In this blog, we are going to tell you about the Exchange Traded Fund (ETF). Such an ETF can have a big impact on the still young crypto market if big players start to enter it. Will we get an explosion of ETFs in all kinds of other coins in 2024? Will we soon have an Ethereum ETF, an XRP ETF, et cetera?
- Approval of Bitcoin ETFs by the SEC could lead to large cash flows and a possible rise in the Bitcoin exchange rate.
- Other cryptocurrencies such as Ethereum, Ripple and Cardano can also get ETFs.
- ETFs track the value of underlying assets and offer investors diversification with low costs.
- Potential risks of ETFs include inability to pay returns, illiquidity and high costs.
- Synthetic ETFs, which do not require direct investment in underlying assets, may carry additional risk.
- The adoption of Bitcoin ETFs in the U.S. could cause uncertainty and possible price volatility in the crypto market, depending on how they are structured.
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- Crypto ETF - Will there be more in 2024?
Crypto ETF - Will there be more in 2024?
In recent months there has been much ado among analysts about a Bitcoin ETF. The U.S. Securities and Exchange Commission (SEC) has finally given its approval to the applications of major mutual funds such as, among others Grayscale , BlackRock, Ark Invest and Bitwise. At least, according to a leaked report that was again pulled from the SEC's site, possible approval has been granted. So we'll keep a finger on the pulse, but assume it's true.
Should it be a go, many people expect lots of money to start pouring into the crypto market and Bitcoin's share price to explode, with all other crypto currencies in its wake. But is that true? We need to talk about that too.
Once there is a Bitcoin ETF, more coins may cross the dam. Ethereum is then a very good candidate, but an XRP ETF, Cardano or some other hugely reliable blockchain that has long been high on the CoinGecko hit parade are also promising.
Anyway, we can talk a lot about an ETF, but what does such a thing really mean?
What is an ETF?
An Exchange Traded Fund is also called a tracker (follower) or an index tracker. You can use it to track anything from a commodity to a bond and a composite of products to so now a crypto (Bitcoin) ETF.
An ETF aims to replicate the value of the underlying products as closely as possible. For example, if you buy an index tracker of the AEX, your investment will follow the value of this index. You can sell your investment at any time and your result will be very close to the result of the performance of the AEX. If the AEX has risen by 5% from when you bought this ETF, you will have almost exactly this 5% as a positive result, minus the costs, which with an ETF are relatively minimal.
There are all kinds of ETFs, such as index trackers, commodity trackers, industry trackers, currency, bond, and so on.
How does an ETF work?
Private investors usually do not have access to stock markets or other underlying assets. Therefore, they may use a broker or a bank.
So when you invest in an ETF, you are not buying the underlying products yourself. The issuer of the ETF must build a portfolio of similar positions . Each ETF has put together its own basket, for example, a sustainable portfolio. It follows that an issuer of a Bitcoin ETF must buy Bitcoin itself as more people invest in its ETF. This can create a very high buying pressure on Bitcoin if there is a lot of investor interest from large investors like BlackRock and the like. With that comes a much higher price.
An alternative would be to work with a synthetic ETF, where there is no direct investment in an underlying asset, but the payout via derivatives is placed on a third party. Frankly, I do expect this principle, otherwise Bitcoin will be too exposed to big money, making market manipulation very easy.
If leverage is also used in such an ETF, this portfolio must be considerably larger. Whether the SEC will allow all this remains to be seen. Given the size of these Juggernauts, this could lead to very strange times in cryptoland. Prices could skyrocket.
Therefore, I actually do expect the SEC to place restrictive conditions on the purchase of, in this case, Bitcoins. After all, with leverage, it could well be that the holder of a Bitcoin ETF must have more BTC in his portfolio than there are in total. Anyone who knows a little math understands that such a thing is impossible.
This is a fairly well-known principle in the investment world. For example, there are more investments in virtual gold than there is gold in the world. Therefore, you cannot exchange these for gold, otherwise the game would soon be over. So it may very well be that soon there will be more virtual investments in the virtual currency Bitcoin, than there are virtually. These are then speculations without the underlying value actually being held by an ETF, as this would be impossible.
What is the difference between an ETF and investing in a fund?
When you invest in an ETF, there is no active management by the manager of the ETF. He is not trying to beat the market, but their automated trading computer tracks the value of the underlying products. A single ETF also uses active management, but then you might as well go with a traditional mutual fund.
A mutual fund has a manager who actively tries to beat the market. He buys more often and then sells again, and there are considerable costs involved. He does try to get above-average results, but in retrospect it often turns out that they did worse than an ETF, mainly because there are too many fees involved. The buying and selling costs are much higher and the manager is paid quite a bit, making it almost impossible to beat an ETF or index tracker, unless your name is Warren Buffett or something.
Benefits of an ETF
- Flexible. You can sell them at any time during a trading day and you can work with limit orders, stop losses and the like. Often you can also work with leverage.
- Low costs. Due to their passive management, costs of around 0.5% per year are common. This makes higher returns than traditional mutual funds quite possible and the rule rather than the exception.
- Diversification. Because you invest in a composite product, your risk is spread across multiple components (in a Bitcoin ETF, of course, it is not). When you invest in stocks, your risks are often huge. If 1 company goes bankrupt, you lose a large part of your portfolio.
- An ETF is transparent. You know exactly what you're investing in, whereas mutual funds usually don't show this. You also know in advance exactly what fees you have to pay. Dividends are also simply paid out.
- With one payment, you can usually invest in a range of investments.
Disadvantages of an ETF
- The provider (broker) cannot pay the return that was achieved. This is especially the case with smaller providers.
- Your ETF is so unpopular that the moment you want to sell it there are no takers.
- Costs can still be so high that they exceed returns.
- A provider may use derivatives, exposing your investment to a third party responsible for the payoff.
Risk of an ETF
If there is no active management of funds, the market cannot be anticipated either. As soon as a major player in your portfolio is taken over or goes bankrupt, it can pose considerable risks to its value, even with enough diversification.
Large price fluctuations can also occur during major market events, such as a recession or a boom. You can capitalize on this with a stop loss order.
Another risk is investing in an untested ETF, making it a coming and going of buyers and sellers, so the price is constantly moving quite a bit.
What also happens is that your investment is in a particular currency and it undergoes a decline, making your investment worth less.
If you invest too much in just a small basket or even just 1 underlying, the risk is also much higher.
Some ETF providers lend the underlying products to third parties. This can increase returns, but if the borrowers go bankrupt it means additional risk.
This is an ETF that does not invest directly in the underlying assets. This allows you to invest in oil without ever having seen a barrel or wanting one. Often the payout is arranged with an intermediary, often an investment bank, which pays out at a certain price per barrel or on a certain date. With these futures contracts, you are dealing with a third party that may not have enough leeway to guarantee payouts.
If new crypto Exchange Traded Funds are going to come out you will have to make sure that the payout does not lie with a third party, otherwise you are at extra risk, given the volatility of crypto.
The growth of investing in an ETF
Since 2002, total investments in various types of ETFs have grown about 25% per year, from just $142 billion to about $10,000 billion.
Investing in an ETF began in 1993, making investing accessible to ordinary people, rather than a plaything for the big boys, such as mutual funds.
Spot Bitcoin ETF
It's highly likely that Bitcoin ETFs will proliferate rapidly. The crypto market may not seem very popular yet, but Bitcoin is so well known that few investors know virtually nothing about it.
In recent years, the price of Bitcoin has become significantly less volatile than in the past. It seems that the crypto market has matured a bit and the volatility curve is flattening. Cryptocurrency has been around for 16 years now and is past its infancy as far as we are concerned.
It had been the case for some time that you could invest in a Bitcoin ETF in the EU, although it wasn't really very well known yet. So the news is mainly that now you can also invest in such a fund in the US. And there are huge investment funds there like Grayscale, BlackRock and the like. Those have thousands of billions of funds under their belt. That's different cake.
So are these funds simply going to buy up all Bitcoins through a spot ETF because they are large enough? That depends. Did the SEC give them permission to do it that way or just an ETF with Bitcoin as the underlying? In the latter case, you can compare it to an investment in the price of oil. Hardly anyone ever wants to buy some of that nasty junk, but you can invest in the underlying asset and speculate on a rise in value.
Now you will wonder why people don't just buy Bitcoin on an exchange and keep it in a hardware wallet. Doch this is a question that cryptocurrency traders ask because they are familiar with it themselves. For someone who just wants to put some money into Bitcoin without doing all that tricky stuff, it is much nicer if someone else, a broker or a bank, does the "dirty work" and makes sure you can invest in Bitcoin without ever touching one.
Another aspect of cryptocurrency is the evil light in which exchanges are placed since the fall of some corrupt ones, such as FTX. There are plenty of people who really don't want to keep their hard-earned money in such a place or in a hardware wallet they know nothing about. Surely then such an ETF is much easier and a great solution to get everyone involved.
With a Bitcoin ETF in the U.S., things can actually go mainly two ways. On the one hand, lots of money can flow into the crypto market and there can be a temporary uptick. Prices may surge temporarily, but trading may slow down afterward because these large funds will have acquired a significant portion of all available Bitcoins. It could be that these funds then do an occasional big dump to bring the price down, then buy everything back cheaper. This scenario could become a reality if it is allowed to buy Bitcoins as collateral for an ETF by very wealthy funds.
On the other hand, if an ETF doesn't directly invest in Bitcoin but instead sells the underlying asset as an investment product. So in that case you buy an ETF, making a profit if Bitcoin has gone up in price and a loss if it's the other way around. In this case, the market will not change at all, because no additional money is flowing into the crypto market.
The last possibility seems the most obvious to me, because otherwise Grayscale, BlackRock and other mega-corporations are going to have too much influence over Bitcoin trading. BlackRock has more than $10,000 billion under management. With its total market cap of less than 1 billion for Bitcoin, BlackRock could single-handedly buy up all the Bitcoins and set the price pretty much at will. That doesn't really seem like the way to go for the still young crypto market. You can read more about this on our story on BlackRock Bitcoin ETF .
So it is very difficult to say what the SEC's approval actually means for Bitcoin and cryptocurrency.
Bitcoin exchange rate
So the Bitcoin price can actually go either way. A rise is in line with prediction; however, the question is whether it can be sustained. If too many Bitcoins fall into the hands of too few investors, this could have very nasty consequences for the crypto market and the price of Bitcoin. In fact, these providers would hold the key to the price of Bitcoin.
The Bitcoin halving is just around the corner. That may be why it is so hard to get it open. The Bitcoin halving is an economic event we've already told you about in our Academy.
Normally the price of Bitcoin goes up some time after the halving and a big boom in the market capitalization of all coins follows. But what if BlackRock and other providers have too much influence over the price? Will this economic principle then come to an end?
In that case, miners may quit. It will no longer be profitable. This would be a downfall for the crypto world, but then miners would emerge who could still mine profitably with much cheaper hardware, and cryptographic puzzles should become much simpler.
Will there be more ETFs in 2024?
When one sheep crosses the dam more will follow. The important thing for investors is that a coin is established and cannot collapse completely tomorrow, like Terra. Therefore, there won't be an ETF for every cryptocurrency.
So which coins can you expect to find an ETF in? I then take a quick look at CoinGecko's top 10 and quickly see a few good candidates listed:
Ethereum is the best candidate because it has always ranked second so far and is hugely reliable. It is a cryptocurrency with the best team and unparalleled technology as far as I am concerned. Moreover, they never sit still at Ethereum and are constantly improving their network. Logically, a number of companies are already preparing an Ethereum ETF (read: getting approval from the SEC).
XRP also ranks stiffly in CoinGecko's top ten. With their strong link to the financial world, it is a good rock to build on. Although it would be good for XRP if the SEC stopped bringing lawsuits against them for once, this is one issue that could make an ETF in XRP a bit hesitant to start.
Cardano is next on the list of fixed top ten clients. This cryptocurrency has risen considerably in price without falling back to its pennycoin status. There is a good chance that this coin will gain increasing star status and can settle into the top five.
When a new crypto ETF comes along it will usually be coins that are well known. Ask a random passerby which coins he all knows and he will say Bitcoin without a glance, after a little pause for thought Ethereum and with a little luck he happens to know 1 more. Sometimes XRP, sometimes Litecoin or maybe Terra.
Investors generally invest in things they know something about. So as far as I am concerned Bitcoin and Ethereum are the most suitable coins to start an ETF in. If anyone knows any other coins they will probably also be able to purchase a hardware wallet and put coins on it or simply deposit their crypto coins with a reliable broker or exchange.
So our prediction is that there will also be Ethereum ETFs, allowing ordinary investors to invest in both Bitcoin and Ethereum starting in 2024 without ever having bought such a coin.
The exact impact this will have on the cryptocurrency market is challenging to predict because it depends on numerous factors, which is why I won't attempt to do so.