The prospect of an exchange-traded fund (ETF) that imitates bitcoin is the biggest option for cryptocurrency fans and traders hoping to profit from the rising demand for this currency.
With Bitcoin ETFs, investors can easily short sell their Bitcoin ETF holdings if they feel the value of the currency will fall in the future. This cannot be accomplished in the usual bitcoin space.
In an interview with Entrepreneur, blockchain wiz Jonathan Manzi thoroughly discussed Bitcoin ETFs, noting that supporters and investors should prepare for an unpredictable experience.
Jonathan Manzi, the CEO of Blockchain platform Beyond Protocol, is recognized as the youngest individual in history to achieve a net worth of more than $1 million through industry, having done so at the age of 16. As an undergraduate, Manzi served as the Chair of Entrepreneurship at Stanford University. He is regarded as a global authority in cutting-edge technologies. So, when Manzi says, “Proceed with Caution,” we should all sit down and take note.
What is a Bitcoin ETF and How Does It Work?
A Bitcoin ETF is an exchange-traded fund and a type of investment vehicle that reflects Bitcoin’s value and trades on conventional stock markets such as the NASDAQ or TSE rather than on a cryptocurrency exchange. With bitcoin ETF, consumers can easily invest in Bitcoin without going through any investment platform. Bitcoin ETF also gives price leverage.
A Bitcoin ETF would function similarly in that the cost of one share of ETF would move in tandem with the worth of Bitcoin. And whenever Bitcoin’s value rises, so will that of ETF too, and vice versa. ETFs are a simpler option to purchasing and selling individual assets for consumers who want to focus just on profits and losses.
Benefits of Bitcoin ETFs
Jonathan Manzi explained that the basic purpose of ETFs was to give recognition to a particular asset category by monitoring a portfolio of similar holdings — for example, oil, biotechnology, or the video game industry and associated businesses. And due to this, investors may simply diversify their investments in a particular manner of their choosing. There were also stock index ETFs that tracked bigger markets like the S&P 500; and the main premise behind ETFs was that an individual should be able to invest in a whole industry through a single platform rather than acquiring individual shares of different firms in the industry.
Highlights of the benefits include:
Ease of access:
Consumers who invest in Bitcoin ETF may not have to go through the trouble of learning how Bitcoin works since the ETF depends on the value of Bitcoin.
More opportunities and flexibility:
An ETF can hold many assets, allowing investors to reduce risk and broaden their investment. It may also allow investors to diversify their current equities holdings by trading on a regulated stock market.
Taxation effectiveness:
Because Bitcoin isn’t regulated and centralized, a lot of tax shelters and retirement schemes around the world may not permit Bitcoin transactions. However, a Bitcoin ETF trading on a conventional stock market will be authorized by the SEC and qualify for tax breaks.
Some investors haven’t warmed up to Bitcoin yet. ETF targets and proposes to cater to this audience by enabling individuals with assets at big brokerage companies to manage their accounts under one platform, while also providing easy access to bitcoin. Furthermore, for self-custody, this SEC-regulated currency may be considered safer than bitcoin.
Potential Drawbacks of Bitcoin ETFs
Administration costs:
ETFs often charge administration fees in exchange for the simplicity they offer. As a result, buying a substantial stake in a Bitcoin ETF may result in expensive administration costs over time.
Inconsistencies in ETFs:
Although Bitcoin ETFs mirror the price of Bitcoin, they can also contain several investments to diversify the portfolio. But, because of these other assets, a certain change in the price of Bitcoin may not be correctly represented in the worth of the ETF. As a result, while an ETF gives leverage to the price of Bitcoin, it may not be a reliable monitor of its price.
Cryptocurrency exchange restrictions:
Bitcoin may be exchanged for other cryptocurrencies. However, a Bitcoin ETF can’t be allowed to be exchanged or traded for another cryptocurrency because it is simply an investment vehicle that matches Bitcoin’s value.
Centralization:
Bitcoin is the perfect haven against centralized financial institutions, fiat currencies, and stocks. Bitcoin, due to its decentralized nature, offers a means of mitigating the vulnerabilities of centralized institutions. Bitcoin also protects consumers and investors by enabling them to maintain their anonymity via the Bitcoin blockchain. These advantages would be lost if a Bitcoin ETF was controlled by the government.
More Advice from Other Industry Leaders
Tyrone Ross, CEO of Onramp Invest, a company that provides crypto asset management technology to financial advisers, had three pieces of advice to give concerning Bitcoin ETFs.
- Before buying, understand what you’re getting:
Ross emphasized that the most important thing to realize is that you are not purchasing actual bitcoin. A bitcoin futures ETF monitors transactions that speculate on Bitcoin’s future price rather than the cryptocurrency’s current market price. And due to this, the ETF and Bitcoin prices may not coincide. Furthermore, with this sort of ETF, investors may gain exposure to the futures market.
- Hedge funds and other experienced investors may benefit more:
He mentioned here that an ETF will bring in more institutional money and seasoned investors may acquire a lot of profit. He went on to add that while this helps market liquidity, it does not benefit retail investors.
Other industry professionals and some members of the cryptocurrency community, concur with Ross on this issue. Some claim that the brokers engaged in an ETF investment, such as hedge funds and providers, will gain more than retail investors, particularly if the ETF exchanges are at a premium in bull markets.
Ross concluded by saying that direct exposure is the greatest method for new users to invest in bitcoin and that bitcoin ETF is merely a product to assist hedge funds and other brokers earn more money, and that a lot of people will purchase without realizing this.
- ETFs are also risky investments:
Ross was mostly concerned about new investors who had been waiting for the futures-based bitcoin ETF to get exposure to the cryptocurrency without comprehending its dangers. He expressed concern for individuals who may have been waiting and believed that this was the item that would make it safe for them, without doing their research.
To conclude, industry leaders encouraged investors to tread carefully, watch the initial development of new ETFs, and minimize their Bitcoin purchases to spot transactions for now.
Andrew is a writer that does most of his work on cryptocurrency-related topics. While he’s primarily interested in Bitcoin, he also follows major altcoins and the innovative ideas that new cryptocurrency and blockchain projects are bringing to the table.