Why is a Crypto ETF a bad investment?

May 25, 2021 | Liam evans

  • Investing in cryptocurrency ETFs is like investing in other ETFs.
  • An ETF management company manages the funds and invests them in crypto.
  • The SEC does not yet approve trading of Crypto ETFs in the United States.
  • Investing in crypto ETFs is risky due to issues like liquidity, non-regulation, and pure fiat speculation.

A cryptocurrency is a virtual currency protected by encryption, which makes counterfeiting and double spending virtually impossible. Many cryptocurrencies focus 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, which makes them technically resistant to political intervention or coercion.

A lot of people are becoming, shall we say, addicted to the idea that cryptocurrencies will be the money of the future. We may not be using Bitcoins to pay for our groceries right now, but it’s actually somehow. something to look forward to.

On the one hand, let’s talk about crypto ETF, which is different from cryptocurrencies. We are going to talk 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) works the same way as the other ETF.

A cryptocurrency ETF will track one or more digital coins, while most ETFs monitor an index or a pool of properties. Digital token ETFs, like all ETFs, will trade on an exchange like a common stock, with the market fluctuating over the course of the day as buyers buy and sell.

How it works?

The management company of a cryptocurrency ETF must own the underlying properties that it monitors in order to function properly. To put it another way, the ETF will need to own a proportional amount of digital tokens. Possession of these coins would be interpreted as securities and ETF participants would implicitly hold these tokens by purchasing these shares. ETF investors will then have access to the upside potential of the underlying assets.

Crypto ETF right now

The Securities and Exchange Commission (SEC) said cryptocurrency ETFs would not be permitted unless the markets showed a level of stability and protection. Despite the SEC’s stance, various 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 the successful Gemini digital currency exchange, Cameron and Tyler Winklevoss, continued to seek SEC approval of an unsuccessful bitcoin ETF.

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 about the GBTC, but they are not only cryptocurrency-based.

What makes crypto ETFs bad?

ETFs can make investing easier, but they have little effect on the fundamentals of the assets they carry.

You don’t own any crypto

Let’s just say that Crypto ETFs are funds invested in crypto. While cryptocurrencies are good investments based on their performance and growing investor interest, many are inclined to invest in them.

What makes crypto ETFs bad is the fact that when you invest in them, you don’t own the crypto they are buying. What you own are ETFs, not cryptocurrencies. So in case you want to use your investment, you must first close your positions before you can use the money, unlike when you actually invest in cryptocurrencies where you can use your coins to transact. .

SEC does not approve crypto ETFs

Since teaching crypto and blockchain courses at the Massachusetts Institute of Technology, some believe Gary Gensler, the current chairman of the SEC, would be more receptive to the possibility of a bitcoin ETF. However, he has more serious concerns including the rise of special purpose buyout companies and whether trading apps like Robinhood allow investors to take excessive risk. Thus, the approval of a bitcoin ETF will be a watershed moment.

Pure fiat speculation

However, when you sign a contract to sell or buy bitcoin in an ETF, you have no way of knowing if you are dealing with real coins or just paper. If these conventional financial firms were arrogant, they could issue certificates for sums that are effectively over $ 21 million (which is the liquidity limit of Bitcoins).

There really is no way to prove the presence of these cryptocurrencies, and since the exchange is paid in fiat currency and resolved in fiat currency, the parties involved don’t seem to care. This is not HODLing, it is not loans, it is not a hedge against conventional financing. We are dealing with pure fiat conjecture here.

The problem is, this fiat bet on ETFs risks destroying the proposed valuation of Bitcoin or other cryptos. The market would be filled with choices for purchasing coins that are not supported by proof of work, cannot be verified, but are convenient If these ETFs are used in market aggregation, the result could be disastrous.


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