracing those first fundamental principles” of protecting investors and maintaining fair and efficient markets, “he said.
Clayton says cryptocurrency pioneers have failed to protect investors in the race for profits.
“One of the problems we had was that we got off on the wrong foot with this innovation,” he said.
“We could put aside some of those accountability or transparency principles. In the past, the agency has had to instruct some companies to raise funds to create a cryptocurrency – known as an initial coin offering – without following the regulatory protocols of other security offerings.
“What we don’t like is when someone says their cryptocurrency’s function is payments, so you should really look beyond the securities law stuff.” I can not do that. “
“Don’t tell us it’s a payment system when it’s actually a financing vehicle.”
Crypto ETF: the story so far
SEC and cryptocurrency stakeholders have been struggling to regulate Bitcoin ETFs for more than two years.
In March 2017, the SEC turned down an application for the first Bitcoin ETF, arguing that the market was open to manipulation by dishonest, too volatile, and opaque investors.
Since then, others have tried to launch the ETFS crypto with no success, while a public consultation by the SEC has silenced the prospect.
Attitudes seem to be weakening, with the latest announcement from the president and other board members appearing to herald a new dawn for cryptocurrency to have a place alongside other commodities in a regulated and legitimate market.
The obstacle is identified in section 6b (5) of the Exchange Act which requires regulators to prevent fraud and market manipulation to protect investors.
The SEC’s hard-nosed reaction to the crypto ETF proposal was a direct rejection for nine applications filed in 2018.
Bitcoin’s price spike thrills investors
Bitcoin has gained over 10% in value in a week and is currently hovering around the $ 16,000 mark, a level the cryptocurrency has held for just two weeks in total since it was launched on the market more than ten years ago.
In December 2017, Bitcoin hit a high of $ 19,800 but plummeted to a three-year low of $ 3,176.44 a year later.
Bitcoin’s market capitalization is now $ 296 billion, just over two-thirds of the total market capitalization of all cryptocurrencies.
Someone who bought Bitcoin a year ago would have paid $ 8,640.42, giving a profit of $ 7,360 in 12 months.
Other cryptocurrencies, such as Ethereum, Litecoin, and XRP Ripple, have also made less spectacular but solid gains over the past week.
Why not just invest in Bitcoin?
ETFs are better for cryptocurrency investors for several reasons.
Although investors can buy shares in a single Bitcoin rather than an entire token to reduce the costs of entering the market, ETFs are still cheaper for retail investors.
Other benefits include:
- Investors don’t have to own Bitcoin
- Cryptocurrency accessories like wallets and other storage methods are unnecessary, reducing the risk of theft and fraud that has plagued the industry in the past
- ETFs can be bought or sold more easily, especially if Bitcoin’s price falls
- ETFs are passive investments that do not require any effort on the part of an investor as the stock automatically follows the market price
Frequently Asked Questions About Cryptocurrency ETFs
As regulators are considering taking cryptocurrency out of the shadows in traditional investing, this guide examines what it means for investors.
For investors unfamiliar with cryptocurrencies and ETFs, here are some answers to the most frequently asked questions our experts receive.
In addition to the normal concerns about the rise and fall of Bitcoin’s price, a dedicated Bitcoin ETF lacks diversification.
Experts warn about investing in an industry or stock, and although a Bitcoin ETF can play a role in portfolio diversification, it’s best not to get carried away and invest all your money in one stock.
The timing of an ETF investment should be medium to long term, at least five to 10 years. This gives you time to overcome any severe price volatility.
Bluntly, the SEC feared that ordinary investors would be sucked into the initial coin offerings, which are like buying stock to finance a startup company, but instead finance a new cryptocurrency.
Some were veiled frauds that offered no protection to investors. The SEC’s response was telling cryptocurrency bosses to clean up their stock and follow regulations in place designed to safeguard investors.
ETFs come in all tastes: good, bad and indifferent. It is up to individual investors to make their own decisions on specific ETFs, but regulation means they can do so in the knowledge that someone in authority has their back if the deal goes up in smoke.
Many ETFs return a performance that reflects the underlying stocks, commodities or currencies. If they behave badly, the same goes for the ETF and the reverse applies if they do well.
There is no fixed date and the first Bitcoin or other cryptocurrency ETF is a long way off in America.
Regulators talk about who takes control of the market and controls ETFs.
Similar discussions to allow ETFs took years to establish ground rules before a product was launched to the public.
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