New Bitcoin Investment Vehicle Debuted on Wall Street, With More on the Way
A new Bitcoin-focused exchange-traded fund, ProShares Bitcoin Strategy ETF, debuted on Wall Street. ProShares Bitcoin Strategy ETF will trade in Bitcoin futures contracts that speculate on the future price of Bitcoin as opposed to the cryptocurrency itself.
In his book, The Dhandho Investor: The Low–Risk Value Method to High Returns, Mohnish Pabrai coined an investment approach known as "Heads I win; Tails I don't lose much." Q3 2021 hedge fund letters, conferences and more The principle behind this approach was relatively simple. Pabrai explained that he was only looking for securities with Read More
In anticipation of the launch of the ETF, Bitcoin recently jumped 3%. Also, Bitcoin futures increased by 2%. Asset managers estimate that with the introduction of crypto NFTs, particularly with Bitcoin, valuation will continue to increase. Some analysts believe Bitcoin is well on its way to hitting the $100,000 mark. With reputable investors like Paul Tudor Jones and Mark Cuban betting big on Bitcoin, many people are flocking to what crypto pioneers call digital gold.
What's An ETF?
An ETF, also called an exchange-traded fund, is an investment that traces the performance of certain assets. ETFs give investors the opportunity to diversify their portfolios without taking ownership of the assets. This investment vehicle has become very popular on Wall Street through the years, with over $507.4 billion invested in 2020 alone.
For investors interested in gains and losses, ETFs can provide an easier way to trade individual stocks. Instead of putting all your eggs in one basket, ETFs follow a particular industry like energy or tech. This allows you to diversify your portfolio.
Institutions and individuals alike prefer ETFs because they are a low-cost investment. They often provide better tax benefits than other investment vehicles like mutual funds. The transparency of ETFs is also favorable to many asset managers. Interested investors can find out what assets an ETF holds by performing a quick Google search.
What Are Some Of The ETFs Currently Available?
There is a wide variety of funds that invest in all types of popular and attractive industries.
Here are some examples of ETFs currently available:
- Industry – Focused on specific industries, such as energy.
- Bonds – Bonds with different characteristics, like issuer and safety.
- Value stocks – Affordable stocks.
- Dividend stocks – Stocks that pay dividends.
- Major indexes – Shares invested on major exchanges such as the Dow Jones Industrial Average.
- Commodity – Physical commodity investments or producers of it, such as gold and other precious metals.
- Country – Stocks focused on a particular country.
- Company size – Companies of a given size.
- Inverse – These ETFs invest when prices drop, giving investors the opportunity to make profits on securities that they believe will be in decline.
- Bitcoin – Tracks the price of the digital currency.
How Safe Are ETFs?
For four years the Commodity Futures Trading Commission (CFTC) oversaw the development of the ETF. The CFTC enveloped the ETF within their jurisdiction under the Investment Company Act of 1940 which provides a certain level of investor protection. Even with regulatory protections, these assets are highly speculative and volatile, so investors should still proceed with caution.
Another issue investors might face is the lack of liquidity in certain ETFs. This can hurt your bottom line if you are trying to shift funds to other investments quickly.
Additionally, an ETF manager's poor administration can lead to the fund shutting down, leaving investors in a potentially bad situation. If an ETF shuts down and you’re forced to sell, you might have to take a tremendous loss.
How Does The Bitcoin ETF Work?
The purpose of a Bitcoin ETF is to purchase shares in a fund that mirrors the actual price of Bitcoin. With this intention, investors can invest in the ETF without having to purchase the token itself. Also, holders of this ETF do not have to worry about digital wallets and other complex issues when holding Bitcoin. This ETF is perfect for those investors who are wary of placing their money in technology they might not feel comfortable managing.
ProShares is one of the largest ETFs by assets. The ETF firm uses leverage to follow activity in several indexes calculated by an amount. This Bitcoin ETF isn’t really what investors wanted, but it’s what the SEC (U.S. Securities and Exchange Commission) is willing to allow in the meantime.
The SEC is permitting ProShares to trade because it’s easier to regulate than Bitcoin. Since Bitcoin is a decentralized digital currency, the SEC is having trouble finding ways to implement regulations.
Are There Any Other Companies That Offer Bitcoin ETFs?
Back in 2017, investment firms requested permission to start spot Bitcoin ETFs but were denied by the SEC. The reason for the rejection was that firms couldn’t disprove the existence of manipulation within the Bitcoin market.
Several investment firms, Galaxy Digital, Valkyrie, VanEck, and Invesco, have applied for their own Bitcoin ETFs with the SEC. Grayscale, another firm, has publicized plans to apply for an ETF that will hold Bitcoin. Currently, Grayscale owns an outstanding amount of the world’s bitcoin under the GBTC ticker. Greyscale manages about $38.7 billion in assets and wants to convert its trust into an ETF that owns bitcoin at spot price.
Given these points, Bitcoin continues to prove to the world that it's here to stay. Even though complete adoption of digital currency hasn't taken place yet, Bitcoin is changing investment strategies. Since ProShares’ Bitcoin Strategy ETF is the first of its kind, there is still a lot to learn about this investment method. We'll continue to monitor how investors react to this ETF compared to actually buying the currency itself. Ultimately, only time will tell if buying the actual digital currency is the way to go or if speculating on the futures of Bitcoin is best.