What is an ETF?
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056 – First of all, it is necessary to understand what an ETF is. Exchange-Traded Funds (ETF) are investment funds listed on the Stock Exchange. These investment funds offer the market a “basket” of shares that seek to replicate the behavior of a particular index.
In other words, ETFs offer investors a “cake” that is made up of various stocks, with the purpose of mitigating the associated risk. This asset is considered medium-low risk, since its purpose is to diversify the investment portfolio and reduce the costs associated with the purchase and sale of assets in traditional finance.
For example, if an investor decides to invest in a specific sector such as technology or health care, instead of buying a specific stock in the sector, he may choose to buy an ETF that replicates the behavior of that sector. In this way, the investor would be investing in several companies and at the same time would have participation in the sector of interest.
It should be noted that the portfolio of assets offered by ETFs varies according to their purpose, since some follow the behavior of a specific sector, and others follow the behavior of commodities or a specific asset.
Since 2021, several investment companies have sought to issue an ETF in line with the price of Bitcoin, which seeks to “unify” traditional finance with the crypto world.
One of the “pioneers” in issuing such an ETF was Admiral Markets AS Jordan LTD, which obtained approval from the U.S. Securities and Exchange Commission (SEC) and is registered under the name “ProShares Bitcoin Strategy ETF (BITO. US)”. However, it has been a product with very little renown in the market due to the fact that it is an exclusive product for Admiral Markets LTD clients and has no major relevance in the market.
Recently the investment company BlackRock, Inc. declared that it will use CoinBase Custody in order to issue an ETF that replicates the behavior of Bitcoin. In the event that such ETF is approved by the SEC, it would be the first ETF available to everyone, and it would also mean a union between the world of cryptocurrencies and traditional finance, which could be a milestone in the medium to long term.
It is striking that a company such as BlackRock, which manages close to USD$10 trillion in assets, is one of the companies promoting this type of assets, which many investors have seen with good eyes and would generate confidence in the ETF’s stakeholders.
Bitcoin ETF advantages and disadvantages
Among the main advantages that the issuance of the Bitcoin ETF could represent is that it could generate a significant inflow of capital, since there are many people who have been shy of investing directly in cryptocurrencies due to their volatility and lack of knowledge; therefore, a product that is backed by the SEC and executed in the traditional financial markets would generate a higher level of confidence.
In addition, a possible issuance of a Bitcoin ETF generates good signs for the future of cryptocurrencies, so the reading between the lines is that sooner rather than later we will see a harmonization between traditional finance and cryptocurrencies.
On the other hand, there are several disadvantages that could arise, such as a competition between traditional financial brokers and crypto exchanges, since people could lean towards a specific market or product, leaving the other side of the scale with less participation.
It should also be taken into consideration that the cryptocurrency market, and in this particular case the Bitcoin market, is a highly volatile and even speculative market, so the regulations that go along with the ETF will determine the feasibility of such product and how receptive it will be to investors worldwide.
On June 30, 2023, the SEC announced to BlackRock and several investment companies that the proposed ETF issuance is not viable as of today, due to lack of understanding of “shared surveillance agreements”, which is nothing more than the union with CoinBase or any other exchange in order to serve as a custodian and be able to support and follow the behavior of Bitcoin (BTC).
With such an agreement, the SEC could guarantee that neither market will be affected by market manipulations and avoid large losses for investors who decide to invest in the ETF.
It is expected that in the coming weeks companies such as BlackRock or Fidelity will file a new application with the SEC in order to obtain the “green light” for a possible agreement. But what can be said in advance is that it is very likely that this ETF will come to the stock market and will mark a milestone not only for the type of product, but also for the inclusion of two markets that historically have been seen as competing with each other.