▪ “The Bitcoin Exchanges on which Bitcoins trade are relatively new and largely unregulated and may therefore be more exposed to fraud and failure than established, regulated exchanges for other products.”
▪ “Since there is no limit on the number of Bitcoins that the Trust may acquire, the Trust itself, as it grows, may have an impact on the supply and demand of Bitcoins that ultimately may affect the price of the Shares in a manner unrelated to other factors affecting the global market for Bitcoins.”
To be fair, the prospectus for most investment products carries some pretty scary language, but many are especially worried given the nature of the bitcoin.
The last phrase highlighted above, especially, has many worried. More or less, the ETF has the possibility to be more liquid than bitcoins themselves, allowing the fund to lead the market as opposed to the underlying leading the market. This in itself is the exact opposite of the intentions of the ETF world, as it is supposed to offer access to an investment space, not drive its prices.
“There are 11,383,350 Bitcoin in existence at a price of roughly $70. Thus, the total market cap sits at less than $800 million,” according to an article on Yahoo Finance.
$800 million in the ETF world is not the smallest number, but considering that the largest exchange traded product holds more than $150 billion in assets, a new fund reaching that level is certainly not out of reach. Even if the fund got up to $100 million, it would have a significant impact on the market and cause enormous volatility spikes.
Volatility Lovers Rejoice
Of course, if you do not mind the risks involved and you are looking for a quick trade, it would be safe to assume that the fund (if it ever launches) would carry a fair amount of liquidity. Anyone looking to profit from strong volatility, as many traders do, may find the bitcoin ETF to be a great option. But be warned: should this fund ever see the light of the trading floor, it will more than likely be among the most volatile currency products on the market. Trade with caution.
Jared Cummans writes for ETFdb, which offers a comprehensive and original ETF database and analytical consulting services for advisors and investors, as well as a free newsletter. Learn more about their services by visiting ETFdb.com.