What is an ETF and what is its role in kryptomere
All summer, the stock market listened to the news that will solve (or not solve) the Commission on securities and stock exchanges of the USA (SEC) about the so-called ETF funds linked to scriptactive.
The situation still looks as deliberately suspended. SEC ignores the requests of market participants — one fails, the other takes the decision at a later date. The impression that the SEC is unwilling to legalize this kind of ETF, at least until the beginning of 2019.
However, even within the SEC, there is no consensus. August 23, the Commission on securities and stock exchanges of the USA, after repeated postponements of the decision, refused to register several bitcoin ETF and ETFs tied to bitcoin futures. And already the very next day the Secretary of the SEC Hester pierce is extremely sharply expressed to the staff of the Commission that rejected an application to open a bitcoin ETF, the Winklevoss brothers. And he also stated that the Commission will reconsider its decision. However, no specific dates were not mentioned.
Why such passion? Why many participants of the stock market so waiting for the launch of cryptocurrency ETFs, and regulators go into denial? However, denial of leave, not all. For example, the Swedish “daughter” NASDAQ lauched in Sweden ETN notes on the spot-contract of bitcoin. Yeah, not ETFs, not in the United States, but American investors August 15, had the opportunity to invest their dollars in this asset. However, for long — 9 September, the SEC banned their treatment under the pretext that “clear-cut information on these products is not enough.”
It goes to the fact that if ETFs will not begin to resolve in the United States, American investors will be looking for them in other countries and jurisdictions. However, they still do it. But in the case that are not under the jurisdiction of the Fund or the company are invested by the Americans, such a transaction is still in USA SEC regulated. And then non-us structures begin to hold the entire set of problems related to violation of American law on the stock market. That is why many non-American projects in order to avoid such situation get the disclaimers and publicly deny Americans the right to invest in them.
The situation around the ETF can be considered a trigger if they are allowed, the stock market will flood a huge flow of money from institutional and non-qualified private investors. And then rally in November—December of 2017 seem to kindergarten, and predictions about the “bitcoin for $25K” — the overly cautious.
By the way, there are just too konspirologichesky version of the causes of the current intransigence SEC: alleged future market makers actively and non-public buying scriptactive for future ETF. To thoroughly earn then the growth Fund, when these resolutions will begin handing out left and right.
Among cryptochiton relation to ETF ambiguous. The man is a legend Andreas Antonopoulos filmed a special video, “Why I am against ETFs”, where he calls them a “necessary evil”. No less than the legendary Nick Szabo said in mid-August, 2018: “I’m not the person who will lobby for ETFs, as, indeed, any investment on wall street. It can do more harm than good. How much bad money was poured into the crypt and how many self-confident investors burned. Stupid to leave the area, and the new we don’t need”. In the same publication cited quote, former Executive Director of Morgan Stanley Catlina long: “I Hope Hodler realize that wall street is no friend of Bitcoin”. Is he hinting that ETF can not only on the growth of cryptocurrencies set, but also to short them — that is, to play on the slide. About the same as happened after the launch in December 2017 futures bitcoin on two us exchanges, the CBOE and CME.
What’s inside ETF
Let’s start with definitions: ETF (exchange-traded fund) or exchange traded Fund is a security (security) that tracks some stock market index, commodity, bond or basket of assets like an index Fund, which quotations reflect the course of a certain stock index.
How does the index Fund: we choose the stock market index, looking for the stocks included in the basket of this index, buy the index Fund for all those stocks that are of interest to us index basket, and take them exactly in the same proportion. That is, to hire expensive managers no need.
What is the meaning of such a Fund? Economists have long proved that the value of the index basket is growing ahead in relation to GDP. That is, if you invest in a mutual index Fund, you are guaranteed going to overtake prices and stay in positive territory.
What if the ETF is created, which in the prospectus says that he will invest in Bitcoin spot (i.e., cash asset)? This means that all funds must be spent on the purchase of bitcoins. And more than anything. If the prospect of another ETF says that it will invest in futures with bitcoin for a period of 1 month, this means that managers of this Fund will buy only fresh one-month futures.
It turns out that the ETF behaves as a Hodler. Such funds are good because it is not necessary to buy expensive investment managers. In the prospectus of this Fund are all described in detail — what exactly is purchased in the portfolio and in what proportions.
Unlike mutual (mutual) investment funds (more on those below), a security ETF is traded like ordinary shares on the stock exchange. The shares of the ETF are experiencing exchange rate fluctuations during the day, when they buy and sell. But for the unit at the end of the day (usually) regularly estimates the value of the assets.
ETFs usually have higher daily liquidity and a lower fee (Commission Fund) than mutual funds, making them an attractive alternative for some investors.
Mutual (mutual) investment Fund is actually a portfolio of different assets, e.g. shares, bonds, futures on raw and God knows what else. Mutual Fund in its prospectus describes the types of assets, which plans to invest. Have a mutual Fund typically has a Manager who makes decisions — what to buy, what to sell, etc., That is, mutual Fund wider choice — where and how to invest. It is more flexible than ETFs, but riskier for this reason. In the end, the managers could be wrong. ETFs are typically less profitable in the short term, than equity funds. But in the long run it is more profitable for small investor because it is not necessary to track the course of units and to pay to the investment Manager.
Since ETF is traded on exchange just like shares, it has no net asset value (net asset value or NAV) calculated once at the end of each day, as do mutual (mutual) funds.
Considered the NAV of mutual Fund understandable way: the mutual Fund shall publish the composition of their assets — what and how much bought and is in control of the Fund. For example, a mutual Fund is so much of the company’s shares And, so many companies, so many companies, and there’s also some government bonds and some gold futures. All of these assets generally are publicly traded and their courses are known. Multiply the number of shares of the company And in the possession of the Fund on their exchange rate. The same is done with the shares of the company — and so add up the total value of the portfolio of the mutual Fund. As soon as the Fund value is known, it is easy to calculate how much one share in that Fund.
How does the ETF? By itself, the ETF owns the underlying assets that works (stocks, bonds, oil futures, gold bullion, foreign currency, cryptocurrency, etc.). In turn produces ETF exchange traded shares whose owners — investors — thus indirectly own the underlying assets.
ETF shareholders are entitled to a share of the profits, for example, earned by the underlying assets, interest or dividends paid. Shareholders may obtain the residual value of the Fund’s assets in the event of liquidation.
ETF shares of the Fund can be easily bought, sold or transferred — as they are traded on public stock exchanges.
Read more about how it works
The issuance of ETF shares is regulated by a mechanism known as “creation and redemption” — more on that below. The process of creation/redemption involves the participation of several large specialist investors, the so-called “authorized participants” (authorized participants, AP). To launch the ETF in the role of the AP should be large financial institutions with high liquidity, it needs to be visible market makers, which serve banks and/or investment companies.
When there is the creation of ETFs, a group of authorized (authorized) participants (AP) collects the necessary portfolio of underlying assets — the purchase of a starter package.
Suppose in our case that AP buy half the starting amount of the Fund’s bitcoins, as well as a quarter of the sum — esters, and another quarter — XRP. Now the portfolio of underlying assets they make the actual ETF Fund “with the top three amount of cryptocoins”, and thus become the owners of shares of the Fund in exchange for the money they were given to buy bitcoins, esters and ripple in the interests of the Fund.
In the future it may happen more buy the underlying asset in the basket of the Fund — say, buy another bitcoin, esters and XRP. And all this is certainly in accordance with the proportions and principles set out in the prospectus of the Fund.
In the event of liquidation of the ETF, the AP return Fund shares “the First three amount of cryptocoins”, and instead get all the same bitcoins, esters and XRP.
The composition of the assets of the ETF Fund is published daily.
Interestingly, the fair price of ETF shares is supported by market hard enough. As shares of the ETF and its underlying assets that are traded daily, during the day, traders can use the instant arbitration. For example, if shares of the Fund “the First three amount of cryptocoins” is overvalued (i.e., overpriced vs realistic), it is possible to sell, say, one stock and use the money to buy more bitcoins, esters and XRP. And the cost of purchased amount of cryptocoins will be higher than the coin value per share of the Fund.
And if the stock is undervalued, you can sell yourself kryptonite, and used the money to buy a stock Fund. And then the cost amount of cryptocoins per share to be higher than the cost sold in the beginning amount of cryptocoins.
Using as underlying asset for derivatives-assets — futures, etc., ETFs can earn on the increase and decrease of the asset.
Within these broad possibilities to play on the rise and fall of the underlying asset and the reason of failures and delays SEC: the risk of manipulating the price of the underlying asset. Already published research, which States that operations with the Tether was actively used in November-December for the “inflation” rate Bitcoin. Obviously, the SEC would like to obtain credible assurances that ETF such manipulation would be impossible.
Why is it so important
The key benefits of ETF know two:
A) the receipt of income from the underlying asset without direct ownership;
B) a temporary exemption from tax on the growth of the underlying asset. While the investor received no money from the sale of shares or dividends earned by the Fund are not taxed. That is, the taxation subject only to a fixed profit resulting from the sale of shares of the ETF Fund and/or the payment of dividends thereon (if such payment is envisaged by the prospectus of the Fund).
Both advantages are extremely important for investors interested in investing in scriptactive.
For example, ownership of shares of the ETF for which the underlying asset is bitcoin, shifts the operating risks (e.g. the risk of hacking of crypto) with the small investor in the Fund itself, whose capacity to provide security, obviously, much more. For this reason, investment banks and “old” stock exchanges are actively working on the creation of institutes of guardian (custody). The presence of the custodian in the market infrastructure also dramatically reduces operational risks.
Owning ETF shares, investors increase the liquidity of their investments and reduce the cost of operations scriptactive as operate not by scriptactive, and a stock Fund that owns them. It is no secret that commissions for the sale/purchase of shares of the Fund is many times less than the commissions/spreads faced by those who wish to officially buy/sell scriptactive directly.