What are bitcoin ETFs and why are they controversial?

A month ago, the US Securities and Exchange Commission (SEC) postponed its decision on the bitcoin ETF, and in a few days it will again decide the fate of derivatives. In this article, we will briefly explain what an ETF is, what types of bitcoin ETFs there are, what the problem with granting permission for a bitcoin ETF is, and which bitcoin ETFs are most likely to be allowed first.

What is an ETF?

Recently, many have been talking about the creation of a bitcoin ETF. An ETF (exchange traded fund) is a security that backs some underlying asset. These assets can be stocks, bonds, commodities or cryptocurrency. The custodian (bank or other financial institution) is responsible for safeguarding the fund's assets. Shares are then issued that provide ownership of those assets.

What are the different types of Bitcoin ETFs?

There are two main types of Bitcoin ETFs:

-ETFs, which represent “physical” BTC coins, such as VanEck/SolidX (backed by the Chicago Board Options Exchange).

-ETFs, which represent Bitcoin derivatives. These ETFs do not own actual coins, but sell bitcoin futures, options, swaps, money market instruments and other investment vehicles. Two examples of bitcoin derivatives ETFs are Direxion ETF and Proshares ETF.

In early August, the SEC was supposed to decide whether to authorize the VanEck/SolidX Bitcoin-ETF, but postponed its decision, and a few days later the Commission the fate of Proshares Bitcoin-ETFwill have to be decided. However, unlike VanEck/SolidX, the SEC cannot delay this decision.

What is the problem with granting approval for bitcoin ETFs?

ETFs are exchange-traded, meaning that they are traded in a similar manner to the public. The regulatory requirements for the approval of ETFs are very strict since their listing on an exchange allows anyone to invest in them. When the SEC evaluates a proposed ETF, it considers how to minimize conflicts of interest, tracking errors, manipulation, and how to provide reasonable and appropriate risk disclosure.

1. The main risk is the loss of assets placed in custodial custody.

 The custodian of the ETF may go bankrupt and no longer support the ETF. In the case of coins, this is a special problem. Bitcoin is primarily traded on unregulated international exchanges that are at risk of being hacked or going out of business. In addition, bitcoin is subject to strong volatility.

2. Opaque data sources.

Reducing custodial risks is still easier than the risks of errors when tracking the value of Bitcoin. This problem applies primarily to bitcoin derivatives ETFs... Compared to regulated capital, cryptocurrency markets are less transparent and more costly. Additionally, small price changes can have a huge impact on the value of an ETF due to leveraged trading. As a result, investors should have a lot of confidence in a bitcoin derivatives ETF manager that monitors Bitcoin's performance.

Conclusion

Progress has been made this year regarding cryptocurrency asset custody solutions. The BTC in the VanEck&SolidXs proposal is now insured, which may improve their chances of receiving approval in the future. ETFs based on physical bitcoins are easier to track, and ETFs based on bitcoin derivatives pose lower custodial risks. In any case, given that the SEC has not yet approved any type of bitcoin ETF, and the price of the cryptocurrency is falling, the community will be closely watching the upcoming SEC decision regarding the Proshare ETF, as this decision will certainly affect the market one way or another.