What is an ETF? And why is it driving Bitcoin back to record high prices?
The Bitcoin bulls are racing again. A year ago the digital currency was valued at less than US $ 12,000. It has now passed the symbolic US $ 60,000 milestone, pushing the record US $ 63,255 which it reached in mid - April, before its price fell as low as US $ 30,000 in July.
The accumulation of Bitcoin over the past month is largely due to speculation that the U.S. Securities and Exchange Commission is about to approve a trading fund, or ETF, based on Bitcoin futures.
So what is an ETF, and why is this important to the value of Bitcoin?
How does an ETF work?
An exchange traded fund is an investment asset, which consists of a collection of assets, traded on a stock exchange. The common draw is that ETFs provide individual investors with benefits from diversification, protectionism, and liquidity.
Say, for example, that you want to invest $ 100,000 in commercial property. You can't buy an office or a shopping center on your own - and even if you could, buying just one property would put all your eggs in one basket.
Here's where an ETF finance manager can help. The manager purchases a number of office buildings and shopping centers across a range of locations. Suppose these funds cost $ 100 million. These are "accumulated" in assets of 1,000 units sold for $ 100,000 each.
It's like buying a stake in a company. It allows you, the investor, to avoid the exposure that comes from buying one asset. Instead, you get a portion of a multiplied package.
If the value of the package increases, so does the value of your unit. If you want your money - to melt your assets by selling it - this is easy to do because the units of the fund are traded on an exchange.
ETFs are also regulated. This protects you from some of the risks (such as fraud) that come from buying assets directly.
How money is managed
Instead of physical assets (as in our example), many ETFs hold securities such as stocks and bonds or derivatives. This money can be managed passively or proactively.
Passively managed assets, and most commonly, hold a basket of assets that monitor the market, or market segment. “Index funds”, for example, hold shares according to their weight in a stock market index such as Standard & Poor's Index 500. If a company makes up 5% of the index value, the manager will ensure that its share makes up 5% of the assets.
In contrast, actively managed assets hold more shares at a price that the asset manager expects to rise sharply, and fewer or no shares. they expect to perform poorly. Whether the return on these funds is higher than those delivered by passive financing will depend on whether asset managers' judgment (or fortune) is better than that in the market as a whole. .
What does this have to do with Bitcoin?
Bitcoin-based ETFs are seen as something that will encourage more investors to play on digital currency.
Buying Bitcoin or other digital currency can be very difficult. Don't forget your private key (equivalent to a password or PIN) and you will lose it all. There is no friendly local bank manager who can recover or reset your password or make your loss good.
Scams are also on the rise. In the US alone, more than 81,000 fraud cases were reported in 2020.
Thus the benefits of accumulating cryptocurrencies in commodities can be seen under the direction of traditional asset managers and regulators, giving more respect to digital currency trading. (As long as that doesn't bother you with being the antithesis of the decentralized and distributed ideas that led techno-libertarians to create cryptocurrencies in the first place.)
Note other bubbles
But while investing in cryptocurrencies through an ETF offers several safeguards, it does not reduce market risk. Indirect gamble remains a gamble.
Of course the ETF of Bitcoin futures does not even indirectly own a collection of bitcoins. It is a collection of contracts about betting on future price cryptocurrency.
If this's somewhat similar to the complex outcomes of so - called collateralised debt obligations that led to the 2008 World Financial Crisis, you would be right. The more complex the financial instruments, the more risky they become.
One of the few who expected that market to collapse was hedge fund manager Michael Burry (produced by Christian Bale in the 2015 film The Big Short). Last week he effectively warned cryptocurrencies are speculative bubbles. This is an idea that is shared by most economists and business leaders.
Like all bubbles, some make a fortune, but many lose. Be careful.
This article by John Hawkins, Senior Lecturer, School of Politics, Economics and Society of Canberra and NATSEM, University of Canberra, is republished from The Conversation under a Creative Commons license. Read the original article.