Over the past year or so, there has been an increased focus on Bitcoin ETFs. The primary purpose of these trading instruments is to make cryptocurrency more accessible for traders. So far, these offerings have seen some moderate success. But are ETFs the next wave of disruption to hit financial markets around the globe?
To put things into perspective, the traditional ETF market is worth US$3tn. That is quite a significant amount during these times of financial uncertainty. ETFs are quickly becoming a mainstream trend for investors to diversify their existing portfolio. At the same time, they also create more risks for investors.
Granted, it has become a lot more difficult to make a profit as an investor these days. Funding startups or buying on the stock market are still popular. But ETFs are slowly making their way up the ranks, despite the risk factor. These tax-efficient investment vehicles are an efficient way to make investors feel “smart”. To be more precise, these investment vehicles often cut out the middle man, or in this case, the financial professional.
Don’t Get Involved In ETFs Without Doing Research
Despite this exhilarating feeling investors may get, there are plenty of ETF risks to take into account. There are still costs associated with these investment vehicles, including taxes, closing procedures, and a behavioral cost. This latter part is often overlooked, as mainstream ETF traction will lead to overtrading costs.
But the biggest risk of all remains liquidity. A fair few traditional ETFs target illiquid markets specifically, which could be cause for concern for investors. Companies dealing with these Bitcoin-based investment vehicles may suffer from a similar fate. Although there is plenty of Bitcoin trading volume every day, it is dwarfed by traditional investment options.
Additionally, most of the Bitcoin ETFs are valuing BTC way higher than the market does. A premium of 5-15% is not uncommon, albeit it is doubtful most people will pay that price to get into an ETF. There is a lot more to these investment vehicles than just being licensed to create them.
One final aspect to keep in mind is how these shares are created and redeemed. Buying into an ETF is the easy part, but getting money out is very tricky. At the same time, if the market is illiquid, getting out of the ETF will become practically impossible. Liquidity problems go far beyond the number of available shares, as there needs to be a growing interest in the product as well.
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