Dubai: A day after the price of the world’s largest crypto Bitcoin abruptly spiked to a 22-month high on an unauthorised post on the US markets regulator's X account (formerly Twitter) said it had approved a new so-called exchange-traded funds (ETFs) in the cryptocurrency, the erroneous post turned out to be true.
The US regulator, who quickly deleted the post and said its account was "compromised", made an announcement approving the new ETFs on Thursday. After Bitcoin’s market value rose by $60 billion (Dh220) in a matter of minutes, to a single token price of $48,000 (Dh176,294), on the fake post, volatility stalled on Thursday.
“Investors were hotly anticipating the potential approval of Bitcoin ETFs and the new approval marks a key milestone for the cryptocurrency market in the investment avenue gaining acceptance to mainstream financial markets,” said Brian Deshell, a UAE-based cryptocurrency trader and analyst.
“The high price of a single Bitcoin has often made the crypto investment beyond the reach of most investors worldwide. This is why there has been a lot of interest in finding alternative ways to invest in Bitcoin and reduce the risks that come with directly buying the top cryptocurrency.”
The high price of a single Bitcoin has often made the crypto investment beyond the reach of most investors worldwide. This is why there has been a lot of interest in finding alternative ways to invest in Bitcoin
Are Bitcoin ETFs better alternatives to buying Bitcoin?
Bitcoin exchange-traded fund (ETF) is one such alternative. With it, investors can get exposure to cryptocurrencies without having to go through the trouble of setting up a wallet or dealing with erratic exchanges, and they are not without risks, flag industry experts. But what are they in the first place?
ETFs are portfolios that allow investors to bet on multiple assets, without having to buy any themselves. Traded on stock exchanges like shares, their value depends on how the overall portfolio performs in real time. So ETF portfolios that contain Bitcoin holdings are referred to as Bitcoin ETFs.
“By buying shares of a Bitcoin ETF, you can gain exposure to the price movements of Bitcoin, but investors looking to utilise ETFs to access cryptocurrencies are not necessarily getting what wanted,” added Deshell.
“Investors should be convinced that by investing in a regulated product like a Bitcoin ETF, their money will be safe. However, it’s not proven to be effective as means to exponentially grow your money in the crypto market. Moreover, there has hardly been any progress in approvals until now.”
Bitcoin ETF to be a safer investment? Not always
“Why investors are not convinced with Bitcoin ETFs as an investment is because they are not able to profit as much as those who buy Bitcoin directly. Bitcoin ETFs do not currently own Bitcoin itself as regulators are concerned that Bitcoin is traded on non-regulated crypto exchanges,” added Deshell.
“Instead, Bitcoin ETFs own companies and other ETFs that are related to Bitcoin or cryptocurrency in general. There is also the added risk of ETFs trading on the market, which adds to their volatility. In that case, mutual funds fare better as they are not traded directly on a stock exchange.”
"What makes Bitcoin ETF comparatively safer is that the fund isn’t a direct investment in the cryptocurrency, but it still holds the risk of volatility risks as it tracks the price of Bitcoin," opined Brody Dunn, an investment manager at a UAE-based asset advisory firm, who went on to explain why.
“Those that may have been waiting to invest in Bitcoin ETFs and thought that this was the thing that’s going to make it incredibly safe for them, without really doing the due diligence, that’s where the concern is,” cautioned Dunn.
Why big investors may profit more from Bitcoin ETFs
Though Dunn notes that the introduction of a Bitcoin ETF is good for the overall Bitcoin and crypto market, he warns that it may not benefit investors individually.
“An ETF is going to drive more of that institutional money in, but they’re going to make a ton of money,” he added. “It does help the market, but what about the average investor? It’s supposed to help them, but that’s not necessarily what is happening here.”
Crypto experts like Deshell, along with some others in the crypto community, agree with Dunn. Some argue that the major firms involved in a potential ETF investment, including hedge funds and providers, would benefit more than individual investors.
“Direct exposure is the best way for a new investor to get into Bitcoin,” Dunn added. “Bitcoin ETF is just a product to help hedge funds and other middlemen make more money, and newbie investors shouldn’t be buying without understanding.”
Those that may have been waiting to invest in Bitcoin ETFs and thought that this was the thing that’s going to make it incredibly safe for them, without really doing the due diligence, that’s where the concern is
Bottom line: Good to buy Bitcoin ETFs after they are launched?
“If you don't want to actively manage your crypto investment, but you want a way to diversify your portfolio with a high-risk, high-reward asset, a Bitcoin ETF is a better option than directly buying Bitcoin,” said Deshell.
Among the several benefits of Bitcoin ETFs, the key perks are low cost of ownership, being able to diversify your crypto investments, while having somebody with knowledge of the market to manage them, which also enables you to save time picking crypto tokens.
“Also, owning crypto ETFs saves investors from costs like network charges and transaction fees. An ETF provider is responsible for the safety of the fund, offering a sense of security to investors. These are factors that should drive you to invest. But it isn’t always that straight-forward,” he said.
“Bitcoin ETFs are now observed to amplify volatility in prices and create risks for investors if the fund is a large share of the market. Recent trends suggest that ETFs can exacerbate price movements and create additional volatility when they have a large footprint in the underlying asset.”
Regardless, whether you invest in the Bitcoin ETF or in cryptocurrency directly, financial experts have widely recommended that you only invest what you can afford to lose.