There has been so much fuss about ETFs in the world of crypto, that we feel we really need to explain why this is such a big deal. ETF stands for an “exchange traded fund”. These types of investments started in the early 90s and gained popularity in the early 2000s.
What is an ETF?
When you invest in an ETF, you do two things: investing in a variety of stocks & spreading risk. This also means that a massive growth in one your stocks only has small influence on your investment. But overall market growth has a huge influence. A strong drop of one stock, will not wipe out your investment either.
The goal of an ETF is the lower risk, and gain the same growth as the market. If the market shrinks, the value of your ETF will go down, and vice versa.
In the world of crypto currencies there are already coins out there that use this system. Take Combi Coin for example. This coin uses the top 25 crypto currencies and spreads them among its portfolio. Each coin starts the month with the same weight, and at the end of the month it gets re-balanced. This way your portfolio value grows with the market. At the peak in early January a CombiCoin was 60 dollars, right now it’s 10 dollars.
But the big story is the concept of adding Bitcoin (or other crypto currencies) to an ETF portfolio. So far the Securities and Exchange Commission (SEC) has rejected multiple propositions for a Bitcoin ETF. They feel the product is to volatile and open to price manipulation. A lack of liquidity (daily trading volume), also plays a role in their motivation to deny the Bitcoin ETF. Another issue is that Bitcoin needs to be valuated at the end of a business day. This could always bring risk with an ETF investment.
Why is it important?
An ETF is one of the most accessible ways for starting investors to make low risk investments. Giving that group access to Bitcoin, would greatly improve the position of crypto currencies as a whole. Bitcoin is still the biggest crypto coin out there, and it’s often deemed the crypto version of gold. Seeing financial institutes embrace Bitcoin would be a win for the crypto market and it would open up crypto to a more mainstream audience.