Preflight preparation. Why cryptocurrency ETF


The portfolio Manager Fund Aurora Blockchain Capital Dmitry Smirnov, in his newspaper column on RBC-Crypto compares “digital gold” with real precious metal and explains what will happen to the market in the case of a positive decision of the SEC

The last few months the main idea in cryptocurrency market was the creation of the first ETF on bitcoin. ETF (exchange traded fund) is a Fund investing in a portfolio of assets, its distinctive feature is that shares of the Fund traded on the exchange, as shares of Apple or Gazprom, for example. The process of investing in the Fund the most convenient, reliable, effective from the point of view of taxation and it allows you to enter the investment or get out of it in a matter of minutes. Moreover, many ETFs your investments you can take directly in physical assets to shares, gold bars or perhaps in the future bitcoin. Google trends confirms the fact that ETF on bitcoin one of the few associated with the cryptocurrency, which is at the peak of its popularity:

source: Google

The introduction of ETFs has changed many markets. The most striking example is the emergence 15 years ago, the first ETF for gold. Before investing in precious metal is mainly carried out in the form of ingots, coins and jewelry. This example is particularly interesting because gold and bitcoin brings together a number of common characteristics: a limited amount of handling, high divisibility, equivalence volumes and the lack of provision of obligations of third parties.

First traded on the stock exchange, the Fund of gold appeared in 2003 in Australia, then it was worth slightly more than $300 per Troy ounce. After 5 years the price of gold approached $1000. It was one of the strongest periods of growth in the value of the yellow metal in the history of mankind. Of course, the emergence of new financial products was not the only growth factor, but it is undeniable that the growth of assets of new gold funds with $100 million in 2003 to $157 billion in 2012 ensured the flow of funds significantly increased the demand for gold and boosted the price.

Net assets of all ETFs for gold in tonnes by region (filled graph) and the price of gold in dollars (the yellow line):

Source: World Gold Council

Creating an ETF on bitcoin, as well as in the case of gold, will solve a number of problems for potential investors. The main obstacles for those who decided to buy a crypto-currency is the security issues of storage and of legal status.

Your property in bitcoins is expressed in the possession of a cryptographic key (in fact, a set of symbols). If someone gets access to it, he will be able to steal your cryptocurrency. And to take something in a decentralized and partially anonymous system that is bitcoin will be almost impossible. For the adoption of adequate methods of protection require some technical literacy, where the average investor has absolutely not.

In the case of ETF storage of cryptocurrency will be carried out with the use of all possible modern methods of digital security and financial insurance. Is it possible to hack ETF? Of course, you can, but it will be very difficult. Here again, the appropriate comparison with the gold, you can store bullion at home or entrust them to the Bank. The Bank can also Rob, and in certain situations you will lose your money, but the risk in this case is much lower.

The second aspect is the legality of bitcoin. In many countries, investing in crypto currencies is prohibited, others are not regulated and can cause big problems with taxation. If you invest in ETFs, is a completely legitimate tool, the investment in which, though taxed, but also give the ability to use deductions and preferential long-term rates.

Using ETFs in cryptocurrency will be able to enter a new layer of investors. Individuals can invest in bitcoin retirement savings (e.g. 401K accounts in the United States or IMS in Russia). Legal entities such as pension funds, insurance companies in some jurisdictions, can also buy previously not available to them cryptocurrencies.

Another question — will they buy? With high probability institutional investors will avoid new asset class. The only obvious motive for investment funds is the low correlation of cryptocurrency with those assets, which fill their portfolio (stocks, bonds, real estate). From the point of view of portfolio theory is a great way to improve the risk-return ratio of portfolios.

Among individuals there are certainly a wide layer of investors interested in investing in ETFs. First of all it’s highly paid young professionals who already have savings. This trend will only increase in the case of a price increase.

Predicting the effects of launch ETF you can look at the history of futures on bitcoin. Start trading coincided with the peak prices in December 2017, many expect a similar dynamics in the case of ETFs. It should be noted that while the market has long anticipated this event, most of the growth last year occurred precisely on these expectations. Now the hype is much more modest. And futures, unlike ETFs, essentially, are not instruments for investment. They are suitable for short-term speculation and hedging (mostly bets on the fall of cryptocurrency) and was not initially able to provide a steady flow of funds.

The creation of ETFs, investing in physical bitcoins, will be able to ensure the inflow of new funds into the market. Whether it is enough for growth beyond the short-term surge is a question to answer which is more important to know the future regulation of cryptocurrency and the growth rate of their adaptation. Soon the decision via the ETF for the physical bitcoin is expected on September 30.

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