When the news hit the cryptosphere that ProShare – a specialized exchange-traded products provider in Maryland – had filed an application to start trading the Bitcoin Strategy Fund, the entire industry went into overdrive.
In truth, it's been a long time coming as it was just a matter of time that the two hottest areas in the investment sector would meet. For investors and crypto enthusiasts that want to take advantage of the ever rising popularity of ETFs (exchange-traded funds), a Bitcoin tracking ETF is the best bet.
However, it is important that we don't throw caution to the wind and get lost in the euphoria of the news. Jonathan Manzi, the CEO of Beyond Protocol, sounded a note of warning that enthusiasts, traders, and investors "may be in for a wild ride."
However, before we go further, let's see the reason for the hype about Bitcoin ETFs and their advantages.
What is Bitcoin ETF?
For those that are still at sea about what Bitcoin ETFs are, we'll explain briefly. According to Investopedia, an ETF is basically an investment vehicle used to track how an asset or a group of assets performs. In simpler terms, investors can use ETFs to diversify their portfolio without having to hold the asset in question.
Now that we know what an ETF means and what it does, we can now explain what a Bitcoin ETF means. Simply put, a Bitcoin ETF imitates Bitcoin's price – which at the time of writing this article is the largest crypto in the world by market capitalization and is also the most popular.
This way, investors can easily buy into Bitcoin ETFs while avoiding the rigors of Bitcoin trading, which sometimes can be a tad complicated. In addition, investors in the ETF are not directly investing in Bitcoin, so they don't have to worry about security procedures and storage of the digital asset.
Thanks to Bitcoin ETFs, we can finally say institutional investment has landed in the crypto industry. On the 19th of October, a Bitcoin-linked fund was introduced on the New York Stock Exchange. In no time, it quickly grew to an estimated 1 billion USD in assets, according to data from Bloomberg. This makes it the fastest ETF to reach that milestone.
With the above data, you can now understand why the crypto industry went into a frenzy when the SEC approved Bitcoin ETFs.
Why then are some industry analysts warning that we should exercise caution?
The reason for this may not be farfetched. According to Jonathan Manzi, if you are a keen follower of Bitcoin or the crypto industry in general, you'd have discovered how volatile the crypto market is. Nevertheless, its rise from innovative digital money to groundbreaking technology is nothing short of amazing.
Although critics will point to the asset's volatility as a major flaw, there's no denying that Bitcoin will significantly impact the finance industry. Since its launch in 2009, no other asset class has outperformed Bitcoin.
The Stanford educated and Massachusetts born entrepreneur further points out that we haven't seen a revolutionary technology like this since the advent of the internet. Although several other cryptos have emerged with inventive use cases, Bitcoin has always held sway.
It is the people's crypto used as a hedge against inflation and tyranny, backed by the blockchain technology and protected by immutable code.
With all these in mind, Manzi further went on to advise prospective investors to "proceed with caution." He advocated that due diligence be carried out by anyone that wants to take the plunge into crypto investing via Bitcoin ETFs.
He said, "monitor the early stage performance of these new ETFs, and limit your BTC investments to spot holdings for the time being."
It is also important to note that ETFs often charge management fees due to the convenience they offer. For this reason, if you have a substantial amount of Bitcoin ETF shares, be prepared to pay high management fees as time progresses.
Also, there could be some sort of inaccuracy with Bitcoin ETFs as it sometimes may not accurately track the crypto's price.
In addition, you can trade Bitcoin for other digital assets like Ethereum, Cardano, XRP and more. However, you can't use a Bitcoin ETF to trade other cryptocurrencies as it's just an investment fund that tracks Bitcoin's price.
Wouldn't it be better to invest in Bitcoin?
Some people are of the opinion that it'll be better to invest in Bitcoin rather than in Bitcoin ETFs since it merely mirrors the crypto's price. However, several people choose Bitcoin ETFs for various reasons. Here are a few:
- Just like we mentioned earlier, as an investor, you don't need to worry about security procedures linked with storing your Bitcoin.
- Bitcoin ETF investors don't have to transact with crypto exchanges as you can trade the ETF via traditional markets and exchanges.
- One major reason that makes Bitcoin ETF stand out from buying Bitcoin directly is the ability to short sell shares. In actual fact, an ETF is an investment vehicle that allows investors to short sell ETF shares if they anticipate a fall in the price of Bitcoin in the near future. You can't do this in the traditional crypto market.
- Most importantly, the traditional investment world understands ETFs better than the complex crypto market. Although digital coins and tokens have started gaining mainstream acceptance, it's not there yet. For this reason, an investor that wants to partake in some kind of crypto trading can work with a vehicle they understand. This way, they don't have to learn the intricacies of the crypto market.
There's no doubt that Bitcoin ETF is just the tip of the iceberg. We'll see more cryptocurrency-based products enter the market in the near future, and investors will have several options to choose from.
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