Trading cryptocurrency can be tempting—after all, we’ve all seen the countless stories of self-made millionaires and big earners. With these possibilities, however, comes no small amount of risk. For every person who gets rich online, there are countless others who never see a return on investment.
So, is there a way to use crypto while minimizing this risk? It is for this purpose that Cryptocurrency Exchange-Traded funds, known as ETFs, were created. Here we will explain the current status of crypto ETFs.
As promising investment funnels, crypto ETFs have attracted the interest of mainstream cryptocurrency enthusiasts, but have failed to satisfy the security and maintenance requirements of the SEC.
This article will explain the dangers of the cryptocurrency market, who the SEC are, and why they have refused to approve ETF transactions. You will also learn the methods that providers have formulated to leverage the prospects of the cryptocurrency market.
What Is a Crypto ETF?
‘ETF’ is an acronym for Exchange-Traded Fund. So, a cryptocurrency ETF is an investment bond that consists solely of cryptocurrencies. Given their constituents, these ETFs have their own share of volatility and instability caused by fluctuating trading volume.
Crypto ETFs are investment bonds made up of cryptocurrency tokens that are prepared by investment companies. Just like common stocks, they are traded on a daily basis. Cryptocurrency ETFs provide several benefits to investors, such as significantly lowering cryptocurrency ownership costs and outsourcing the steep learning curve required to trade cryptocurrencies.
However, the regulatory status of crypto ETFs is still unknown.
Types of Cryptocurrency ETFs
There are two types of cryptocurrency ETFs:
ETFs Supported by Physical Cryptocurrencies
ETFs of this nature function similarly to the traditional method of purchasing shares in a promising company. The ETF provider buys promising currencies and sells them as shares to hoarders of mainstream cryptocurrency. Therefore, each share with the ETF provider is the equivalent of one or more cryptocurrency. As a result, shareowners are excused from the analytical headache that comes with direct ownership of the coin.
ETFs Supported by Cryptocurrency Derivatives
Here, the ETF provider uses the prices of futures contracts and cryptocurrency exchange-traded products to gauge the price of an ETF. Therefore, the share price in this type of ETF is not dependent on the price of a cryptocurrency, but rather on the price of the derivatives. As the derivative increases, the value of the share increases correspondingly. When it decreases, the share also decreases.
SEC Bitcoin ETF Decision
To earn the trust of mainstream cryptocurrency enthusiasts, ETF providers must be ratified and certified by the Security and Exchange Commission. But, aware of the intricacies of investment in unstable businesses, the SEC Bitcoin ETF decision was to refuse certification of any ETF. This decision has been upheld since 2014, when the first ETF proposal for Bitcoin was submitted by a provider. But why has the SEC refused to allow it?
- The volatility of the cryptocurrency market connotes the treasury volatility of the ETF provider. Hence, the investors’ money is at risk.
- Blur in the cryptocurrency market, coupled with its openness to manipulation, presents significant risk. As the body chiefly responsible for the security of investment and protection of people’s funds, the SEC cannot ignore this danger.
Based on these factors, the SEC has reiterated its stance on ETFs, stating that it will approve them once the market displays a great deal of stability and security.
Exchange Traded Funds Advantages and Disadvantages
- They shield crypto owners from the running costs of the crypto business. In the market, there are miscellaneous fees like custody charges and network fees that add up to a considerable annual sum. ETF providers take on these financial responsibilities.
- Cryptocurrency ETFs excuse the shareholders from the constant headache that comes with direct ownership of crypto assets. There is an incredible amount of jargon used in the blockchain industry. But with cryptocurrency ETFs, the learning and analysis is placed in the hands of the ETF provider.
- A cryptocurrency ETF places the maintenance and security of the crypto asset in the provider’s hands. This means more secure assets with a backup plan in case of a security breach.
- By far, its greatest shortcoming is in the market’s instability, which poses financial risks to both the ETF provider and the crypto investor.
- Security is another challenge. There is no hack-proof system in the Blockchain industry. You can never be 100% sure that your investments are safe.
Cryptocurrency Investment Trusts
In the face of the SEC’s continued refusal to approve cryptocurrency ETFs, investors desperate to leverage the volatility of the cryptocurrency market have improvised. They have created Cryptocurrency Investment Trusts in place of ETFs.
Championed by Grayscale Bitcoin Investment Trust, investment trust providers buy cryptocurrency on behalf of investors, trade it, and share the cumulative profits with GBTC interactive brokers after a specified period of time.
For now, Cryptocurrency Investment Funds are not open to everyone. They are exclusively available to large investment firms, high net worth individuals, and accredited investors enlisted on the GBTC message board. GBTC interactive brokers pay an annual fee (2% of the fund’s assets), and their shares’ value is prone to swings and security breaches.
To recap, cryptocurrency ETFs are funds composed of cryptocurrencies owned and traded by ETF providers on behalf of mainstream financial investors. They are not approved by the SEC in the United States due to reliability, security, and stability concerns.
As a result, institutions have improvised to create bonds that mimic the ETF, but have notable restrictions that make it inaccessible to the average investor. Cryptocurrency Investment Funds are a possible alternative to ETFs for investors vested in the cryptocurrency market. Away from its stringent protocols and guidelines, it has so far proven to be a viable alternative pending the allowance of ETFs by the SEC.
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