Why Is a Crypto ETF a Bad Investment?
A cryptocurrency is a virtual currency that is protected by encryption, making counterfeiting and double-spending virtually impossible. Many cryptocurrencies are focused on blockchain technology, which is a public database implemented by a distributed network of computers.
Author:James PierceReviewer:Gordon DickersonMay 25, 20214.7K Shares524.3K Views
- Investing in cryptocurrency ETFs is like investing in other ETFs.
- An ETF management company manages the funds and invests them in crypto.
- The SEC doesn’t approve the trading of Crypto ETFs yet in the US.
- Crypto ETF investing is risky because of issues such as liquidity, non-regulation, and pure fiat speculation.
A cryptocurrency is a virtual currency that is protected by encryption, making counterfeiting and double-spending virtually impossible. Many cryptocurrencies are focused on blockchain technology, which is a public database implemented by a distributed network of computers. Cryptocurrencies are distinguished by the fact that they are not distributed by any central entity, making them technically resistant to political intervention or coercion.
Many people are becoming, shall we say, addicted to the idea that cryptocurrencies will be the future money. We might not be using Bitcoins to pay for our groceries right now, but it’s actually something to look forward to.
On the one hand, let’s talk about crypto ETF, which is different from cryptocurrencies. We’ll be talking about what they are and why they are bad as an investment.
What Is A Crypto ETF?
In theory, a crypto exchange-traded fund (ETF) functions similarly to the other ETF.
A cryptocurrency ETF will follow one or more digital coins, while most ETFs monitor an index or a pool of properties. Digital token ETFs, like all ETFs, will transact on an exchange like a common stock, with market fluctuations during the day as buyers buy and sell.
How Does It Work?
A cryptocurrency ETF's management company must own the underlying properties it monitors in order for it to function properly. To put it another way, the ETF will have to own a proportionate amount of digital tokens. The possession of these coins would be interpreted as securities, and participants in the ETF will implicitly hold these tokens by purchasing these shares. Investors in ETFs will then gain access to the upside potential of the underlying assets.
Crypto ETF Right Now
The Securities and Exchange Commission (SEC) has stated that cryptocurrency ETFs would not be authorized unless the markets have shown a level of stability and protection. Despite the SEC's position, a variety of companies have attempted to introduce digital currency ETFs.
The Chicago Board Options Exchange (CBOE), the exchange that recently introduced bitcoin futures, has urged the Securities and Exchange Commission (SEC) to reverse its previous ban on digital token funds. The owners of successful digital currency exchange Gemini, Cameron and Tyler Winklevoss, have continued to petition the SEC for approval of a bitcoin ETF without success.
Coinbase, the world's most successful digital currency platform, has introduced an index fund that tracks four of the most popular digital currencies, although it's not the same as an ETF.
Few ETFs also have a limited level of information to GBTC, but they aren't solely based on cryptocurrencies.
What Makes Crypto ETFs Bad?
ETFs can make investment easier, but they have little effect on the fundamental elements of the assets they carry.
You Don’t Own Crypto
Let’s just say that Crypto ETFs are funds invested in crypto. While cryptocurrencies are good investments based on their performance and the growing interest of investors, many are inclined to invest in them.
What makes crypto ETF bad is the fact that when you invest in it, you don’t own the crypto they buy. What you own is ETFs, not crypto. So in the event that you want to use your investment, you need to close your positions first before you can use the money, unlike when you actually invest in crypto wherein you can use your coins to make transactions.
The SEC Doesn’t Approve Crypto ETFs
Since he taught crypto and blockchain classes at the Massachusetts Institute of Technology, some believe Gary Gensler, the SEC's current chair, would be more receptive to the possibility of a bitcoin ETF. However, he has more serious concerns, including the rise of special purpose takeover firms and whether trading applications like Robinhood allow investors to take excessive risks. So, approval of a bitcoin ETF will be a watershed moment.
Pure Fiat Speculation
When you sign a contract to sell or buy bitcoins at an ETF, though, you have no way of knowing if you're dealing with actual coins or only paper. If these conventional financial companies were arrogant, they could grant certificates for sums that were effectively greater than 21 million dollars (which is the limit of liquidity of Bitcoins).
There really is no way to prove the presence of these cryptocurrencies, and because the exchange is paid in fiat currency and resolved in fiat money, the parties concerned don't seem to mind. It's not HODLing, it's not borrowing, it's not hedging against conventional financing. We're dealing with pure fiat conjecture here.
The issue is that this fiat betting on ETFs risks destroying Bitcoin's or other cryptos’ valuation proposition. The market would be filled with choices for purchasing coins that aren't supported by Proof of Work, can't be checked, but are convenient If these ETFs are used in the market aggregation, the outcome could be disastrous.
James Pierce
Author
James Pierce, a Finance and Crypto expert, brings over 15 years of experience to his writing. With a Master's degree in Finance from Harvard University, James's insightful articles and research papers have earned him recognition in the industry.
His expertise spans financial markets and digital currencies, making him a trusted source for analysis and commentary. James seamlessly integrates his passion for travel into his work, providing readers with a unique perspective on global finance and the digital economy.
Outside of writing, James enjoys photography, hiking, and exploring local cuisines during his travels.
Gordon Dickerson
Reviewer
Gordon Dickerson, a visionary in Crypto, NFT, and Web3, brings over 10 years of expertise in blockchain technology.
With a Bachelor's in Computer Science from MIT and a Master's from Stanford, Gordon's strategic leadership has been instrumental in shaping global blockchain adoption. His commitment to inclusivity fosters a diverse ecosystem.
In his spare time, Gordon enjoys gourmet cooking, cycling, stargazing as an amateur astronomer, and exploring non-fiction literature.
His blend of expertise, credibility, and genuine passion for innovation makes him a trusted authority in decentralized technologies, driving impactful change with a personal touch.
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