Bitcoin ETF: Worth the Hype?
Everyone's talking about the Bitcoin ETF, but is it worth investing in?
Do you invest in crypto? Or do you know someone who invests in crypto?
Well, in today's FOMO-driven world, cryptos have become a desirable asset class. And why not!
Psychologists keep saying that familiarity builds acceptance. Our familiarity with cryptos has gone to the next level. We're constantly bombarded with crypto-related memes, videos, and influencer (Read: Elon Musk) promotions. We keep seeing posts about how some new cryptocurrency has made people millionaires overnight. Just like that, we also began dreaming about hitting a jackpot with cryptos.
But then, just one tweet, one news, one press release has the power to bring cryptos crashing down. Doesn’t it make it scary for the crypto virgins to take the plunge? Only the lion-hearted can sail through the ups and downs without getting unnerved. So, the US has come up with a potential solution.
Asset manager ProShares has launched the US' first Bitcoin-linked Exchange Traded Fund (ETF) called ProShares Bitcoin Strategy ETF this week. And like anything with the word Bitcoin before it, the ETF immediately became the talk of the town. Hell, it became the talk of the entire world. So much so, that it hit $1.1 billion in assets under management on its second day!
Wondering how this will affect you and me? Well, Indians can also invest in this ETF by opening an overseas brokerage account.
Before you rush to invest, what does this ETF do and how is it different from investing in Bitcoin?
An Exchange Traded Fund is (literally) a fund that is traded on the stock exchange. Just like how you trade shares. But instead of trading a single share or a single asset, when you put your money into an ETF, it goes into a pool of different assets like gold, equities and bonds together.
Coming back to our Bitcoin ETF, the ProShares Bitcoin Strategy ETF will trade on the New York Stock Exchange and allow investors to invest in Bitcoin futures (30%) and Treasury Bills (70%): a combination of risky and safe bets.
Hang on! Bitcoin Futures. What’s that?
You see, futures contracts are essentially wagering tools. You bet on a certain stock going up or down, without actually buying or selling it. Pretty neat way to avoid blocking a lot of capital to just prove that you can predict the markets. It’s like betting real money on CSK to win the IPL, without buying the team. Get the drift?
The Bitcoin ETF works in the same way. You don't actually own any Bitcoin but you can bet on it. And the best part? You can even bet on Bitcoin prices falling. “Bitcoin is a sham” gang: this ETF is also for you!
Essentially, you can think of this ETF as a dating app for Bitcoin. If you're too scared of committing to Bitcoin and buying it, you can flirt with it through the ETF.
But why make it so complex yaar. Why Bitcoin futures ETF? Why not seedha seedha backed by Bitcoin?
Well, probably because it is easier to launch a futures-backed fund. For a Bitcoin-backed ETF, the Fund Manager is required to buy, hold, and manage actual Bitcoins. Quite hasslesome if you compare it to make-believe futures instruments.
But that’s not all. There could be other reasons too.
You see, a futures-backed contract was more likely to get the approval of the SEC. They have this comfort that Bitcoin Futures are created and traded under the watch of the Commodity Futures Trading Commission. Futures is a financial instrument that they know and that they understand. But Bitcoin is an unknown beast.
So, how safe is this ETF?
Well, as always, there is a difference of opinion.
Pros:
For starters, unlike cryptocurrencies which are decentralized and obey no masters, an ETF is somewhat regulated by the US Securities and Exchange Commission, making it a little safer.
It also allows you to diversify your holdings.
Also, since you're trading through your brokerage account, you don't have to worry about someone hacking into your digital wallet and stealing your crypto or about forgetting the password and losing your crypto forever. You also don't have to worry much about trading, since the ETF’s portfolio manager will take care of that.
Cons:
Well, unlike directly investing in crypto, you will have to pay a management fee to invest through an ETF. ProShares charges a 0.95% fee. This means that for every $1,000 invested, you pay $9.50 to ProShares.
Also, unlike an online crypto exchange which allows you to trade whenever, you can only trade ETFs when the stock market is open.
All in all, the crypto space is getting serious. Whether you like it or not. Better to learn about the demon before it’s too late, no?
Would you consider investing in a Bitcoin ETF? Tell us why or why not?
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