What is this bitcoin ETF?
Exchange-traded funds (STFs) are funds that can be bought and sold on exchanges, like an investor would trade stocks. These funds–which track an asset class such as gold–let an investor benefit from the price movements in that asset class without physically owning the asset. The Proshares Bitcoin Strategy ETF tracks bitcoin’s futures traded on Chicago Mercantile Exchange.
Why futures and not the spot market?
This is probably the fastest way to the market, according to Nischal Shetty, founder and CEO of WazirX, a leading cryptocurrency exchange in India. “With the spot market you also have to concern yourself with custody and holding the bitcoin, that is a completely different game altogether involving security and a custodian… quite a few challenges,” said Shetty. He added that there is talk of allowing a spot market.
Why is the listing significant?
More importantly, it is another big step in mainstreaming the cryptocurrency. “Crypto usually sees few investors from the traditional markets. The ETF can now reach investors who are more comfortable with traditional financial investments. It exposes bitcoin to a new demographic,” said Shetty. “Second, it gives bitcoin more visibility among regulators and the media. Third, the listing will get traditional investment houses to take some exposure in cryptocurrency.”
Swapnil Pawar, a financial planner and founder of ASQI, which runs a technology platform for investors, said, “Crypto is an interesting asset class but trading in it is restricted to a few crypto enthusiasts. The listing of the ETF is a good way to mainstream it. It also means the trade being better regulated through the ETF structure.” Sharan Nair, chief business officer at CoinSwitch Kuber, a crypto exchange that recently turned a unicorn, echoed similar sentiments. “Traders can now participate in bitcoin with ease and ETFs are filed under MF rules, which give investors protection as well,” he said.
How does it change the lives of Indian investors?
Indians have one of the largest bitcoin stashes in the world. Therefore, demand going up for the currency in any part of the world–such as through trade on the NYSE exchange or a country like El Salvador accepting it as a legal tender–is good news. “It might also influence traditional fund houses in India to explore if we can have something like this, a futures contract on bitcoin,” said Shetty.
The ETF avatar also lets Indian investors participate in the US crypto market, through the liberalised remittance scheme (LRS). The scheme allows Indian investors to participate in the US stock markets but it does not allow investments in cryptocurrency. “In the LRS forms, banks ask investors to declare that the money will not be used to invest in crypto currencies,” said Pawar, adding, “Now investors can invest in the ETF based on the cryptocurrency futures, since there is no ban on ETFs.”
With the regulatory environment uncertain in India, financial advisor Rishabh Parakh will continue to tell his senior citizen clientele not to invest in cryptocurrency. “Investing in it depends on your risk profile. If you are young and have no dependents, then you can invest up to 5% of your wealth in bitcoin. Otherwise, if you are in your forties with dependents and other financial obligations like EMI, I would say keep it to 3 to 4%,” said the founder of NRP Capitals.
What to keep in mind before investing?
An investor should not buy into it thinking they will become billionaires overnight, for one. “Bitcoin will deliver good returns, maybe even better than equity, but it will not give returns like you have seen in the last decade,” said Pawar.
Also, better governance does not mean lesser volatility, he said. “There is no change in the risk parameters.”
Nair adds, “These funds will not be holding actual bitcoins, hence, if there is a hard fork or staking in the future, Bitcoin ETF participants would not be able to participate in the ecosystem activities.”Internet Explorer Channel Network