Exchange-traded funds (ETFs) have become popular recently as many companies seek approval to trade, sparking a wave of enthusiasm and anticipation throughout the cryptocurrency community.
As financial instruments that track cryptocurrency prices, these ETFs provide a new and seemingly more accessible way for investors to enter the cryptocurrency market. However, amid the euphoria and bullish expectations, it is important to take a closer look at the potential dark side of this development.
This article aims to highlight the hidden risks and challenges that cryptocurrency ETFs present to both individual investors and the broader cryptocurrency market.
Centralization of crypto assets
Cryptocurrency exchanges come in different forms, with centralized exchanges, represented by platforms like FTX, being the most prevalent. Centralized exchanges maintain control over their customers’ private keys and typically enforce a Know Your Customer (KYC) process to deter illegal activities.
In contrast, decentralized cryptocurrency exchanges operate on a decentralized, non-custodial blockchain system, facilitating direct peer-to-peer transactions. This eliminates the need for intermediaries, allowing users to bypass the KYC process. It is particularly important for individuals living under repressive governments, as it gives them the opportunity to participate. Users also retain full control of their private keys and are solely responsible for securing their funds, which can be staked to generate interest.
The primary purpose of the cryptocurrency industry is to provide these benefits, especially to unbanked individuals who lack access to traditional banking services. Conversely, ETFs are inherently centralized products, going against the decentralized essence of Bitcoin and other cryptocurrencies. It does not include the basic benefits of cryptocurrencies, and does not encourage new users to get involved in this field.
Furthermore, ETFs introduce the concept of “fiat” Bitcoin, which represents Bitcoin on a theoretical level only. Without the ability to withdraw allegedly owned Bitcoin, crises similar to those experienced by FTX become more likely in the future. This poses a threat to the fundamental principles of decentralization and trustless transactions that underpin Bitcoin.
The regulatory landscape surrounding cryptocurrency ETFs presents a wide range of challenges and risks. The approval process for these financial products is complex, creating an atmosphere of uncertainty for investors. Government agencies such as the US Securities and Exchange Commission (SEC) have been cautious in approving ETFs tied to bitcoin and other cryptocurrencies. Their hesitation stems from concerns about potential fraud and manipulation within the underlying market.
Todd Rosenbluth, head of research at VettaFi, noted that the previously expected government shutdown may further complicate matters for ETF applications seeking approval. He noted that with the SEC likely unable to review new ETFs, there may be room to move forward with launches.
The Securities and Exchange Commission has Delayed Its decision to approve applications for spot bitcoin ETFs until mid-October, Reuters highlights. Todd Son, ETF and technical strategist at Strategas Securities, noted that this delay only extends to the ongoing deliberations surrounding Bitcoin exchange-traded funds. He noted that investors and exporters may already be running out of patience with this process, so the closure adds to the frustration. Analysts also warned that listed funds may face increased volatility.
However, with a lockdown avoided for now, one crypto enthusiast, Mike Dudas, said, books On X he is looking forward to 6 Bitcoin ETF decisions by the SEC because they have no reason to postpone the decision any longer.
Previous post on X by Eric Balchunas, Bloomberg ETF Analyst, male Valkyrie recently reported that it would refrain from buying Ethereum futures until they are operational. In addition, they decided to sell the Ether futures contracts they had previously acquired, perhaps in an attempt to speed up the process. The move may be in response to pressure or warnings from the Securities and Exchange Commission.
Hector McNeil, co-CEO and founder of HANetf, emphasized that ETFs essentially act as pass-through vehicles. Therefore, any impact on the underlying markets will naturally have ramifications for the ETFs themselves.
Profit potential is limited
The high price of a single Bitcoin often makes it a difficult investment for many individuals around the world. This has led to a growing interest in finding alternative ways to invest in Bitcoin and mitigate the risks associated with purchasing the cryptocurrency directly.
One such alternative is the Bitcoin ETF, which allows investors to gain exposure to cryptocurrencies without having to build a portfolio or deal with volatile exchanges. However, industry experts warn that Bitcoin ETFs are not without risks, Gulf News highlights.
Brian Dishel, a UAE-based cryptocurrency trader and analyst, highlighted that while purchasing Bitcoin ETF shares provides exposure to Bitcoin price movements, it may not necessarily satisfy all the desires of investors looking to access cryptocurrencies. He stressed that investors should be confident that their money will be safe in a regulated product like a Bitcoin ETF. However, it has not proven to be an effective way to significantly grow one’s wealth in the cryptocurrency market, and progress on regulatory approvals has been limited.
Brody Dunn, investment director at a UAE-based asset advisory firm, noted that although the Bitcoin ETF is not a direct investment in the cryptocurrency, it still carries risks due to its exposure to Bitcoin. He warned that individuals who assume that investing in Bitcoin ETFs will make it incredibly safe for them without conducting proper due diligence may face concerns.
Dunn acknowledged that the introduction of a Bitcoin ETF is a positive thing for the Bitcoin market and cryptocurrencies in general. However, it has raised concerns that it may not necessarily benefit retail investors as much as institutional players. While ETFs may attract more institutional money to the market, the average investor may not enjoy the same level of interest as intended.
More SEC Delay on Cryptocurrency ETFs
Although U.S. Representatives Mike Flood, Willie Nickel, Tom Emmer, and Ritchie Torres have urged the Securities and Exchange Commission (SEC) to immediately greenlight the listing of Bitcoin (BTC) exchange-traded funds (ETFs), it has The agency stated the following: Once again, it postponed its decision.
The Securities and Exchange Commission has extended decision deadlines for VanEck and ARK 21Shares Ethereum ETFs to December 25 and January 10, respectively. GlobalX will have to wait until November 21 for the committee’s decision on its application. Additionally, the SEC has postponed decision dates on spot bitcoin ETF applications from Invesco, Bitwise, and Valkyrie to mid-January.
These latest delays occurred two weeks before the expected second deadline for many applicants, who had initially expected to receive feedback from the securities regulator between October 16 and 19. The timing of the delay may be related to the narrowly avoided US government shutdown, which could have crippled several federal agencies, including financial regulators.
In response to the Bitcoin ETF’s delay, Bitwise Asset Management has filed an amended application, addressing the SEC’s concerns about the product. In this revised application, Bitwise addressed what the SEC called a “‘mixed’ or ‘inconclusive’ academic record” on the relationship between bitcoin futures and spot markets.
Meanwhile, several Ethereum futures exchange-traded funds (ETFs) have begun trading in the US. On Monday morning, investment firms, including ProShares, VanEck, Bitwise, Valkyrie, Kelly and Volshares, collectively floated nine ETFs on the Chicago Board Options Exchange (CBOE). This is the first time that Ethereum-related ETFs will be traded in the US market.
ProShares introduced three funds in this launch: the Ether Strategy Fund (EETH), the Bitcoin and Ether Strategy ETF (BETH), and the Bitcoin and Ether Equal Strategy ETF (BETE). These funds offer investors different strategies for exposure to both Bitcoin and Ether.
While navigating the promising yet challenging terrain of cryptocurrency ETFs, it is essential to recognize the risks and challenges that lie beneath the surface. The centralization of crypto assets within these funds poses a threat to the spirit of decentralization that underpins cryptocurrencies. Regulatory uncertainties and potential delays exacerbate the complexities surrounding this innovative financial instrument. Furthermore, the limited profit potential due to fund structures and associated fees may not meet some investors’ expectations.
Potential investors need to approach cryptocurrency ETFs with a keen eye. A thorough understanding of the risks described in this article is critical in making informed decisions. Regulatory bodies need to prioritize transparency and provide clear guidelines for establishing and managing these funds. Likewise, investors should conduct extensive research, seeking diverse viewpoints and expert opinions. Before allocating capital to cryptocurrency ETFs, it is necessary to weigh the potential benefits against the inherent risks.
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