Three points of difference between Bitcoin ETFs and commodity ETFs


The introduction of bitcoin ETFs is "almost certain" or will happen next year. It is expected that the debut of the bitcoin ETFs will transform the cryptocurrency markets. Institutional investors, such as pension funds and hedge funds, will bring a wave of capital into the sector and stabilize volatile encryption prices. They are also touted as an investment vehicle that will make the bitcoin accessible to average investors. (See also: Top ETFs and what they track).

Bitcoin is often referred to as digital gold because it shares similar characteristics with precious metal. Both are extracted and scarce. For the most part, investors expect exponential increases in bitcoin markets as they have been observed for gold and other commodities, when funds have been introduced to track their prices.

But those rosy predictions assume similarities between the structure and the compositions for ETF commodity and bitcoin ETFs. The digital provenance of Bitcoin makes it a unique case. For one, it already has a defined data mining program. So, there is the fact that its storage and storage ecosystem is not yet mature. Transaction costs and miners are also expected to play an important role in its evolution as a store of value. All these factors are expected to play an important role in ETFs designed around cryptocurrencies. Here are three ways in which cryptographic ETFs could be different from conventional ETFs.

Could be more expensive per share

The VanXck SolidX ETF application, presented in June this year, proposes to hold 25 bitcoins per share. Taking into account current and possible future prices for bitcoins, this could translate into fairly high prices for retail investors. For example, the price per bitcoin is $ 6.951 at the time of writing this article. The price per share of the ETF translates to $ 205,712 based on this price. Joshua Gnaizda, founder of Crypto Fund Research, says that the unit price of a bitcoin ETF could be comparable to the highest share price in the world, the shares of the Berkshire Hathaway Class A. To be sure, the net asset value (NAV) of an asset also depends on other factors, such as the number of outstanding shares. But the point is that institutional investors will have to take a step forward in the pot to make ETFs accessible to retail investors. This is not impossible, but the crypto ecosystem will require substantial institutional funds.

Unique risks could lead to higher prices

According to Gnaizda, cryptocurrencies present unique risks that are not present in commodity and gold ecosystems. "The keys (used to access bitcoin holdings) not in the cold room can be violated, the private keys can be lost and the stolen money can be moved almost anonymously," he says. Insurance for cryptocurrency investments has another significant risk. Crypto insurance has become a lucrative industry for existing insurers mainly because they can charge high premiums. The lack of customers for custody solutions, which can help spread the risk to a large number of customers, has not helped things. Gnaizda estimates that insurance prices could reach 5% of companies and remain expensive unless several billion dollars of assets are achieved. "The bigger the fund, the greater the likelihood of counterparty risk in the insurance policy," he says. (See also: Cryptocurrency insurance could be a big industry).

Spending reports may be higher

The expense ratio is the commission charged by the fund managers for the administration and conservation of activities. However, it could be significantly higher for cryptocurrency holdings. "Given the problems of custody, insurance and compliance, it would not surprise me if it ended up with 1% or more," says Gnaizda. For the context, the expense ratios for most of the funds are between 0.2% and 0.4%; Gold ETFs on average between 0.25% and 0.40% as expense ratios

Investing in cryptocurrencies and other initial coin offerings ("ICO") is highly risky and speculative, and this article is not a Investopedia or writer's recommendation to invest in cryptocurrencies or other ICOs. Since the situation of each individual is unique, a qualified professional should always be consulted before making any financial decision. Investopedia does not make any representations or warranties regarding the accuracy or timeliness of the information contained in this document. At the date of this article, the author possesses small amounts of bitcoin and litecoin.

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