What Does the New Bitcoin ETF Mean for Investors?
The price of Bitcoin rose to a new all-time high of $66,000 on October 20, boosted by news that the first Bitcoin ETF has been approved by the US Securities and Exchange Commission (SEC). At the same time, popular cryptocurrencies such as Ethereum, Litecoin, and Doge prices such as Dogecoin also increased in value.
The ProShares Bitcoin Strategy ETF, trading under the ‘BITO’ ticker on Wall Street, is based on Bitcoin futures rather than Bitcoin spot, with a 0.95 percent administrative fee, and began trading on the NYSE Arca exchange on October 19. According to sources, the SEC approved the Bitcoin futures ETF issued by the fund management company ProShares on October 15. BITO aims to offer investors an opportunity to gain convenient exposure to bitcoin returns, through a brokerage account.
“We believe a multitude of investors have been eagerly awaiting the launch of a bitcoin-linked ETF after years of efforts to launch one,” said ProShares CEO Michael L. Sapir. “BITO will open up exposure to bitcoin to a large segment of investors who have a brokerage account and are comfortable buying stocks and ETFs, but do not desire to go through the hassle and learning curve of establishing another account with a cryptocurrency provider and creating a bitcoin wallet.”
Following the approval of the first Bitcoin ETF by the SEC, several companies, including Invesco and Valkyrie, were expected to launch similar ETFs. However, shortly before the ProShares ETF launch financial giant Invesco decided to withdraw its ETF, at least for the time being. In a statement, the company said: “We have decided not to pursue the introduction of Bitcoin Futures ETFs in the short term. However, we will continue to work with Galaxy Digital to offer investors a full range of products with exposure to this transformative asset class, including finding a technical asset ETF.” At the same time, media reports suggest that Grayscale, a digital currency management firm, intends to convert its Bitcoin trust product, Grayscale Bitcoin Trust, into a spot Bitcoin ETF and will file an application soon.
The first Bitcoin ETF passing the SEC audit and launching, is extremely significant for the market. ETFs can be traded in the stock market as financial derivatives, with low investment thresholds, low commissions, good liquidity, and simple trading operations. If investors can directly hold Bitcoin ETFs, there is no need to purchase and store Bitcoin assets, and there is no risk of losing your secret keys.
On the other hand, while the benefits of the new Bitcoin ETF are clear, the risks also needed to be considered, despite the BITO ETF “having swelled to more than $1 billion worth of assets, making it the ETF quickest to surpass $1 billion,” according to Fortune. The main risk is down to the fact that BITO is structured very differently from traditionally popular ETFs, as it tracks Bitcoin futures contracts rather than “spot” Bitcoin, an approach which comes with hidden disadvantages to newbie investors. “The futures-linked fund is subject to rollover risk, meaning that when it periodically closes positions in the futures contracts it holds, it can find itself, as is the case now, repurchasing new batches of future-dated contracts for more money. The situation, known as “contango,” eats into profits,” confirmed the report in Fortune.
At the same time, some investors believe that the fear of rising global inflation will also drive increase people’s interest in Bitcoin. At BigONE Exchange we believe that as more investors believe that inflation is not a passing fad but here to stay, that Bitcoin could be increasingly used as an inflation hedge.
The SEC believes that the cryptocurrency market lacks regulation
The ProShares Bitcoin Strategy ETF is not the first Bitcoin ETF to be submitted to the SEC for approval. “Cameron and Tyler Winklevoss, famous for their involvement in Facebook and, more recently, for their Gemini digital currency exchange, had their petition to launch a bitcoin ETF called the Winklevoss Bitcoin Trust turned down by the SEC in 2017,” confirmed Investopedia in an article coinciding with the ProShares ETF launch. On Friday October 22, Valkyrie launched the second bitcoin futures-based ETF in the US.
Prior to the Bitcoin ETF’s approval, the SEC published a tweet cautioning investors to consider the risks and benefits of investing in Bitcoin futures contract funds. Previously, SEC Chairman Gary Gensler has been aggressively promoting exchange-traded funds linked to futures rather than funds linked directly to Bitcoin, believing that the futures market can provide better protection to investors. Chris Weston, Pepperstone’s research director, believes that the series of Bitcoin ETF news is unquestionably a significant step forward for the entire market. “The news of a suite of futures-tracking ETFs is not new to those following the space closely, and to many this is a step forward but not the game-changer that some are sensing,” said Weston, from his office in Melbourne, Australia. “We’ve been excited by a spot ETF before, and this may need more work on the regulation front,” he added.
Cryptocurrencies are volatile investments
With the launch of the ETF, the price of Bitcoin has surpassed the previous all-time high set in April, reaching $66,000. In Forbes it’s reported that a panel of 50 bitcoin and cryptocurrency experts has predicted “the bitcoin price will continue to climb through 2021, hitting highs of around $80,000, before surging to $250,000 by 2025 and a staggering $5 million per bitcoin by 2030”.
Despite the good news some analysts are concerned about Bitcoin’s recent rise if it encourages a short-term attitude to investing. Before buying Bitcoin its prudent to consider your options carefully, especially if the price of Bitcoin is at an all-time high, due to the volatile nature of the market. In addition, BigONE believes that investors who are reaping the benefits of the current bull market should be prepared for future regulatory changes that may make the cryptocurrency market more confusing and unstable.
Certainly, as the Forbes bullish report suggests, there are other threats to the primacy of Bitcoin. “A bitcoin price collapse could be the result of disillusionment with all private crypto (with the possible exception of stablecoins with genuine backing) as central bank digital currencies demonstrate they are the future of e-currency, or it might just be because ethereum (or if it ever launches, Facebook’s diem) is seen as the better crypto,” said University of Canberra senior lecturer John Hawkins. The best advice is to carefully weigh up the pros and cons of buying Bitcoin for the long term and make sure you have a well thought-out crypto investment plan at the outset. Cryptocurrencies can help you make more money, but it is important to choose wisely. Whether you are buying cryptocurrency for the first time or a more common investment such as stocks or funds, a good rule of thumb is to plan ahead and conduct research.
