Last month was a turning point for cryptocurrency — it was finally accepted as a legitimate asset class, like shares, cash or property.
On 19 October, the Securities and Exchange Commission (SEC) in the USA gave the green light for the very first Bitcoin-based ETF to trade. It’s the first time that a crypto-based instrument will be traded on a traditional stock exchange — in this case, the New York Stock Exchange.
What the ETF?
ETF stands for “exchange-traded fund”. In simple terms, it’s a fund that tracks investments, like stocks, bonds, commodities and others. This new Bitcoin ETF tracks the value of the digital currency. What this means in practice is that if you invest in the ETF, you are exposed to Bitcoin without having to buy actual Bitcoin, but your investment will still grow according to the value of the currency.
The new ETF is offered by ProShares and it’s actively managed, which means it’s a fund that’s striving for superior returns. Superior to what? Well, a passive investment fund simply tracks an index, whereas an active fund tries to beat or match the benchmark. This is done through some pretty complex financial structures like Bitcoin futures. (Read more here if you feel like bending your brain.)
What does this mean for you?
With the approval of this ETF — and others in the pipeline — cryptocurrencies like Bitcoin can be incorporated into traditional investment portfolios. It also allows crypto investors to gain exposure to the currency without the hassles of owning and trading it themselves. Lastly, and maybe most importantly, it gives individuals the opportunity to benefit from the growth of Bitcoin in a more regulated setting.
The ETF makes it clear, however, that Bitcoin and Bitcoin futures are relatively new investments and are subject to risks such as price volatility. The value of an investment could therefore decline significantly.
A big step for crypto
Despite the risks involved (surely not news to anyone who has followed the rise of cryptocurrency), being able to interact with Bitcoin in a more regulated investment space is a refreshing development. It will be interesting to see which new crypto ETFs are approved and how they will influence the crypto market in general. Will the new ETF soar, or will it go down in flames? Only time will tell.
Want to find out more? Here’s the ProShares Bitcoin Strategy ETF fact sheet and summary prospectus.