Inherent risks with BTC ETFs

19 Jul, 2018
by David Borman
News
Inherent risks with BTC ETFs

Today in a blog post on Hackernoon, Igor Feerer explained how once bitcoin ETF's become a reality, they could in fact be a major roadblock to bitcoin ever being used as a real currency. In addition, they pose risks to investors that buying bitcoin directly does not.

An ETF is basically a collection of assets which can be bought and sold on an exchange much like traditional assets. Therefore, for someone to issue an ETF, they must hold the asset. This means that if large financial institutions want to start offering BTC ETFs, they will necessarily have to buy a lot of bitcoin.

This sounds great, as it will obviously drive up the price, but there's a catch. By definition, people trading ETFs are not trading bitcoin, they're trading shares of a portfolio that is based upon bitcoin. The bitcoin itself is essentially in a vault (cold storage wallet or such) somewhere. Since bitcoin has a limited supply, and already most people sit on it (HODL) more than they spend it, it could definitely lead to bitcoin becoming much more like a commodity than a currency.

To some, this is not a problem. In fact many feel this is the natural path for bitcoin. Others point out this is not exactly in line with the vision laid out in Satoshi Nakamoto's whitepaper, clearly stating the intent for bitcoin to be a form of currency.

The other, more individual risk coming from ETFs is the fact that because the investor doesn't actually hold bitcoin, they are subject to additional factors affecting their investment. Basically, the institution(s) that issue the ETF are open to various issues such as mismanaging the bitcoin, failing to provide proper security for their bitcoin, or even going out of business.

It is unclear how these risks will be mitigated as BTC ETFs begin to rise, but it looks like they are on the horizon. It is ultimately up to each investor how they want to invest and whether they would rather control their own bitcoin or simply a share of a portfolio.

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Read more about: Bitcoin (BTC)

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