Understand Bitcoin ETFs in One Article (2)

Why did the SEC choose to continue to delay the ETF?

The SEC actually delayed any bitcoin ETF applications. In January 2018, the SEC noted why the ETFs were delayed. That article was very long, and we'll summarize some of the key points here.

Valuation - It is very important to value the net asset value correctly. Because it will determine the amount of funds that authorized participating brokers need to issue or collect during the creation or redemption process. the SEC is concerned that the This, because the prices of digital currencies are highly volatile and exchange prices are uncorrelated, the valuation of NAVs The methodology is not accurate. Arbitrage (for ETFs)

- Because NAVs are inaccurate and markets are volatile, the SEC is concerned that the arbitrage mechanism, a necessary tool to maintain ETF prices and NAVs, may be ineffective.

Liquidity - The SEC is concerned that the large number of daily redemptions will become the norm in a more volatile market like digital currencies.

- The SEC is also concerned that ETF-based futures will take up a disproportionate share of the bitcoin futures market, which will affect the efficiency and liquidity of the funds.

Custody of Funds - The SEC is concerned that ETFs won't protect against cyber attacks on Bitcoin.

- The SEC is also concerned that ETFs will hold any bitcoin derivatives.

Potential manipulation and other risks - SEC fears unregulated digital currency market and widespread market manipulation

Future developments

ETFs that hold bitcoin > ETFs that trade bitcoin derivatives

After reading the SEC's filing on the Bitcoin ETF proposal, I'm leaning more towards those ETFs that hold Bitcoin.

Obviously, the biggest problem with ETFs is that holding bitcoin is inherently risky. But I believe it's a lot easier to address the custodial risk of bitcoin than it is to address the risk of tracking bitcoin trade derivatives.

As we mentioned earlier, investors need to give these funds a lot of credit to predict how bitcoin will perform when using derivatives . This will be more opaque, more expensive, and very small price swings can make a big difference because it involves leveraged trading.

Bitcoin ETFs need to keep the fund's net worth stable until they can attract institutional investors.

We have now overestimated the amount of fiat money that can flow in from Bitcoin ETFs. Some articles, using very exaggerated math, to estimate that the ETF will bring in 2,400 investors, along with 4,200 A billion dollar flow of money, which seems to have been done overnight.

In fact, many institutional investors remain ambiguous when it comes to discussing investing in digital currencies. They won't rush to invest in Bitcoin ETFs when there's a huge premium on them.

Grayscale's Bitcoin Trust, which traded at a 50% premium in July. This is similar to the issue we were talking about before. For authorized participating brokers, it takes a long time to get the price of an ETF to stabilize near its net asset value.

Bitcoin ETFs Can Have High Expense Ratios

Someone needs to pick up the cost of the transaction from fiat to bitcoin. There are also people who need to bear the cost of safe holding.

The SPDR S&P 500 Fund is subject to an annual fee of 0.09%. Bitcoin ETFs require a fee of 1-3%.

Digital Currency ETF Indexes Aren't Even Close

The SEC is already concerned about liquidity, valuation and the safety of holding bitcoin. Imagine if you were to create an ETF through a top 20 ranked digital currency, it would be very difficult.

This actually expresses one of the main benefits of using ETFs: the ability to gain partial ownership of very large and diversified assets. If you want your portfolio to include the top 20 digital currencies, you need to hold these underlying assets yourself.

Implications for the price of Bitcoin

Holding Bitcoin, rather than Bitcoin derivatives in ETFs can have a significant impact on the price of Bitcoin.

Retail investors need to wait

To address the SEC's concerns, many ETFs say their investments are unaffordable to retail investors.VanEck presents Bitcoin ETFs, with a minimum purchase price of 25 BTC. the SEC should start on the institutional side before opening ETFs to retail investors Conduct water testing.