Early Investing

Mailbag: Welcoming Institutional Money and Explaining Bitcoin ETFs

Mailbag: Welcoming Institutional Money and Explaining Bitcoin ETFs
By Early Investing
Date August 19, 2018

Editor’s Note: Early Investing Co-Founder Adam Sharp is participating in a special event next week where he will talk about the building institutional boom in cryptocurrency. We will send you a special invitation to attend this event in a few days, so keep an eye out!

Q: If crypto is supposed to be an alternative to the current economic system, why is institutional money so important to its future? Shouldn’t the establishment be interested in shutting down bitcoin?

A: Great question. I do view crypto as an ongoing monetary revolution – a bold effort to reintroduce hard money into the financial system. So at first it may seem strange (and even ironic) to want and welcome the “establishment” system, which is based on fiat (monopoly) money, in the crypto markets.

But I don’t view the establishment system as the enemy. Sure, some of them want crypto to fail. It threatens their suddenly outdated system. But others are beginning to see the light.

I believe the old system needs the benefits of crypto as much as the rest of the world and will come to see this in time. Crypto offers more efficient ways to settle financial transactions. And good cryptocurrency is truly scarce, unlike today’s money, which is recklessly printed.

So I see the blending of old and new as a necessary step in crypto’s evolution. If crypto is to succeed, we’ll need more ways to move financial assets from the legacy system to the new. Crypto ETFs and institutional custody solutions will allow these shifts to happen more quickly and easily.

+ Early Investing Co-Founder Adam Sharp

Q: A couple of questions for you. What is an ETF? More specifically, what is a bitcoin ETF? And why does bitcoin’s price keep going down every time one is delayed or rejected?

A: ETF stands for exchange-traded fund. ETFs have become popular over the past 10 years because their fees are much lower than those of mutual funds.

And they’re lower because they’re “passive” funds, meaning they automatically go up and down with the index they follow. A fund manager doesn’t have to pick companies to buy and sell. Compared with mutual funds, the cost of managing an ETF is pretty modest.

There are more than one thousand ETFs to choose from. Some are very broad, following the Nasdaq or the S&P 500, for example. And some are narrow and specific. There’s an obesity ETF, for instance. And there’s a gaming ETF that tracks the casino industry.

ETFs are traded like stocks. They’re easy to get into and out of. One share of the gaming ETF (BJK) is only $43, for example.

Bitcoin ETFs will shortly become the latest entries into the ETF universe. We expect that to happen as soon as the end of next month.

ETFs will follow bitcoin prices by basing their benchmark on futures, prices from bitcoin exchanges like Coinbase or bitcoin trading desks – where bitcoin is privately bought and sold between large investors called “principals.”

Some will be designed for institutions only… the big moneyed investors, in other words. Some will be for everyday investors. And some will be for both. Because it’s a safe and convenient way to park your money, these ETFs will release a flood of money into bitcoin and, soon thereafter, other cryptocurrencies. That will drive crypto prices significantly higher.

Just the expectation of this happening buoys the market. But when delays happen, the opposite reaction plays out.

Bullish investors (eager to buy bitcoin) are disappointed. Frustration and impatience sets in. And the price of bitcoin tends to drop.

That’s where we are right now… the calm before the expected frenzy of bitcoin buying hits.

+ Early Investing Co-Founder Andy Gordon

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