Waiting on ETFs: How the SEC Action Can Lift Cryptocurrencies

A New World of Cryptocurrencies?



Cryptocurrencies continue to dominate the modern financial landscape. Ever since Bitcoin first broke into the scene a decade ago, its underlying technology, blockchain, has been in the public spotlight. After that, hundreds of other digital tokens followed suit, such as the likes of Ethereum and Ripple. Even as we speak, new cryptocurrencies are being devised and launched everyday and it continues to grow at an astonishing pace.

Part of the reason of the rapid growth of these cryptocurrencies is the potential of high gains. On the flipside, though, these are some of the most volatile instruments the financial world has ever seen. Uncertainty is the name of the game. It is for this reason that a lot of people still shy away from actively investing in cryptos. For them, the risk far outweigh the benefits.

A safer investment vehicle is the solution to reap the gains of the cryptocurrency market while minimizing the risks involved. One of the hottest ones right now are Exchange Traded Funds, or ETFs.

In the traditional financial market, ETFs are securities that track a given asset. These assets can be anything from a stock or commodity to a group of assets like an index fund. They can even be used to track diverse and exotic markets like marijuana.

ETF Angle

An ETF is in many ways similar to a mutual fund but, unlike a mutual fund, ETFs can be traded on the stock market. Ownership of an ETF entitles you to shares of the profits, such as dividends, earned interest and residual value in case of liquidation. Like stocks, ETFs are subject to volatile price changes depending on market conditions. ETFs have higher liquidity and lower fees than mutual funds. This makes it popular for individual investors by providing a safer, more safer investment vehicle.

In theory, ETFs can be used to track cryptocurrencies, since they are also considered to be assets. This makes it possible to indirectly trade cryptos in a traditional stock exchange by trading their parent ETFs. The implications are huge. Will ETFs finally be the way for cryptocurrencies to make it to the big leagues in traditional asset markets?

For ETFs to work, they are required to own the underlying assets they represent. In this case, it needs to own the digital tokens themselves. But the great thing about this is that ownership is taken by the whole Fund itself. This frees individual investors from the risk of directly owning the digital wallets that house these tokens. They instead own shares of ownership of the Fund. This is the biggest advantage of using ETFs, especially as digital wallets are prone to hacks and, let’s face it, are not the most user friendly things in the web.

Having ETFs also add an extra wall of protection, since a third party can assume some of the dangers and risks. These are usually banks. ETFs also relieve you of the hassle of dealing with multiple cryptocurrencies, most of which require their own digital wallets. Having a single ETF to represent the aggregate value of all of these digital coins is very convenient, especially for beginning investors.

ETFs also have the potential to boost the value of their underlying assets, as seen with a similar foray into a then new market: gold. Back in 2003 with the launch of ETFs for the gold market, it lead to a 300% increase in the value of gold.

So, what’s the hurdle for ETFs, seeing as they are so beneficial to the market? For one, the US has yet to approve and make ETFs legal. The US Securities and Exchange Commission has stated that it will only grant legality to ETFs if the cryptocurrency market as a whole shows stability and security. Different groups have lobbied for its approval, among them the Winklevoss Twins (owners of exchange Gemini and of Facebook fame). Sentiments say that it’s only a matter of time before the SEC approves ETFs.

Some companies have launched “pseudo ETFs”, like the Bitcoin Investment Trust (GBTC). They are similar to ETFs in that they track multiple cryptocurrencies, but they charge significantly more than what ETFs would (at the time of this writing, 2% of the fund’s value). This makes it still fairly inaccessible to majority of investors looking to go into crypto.

Alternatively, you can find ETFs that invest on the blockchain companies themselves, some of which have already seen some success. Some examples of ETFs that do this are Amplify Transformational Data Sharing ETF and the Reality Shares Nasdaq NextGen Economy ETF. Both offer fantastic opportunities to invest in blockchain focused companies, whose fate is closely tied to the performance of cryptocurrencies themselves. Some see this as a safer alternative to get into the blockchain craze.

It is predicted that, should ETFs be finally approved, it would skyrocket the price of digital coins, notably Bitcoin. With a potential influx of new investors, it might lead to exponential growth in the price of Bitcoin, maybe possibly exceeding its all-time high of $20,000. If growth is comparable with that of the gold ETF boost stated earlier, then a single Bitcoin would cost roughly $22,500.

Last Words

At the end of the day, cryptocurrencies’ biggest obstacle in become mainstream is its uncertainty and volatility. On top of this, investing in multiple cryptocurrencies is notoriously difficult and time consuming. Imagine having a separate broker for each stock you want to trade. It would be a nightmare.

ETFs can be the big breakthrough cryptocurrencies need to break into the traditional markets. By making cryptocurrencies easier and safer to trade through an ETF, these would attract more traditional investors into the mix. Share prices would rise, crypto values would rise, and everyone would be happier and richer in the process.

Before this happens, however, cryptos need just a bit more push in the right direction to achieve the minimum in security and stability for it to get approval. But once that happens, it would be a big day for crypto, indeed. It would literally change the game.



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