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- What are ETFs and how they affect cryptocurrencies?
What are ETFs and how they affect cryptocurrencies?
Bitcoin capitalization has grown to more than $ 1 trillion in the last few years. This makes it the most profitable asset that has ever existed and the potential for further growth attracts an increasing number of investors. Bitcoin achieved this also through retail money from ordinary people. However, most of the money is owned by large companies and investors, who remain very sceptical about cryptocurrencies. To fully enter the world of cryptocurrencies and bring in a huge amount of capital, they need to be able to trade cryptocurrencies as securely as other assets. And that's exactly what the ETF is for.
ETF stands for exchange-traded fund. We have known this type of asset from other markets since 1993 when it was first created in America. Its creation was driven by the demand for a combination of the best features of stocks and index funds.
From equities and index funds to ETFs
As you probably know, stocks are basically co-owning of the company. For example, if you own Apple stock, you are a co-owner of this company. This ownership gives you the right to participate in decisions about the running of the company, which is why many companies retain at least 51% of the shares. If the company is in profit, it pays dividends to its shareholders - ie part of the profit according to the number of shares owned. They are traded at the same time as trading time at stock exchanges where they are listed on.
Read also: WHY NOT BUY TESLA FOR BITCOIN?
On the other hand, index funds monitor the performance of a group of assets. So if you buy an S&P 500, for example, you actually get a small proportion of 500 different stock companies in one transaction. These funds are managed passively, which means that their managers buy and sell individual assets according to the demand of the people who have invested in their fund. In mutual funds, their managers actively buy and sell assets to maximize investors' profits. However, these funds can only be traded once a day.
What are ETFs?
ETFs thus combine the best of the stock and index markets. They are traded like stocks and consist of several assets. In 2020, there were almost 8,000 different ETFs on the market, which are traded on more than 70 exchanges around the world. Their total value is at the level of $ 8 trillion. They are considered a safe form of investment as they are governed by strict regulations. Most of them are registered in the US market, where they are regulated by the SEC. Since the bull run in 2017, the SEC has seen several applications from various companies to register crypto-related ETFs and all of them have been rejected.
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So, for example, if you buy a bitcoin ETF, the fund will buy the required amount of BTC and create new "shares" representing that BTC. When selling, on the other hand, the fund sells the required amount of bitcoin and pays the investor his FIAT money. The first 3 bitcoin ETFs, which originated in Canada were listed on the Toronto Stock Exchange, bought a total of more than $ 750 million worth of bitcoin in two months.
The biggest problem for obtaining a bitcoin ETF registration from SEC is probably the high volatility as well as the low market capitalization of bitcoin (compared to other markets). Cathie Wood, founder and CEO of ARK Investment Management LLC, said that in her opinion, no company will receive a BTC ETF registration from the SEC until the total bitcoin capitalization exceeds $ 2 trillion (which is about $ 110,000 / BTC). Acquisition of BTC by large and well-known companies such as Tesla, PayPal, MicroStrategy and others also helps to speed up this process. We must not forget the banks, which are already reporting a huge interest of their clients in cryptocurrencies.
The main obstacle that prevents crypto-related ETFs from spread around the market is the approval of the first on the American market. Then nothing will stop the influx of huge amounts of capital into cryptocurrencies. Hopefully, great news has come in this direction. Gary Gensler, a professor at MIT (Massachusetts Institute of Technology) who specializes in blockchain and digital currencies, has become SEC chairman. It is thus possible that we will see the approval of the crypto ETF on the US market this year. Such a report could easily result in the creation of a new bitcoin ATH and become the main power of growth that we currently see in the market.
The criticism of the ETF is legit
Finally, we should definitely mention that bitcoin and crypto ETFs also have their critics. In particular, they fear that large companies will start to manipulate cryptocurrencies prices after entering the market, as they currently do with other assets (such as gold). The problem could also occur with the so-called cryptocurrency fork, where these companies could have the main word in decision-making. The crypto ETFs thus partially goes against the meaning of cryptocurrencies, which was to replace the current financial system, not become part of it.
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