Can someone offer a non-securities person a description of what an ETF is? What is the impact on Bitcoin?
An Exchange Traded Fund or ETA was originally a way to buy an index or basket of funds.
Say you wanted to buy Standard and Poor's top 500 stocks. As an individual investor, you'd would need a lot of money and would pay a lot of fees to buy up all 500. Then if some stocks were added and others were removed from the index, you would have to pay to get in and out of those.
Enter the ETF ticker symbol SPY. If you buy it, you own a single stock that reflects the composite value of the Standard and Poor's top 500.
ETFs are generally cheaper than mutual funds.
Common ETFs:
DIA is the Dow Jones index, it is only the biggest/"safest" blue chips.
RUT is the Russel 2000 which is a larger number of smaller than SPY stocks.
There are now ETFs for everything. GLD for gold, SLV for silver. I'm pretty sure if you wanted to buy cows via ETFs you could do it.
ETF Negatives:
There is a lot of debate on the precious metals ETFs because there is a LOT more paper being traded than known world supply of Gold or Silver. If everyone called it in, there would be a lot of unhappy people holding paper instead of metal.
My opinion on a bitcoin ETF:
Bitcoin is bitcoin. Unless you want to say that you are starting an ETF that represents a diverse amount of exchanges and in so doing lowers spread risk, then there is really no technical reason for this ETF being founded.
However, if you think that the less technically savvy stock traders in the world might not be able to buy bitcoin because they do not know how but do know how to trade stocks, then you could act as an easier means to the value store they wish to hold.
This is likely what they are up to, and I think it'll work for a while.
I would like to buy bitcoin with my 401(k). I can't do that right now, but if my investment bank had access to a bitcoin ETF...
This actually isn't true. All the physical ETFs claiming to be holding physical gold do actually hold gold for each individual share (in fact thats the only way shares can be created!). It can get confusing because people short it which can make it seem like there are more shares outstanding than there really are. But there is actual physical gold for every true outstanding share of the ETF.
Otherwise, great summary.
There is _tremendous_ non-market risk in ALL of buying, holding, and selling bitcoin right now.
We're talking about the kind of risk that makes price speculating in a one-of-a-kind virtual internet cryptocurrency look like t-bills by comparison. It vastly outweighs the volatility inherent in the asset.
Your money can be seized by feds on the way to the exchange. The exchange could shut down or get DDoSed. The coins could get stolen out of the exchange before you pull them out.
Ok, dodged all that. Now you've got bitcoins. Your computer could get compromised, rendering your encrypted USB keyfiles or QR printouts unhelpful. Your keys could end up on the security footage of the bank's safety deposit vault camera. Your computer could get backdoored in the months of holding, waiting for the day you load your keys back in to send the coins back to the exchange.
Selling time. You manage to keep your keys private and sign a transaction, sending your bitcoins to the exchange. Maybe they get hacked, maybe they shut down, maybe they don't presently have a partner bank in the US to send transfers out...
There is growing demand for secure and convenient access to the bitcoin market's growth. Right now it's terrible and insecure and fragmented and illiquid and risky, and that's not changing anytime soon - but it will, eventually. It must.
I don't think this ETF is that, though.
A normal, unleveraged, passive ETF represents an underlying investment or basket of investments, like gold or the S&P 500, or in this case, Bitcoin.
At any point, people can go to the sponsor and exchange the underlying for the ETF. So if the price gets out of whack with the underlying, people step in and buy one and sell the other, to bring prices back in line.
So it has a lot of the benefits of publicly traded stock, easy/cheap to trade, put in your brokerage account etc.
It does add a layer of fees (not specified yet as far as I see in prospectus on p. 40). You can just buy Bitcoin yourself, you avoid the fees, but investment advisors, retirees, may find it worth the usually small fee (like 0.1% for the SPY, probably not quite that low for this ETF).
ETFs, used properly, are great - liquidity, tax efficiency, ultra low cost.
However, as Gandhi said, "The greater the institution, the greater the chances of abuse."
The problem here is, if the underlying Bitcoins are illiquid, in a volatile market, the price of the ETF can diverge a lot from the price of the underlying.
Basically, unless you know what you're doing
- Stick with big sponsors, like Vanguard, iShares, State Street (SPDRs)
- Index ETFs only (not actively managed)
- No leveraged ETFs
- Liquid underlying securities, actively traded ETFs (e.g., probably doesn't apply to this ETF)
The thing is, they can be traded like stocks and their value depends on the total value of all the stuff they're holding.
If you invest in ETF it's generally safer since your investment doesn't depend on one stock (putting eggs in one basket) but you're still affected by the market.