The Effect of Demand in Bitcoin Basket Funds on Its Price
Bitcoin may be the most surprising asset class in recent years explain
Qoinix experts. While its schizophrenic price swings have frightened many investors, others have profited from the volatile cryptocurrency’s wild price surges. This has fueled demand for financial instruments that provide exposure to Bitcoin’s volatile price movements. Investors have been demanding ETFs that hold actual Bitcoin, rather than futures contracts. Now, several new funds are on the verge of launching, including BlackRock’s new ETF, Fidelity’s offering and Cathie Wood’s Ark 21Shares bitcoin product. These products have been dubbed “spot” bitcoin ETFs because they will hold actual coins, not just futures contracts, which offer secondary exposure to the cryptocurrency.
These new products, along with Grayscale’s existing bitcoin investment trust BTC, will allow more mainstream investors to gain exposure to the crypto through traditional stock exchanges. Unlike futures contracts, which are traded on a centralized market and can be sold at any time, the new ETFs will hold actual bitcoins. Most of these companies will hire Coinbase, which is one of the largest crypto exchanges, to be their custodian and store all of the ETFs’ bitcoins. These ETFs will then sell and redeem their shares based on market demand, matching the price of the underlying cryptocurrency as closely as possible.
The new ETFs are also likely to have lower fees than their rivals. Most fees range from 0.19 percent to 0.39 percent of assets annually, according to Morningstar, with some online brokerage firms waiving fees for an introductory period. However, the low fee structure may not offset the fact that investors will still be subject to the risks of a volatile market and the high risk of losing money.
It remains to be seen if the new spot ETFs will prove popular. If they do, it could mean that more advisers will start adding bitcoin to their client portfolios and retirement accounts. But even if that happens, experts say that it will take some time before the market is mature enough for most investors to add significant allocations to bitcoin. And until it is, the volatility of the currency will make it less appealing than more stable assets such as stocks and bonds. Besides, as long as bitcoin’s volatility is so high and transaction fees are so expensive, it will struggle to gain wide acceptance as a medium of exchange or store of value. And as the cryptocurrency becomes more widely used, it will face the risk of regulation. This would reduce its attractiveness to investors who believe that it is a decentralized alternative to traditional currencies, which are controlled by governments and central banks.
