Once again, the price of bitcoin is on the rise. Just a year ago, the value of the cryptocurrency was worth less than $12,000. Having reached a US$60,000 milestone, it has surpassed the US$63,255 record it reached in April before its price fell as low as US$30,000 around July. As of November, it is edging towards $67, 000 back from its July milestone.
The recent rally in Bitcoin’s value is largely dependent on the speculation that the US SEC will approve an exchange-traded fund ETF, based on the futures of Bitcoin. So what exactly is an ETF and why does it affect Bitcoin’s value?
What is an Exchange Traded Fund or ETF?
An exchange-traded fund is an investment fund consisting of assets that are exchanged on the stock exchange market. Individual investors are attracted to ETFs because they provide protection, diversification and liquidity.
Consider, for example, investing $100,000 in commercial property. A building such as a shopping centre or office building would cost too much money for an individual to purchase and even if an individual could, buying only one building can be a bad investment idea.
Fund managers with ETFs can play a role here. In a variety of locations, the manager purchases some shopping centres and office buildings. Let’s say these assets are valued at $100 million. Each of these units is worth $100,000, with 1,000 units combined into a fund.
It is similar to investing in a company. Investing in a diversified portfolio reduces the risk of being exposed to a single asset investment. As a result, you benefit from a diversified portfolio. Your unit’s value rises if the worth of the portfolio rises. Due to the fund’s units being traded on an exchange, it’s easy to sell your assets if you want your money.
Similarly, ETFs are regulated. As a result, you are protected against some of the risks associated with the direct purchase of assets. Away from this, there is a great need for trading crypto with the right tools at a top platform, including Bitcoin Revolution platform.
How are Exchange Traded Funds managed?
Lots of ETFs manage securities such as stocks, bonds or derivatives instead of physical assets Investing in these types of funds can be active or passive. The most common passively managed funds include a combination of assets that tracks a segment of and the whole market.
For instance, an index fund manages shares in relation to its weight. So, if a company makes up a percentage of the index’s value, it will be allocated that same percentage of the fund.
An Actively managed fund, on the other hand, holds a greater number of shares whose price the manager expects to strongly rise, with fewer or no shares expected to decline. Whether these funds outperform passive funds is based on if the manager’s thoughts prove more fruitful than the market.
How does Bitcoin fit into this context?
ETFs based on Bitcoin is perceived as something that will encourage users to gamble on cryptocurrencies. Directly purchasing other cryptocurrencies or Bitcoin can be risky. The moment you lose your key, you’ve lost everything. The bank manager in your area cannot retrieve the password or help you make up for your loss.
Consequently, putting cryptocurrencies into products overseen by regulators or traditional fund managers can be considered beneficial, bringing respect to cryptocurrency trading. As long as you don’t care about being at odds with the distributed decentralised ideals behind cryptocurrencies that led technologists to create them.
However, even though investing in crypto using ETF comes with different safeguards, it does not include a reduced market risk. Bitcoin futures ETF is not even indirectly holding a pool of bitcoins. This is a mix of contracts about how the future price of the cryptocurrency will change.
ConclusionYou’d be right if you thought this was similar to the derivative known as a collateralized debt obligation that caused the Global Financial Crisis in 2008. The increasing complexity of financial instruments increases the danger involved with this type of investment.