Your Bitcoin Profit Calculator May Need To Take Account Of Emerging ETF
Exchange-Traded Funds (ETF, for short) achieved a great popularity in the financial world a little over a decade ago, though they were first introduced in the 1990s. They have something of an Index Fund quality to them.
Index Funds were premised on John C. Bogle's recognition that most fund managers were not actually able to beat the market on a consistent basis. Once their fees were taken into account, from the perspective of the financial end-consumer, the idea of beating the market was sheer folly.
There's some irony in that turn of phrase, as "Bolge's folly" was the term of derision used to dismiss his ideas by the Wall Street crowd. Bogle was, though, to have the last laugh: his philosophy, initially implemented through funds established to track the S&P 500, at minimal-to-no fees, proved to be a big time winner.
ETF are an effort to profit from the Index Funds lessons, with the additional benefit that, while the latter were very expensive to trade - the whole point being that constant movement was too costly - ETF can be traded often commission-free. And, since they're indexed, they are far less expensive in transaction costs than are mutual funds.
There have been movements afoot to create a publicly traded Bitcoin ETF. The most famous efforts in this direction have been those of the infamous Winklevoss twins.
The brothers, renowned for their struggle over FaceBook, with Mark Zuckerberg, have been early adopters of Bitcoin. Estimates have their holdings in the crypto-currency at around $11 million.
Permission to establish a publicly traded Bitcoin ETF though must be provided by financial regulators. And the effort is already being pooh-poohed by bigwigs in the industry, such as Knight Capital managing director Reggie Browne.
It is true, of course, with the extreme volatility of Bitcoin of late, such efforts would seem to run counter to the original Index Fund spirit of the early ETF tradition. This might though be a case of not seeing the trees for the forest (or the forest for the trees, perhaps).
Right off the bat, sweeping claims about the viability of Bitcoin on the ETF market has to be tempered with the realization that in fact such trading opportunities already exist. SecondMarket offers a private Bitcoin Investment Trust (BIT, for short, get it?). BIT is modeled on a well established gold ETF. And, with its $25k minimum investment, it is humming right along, according to its creator, the SecondMarket CEO: the close of 2013 finds it holding $65 million.
So, it seems a bit far-fetched to allege that the digital currency's fluctuations are too rich for ETF investors, as Browne has. All this though seems to me to be missing a fundamental point. The point of a currency is as a medium of exchange, not an investment opportunity.
This is not to say that betting on (or against) anything, including a new currency, is perfectly legitimate and speculators and short selling and so on is all a necessary and valuable part of a dynamic and free market. The danger, though, of treating Bitcoin as an investment opportunity is that - unlike gold, for instance - it has been designed specifically to serve as an alternate currency.
Like any other product designed to serve a specific purpose, its features and benefits will only be revealed as tested in time. The recent volatility has been a function of financial, rather than monetary, considerations. I can only see two long term prospects.
Bitcoin pile What would an ETF Mean for Your Bitcoin Profit Calculator? Either, Bitcoin will somehow (and there are many issues to consider here) catch on and become widely used around the world - whether sanctioned by nation-states or not. Or, it will be judged by the consuming public (consumers of currency, you understand) to not provide enough benefits over so-called sovereign currencies, and will lapse into disuse.
If the former happens, the holdings of the currency will be so extensive (and exempt from the inflationary pressures of fiat currencies) that financial hiccups will cease to cause the kinds of fluctuations recently observed. If that is the result, Bitcoin ETF will indeed become the kind of secure, indexed funds which were the original inspiration behind ETF in general.
On the other hand, should we see the collapse of the currency, the truth is that it is those who bought into the currency, not for the virtues of its monetary features, but to gather its hoped for financial windfalls, that will be most hurt in the process. The big losers would be the speculators. And speculation offers the prospect of big rewards, because it presents the danger of high risk.
This is not to say that if you fervently believe in the future of Bitcoin that you shouldn't invest in an ETF and attempt to profit off your knowledge of and conviction in what you consider a great product. If though you're just trying to catch a financial wave, you have to be prepared for the fact that surfing entails a lot of being dumped in the drink.
Bitcoin ETF are an interesting prospect worth watching, but, ultimately, whatever their fortunes, they tell us little about the future prospects of Bitcoin as a currency. That story will be told, not by financial, but by monetary, and, even more importantly, by consumer markets.
Index Funds were premised on John C. Bogle's recognition that most fund managers were not actually able to beat the market on a consistent basis. Once their fees were taken into account, from the perspective of the financial end-consumer, the idea of beating the market was sheer folly.
There's some irony in that turn of phrase, as "Bolge's folly" was the term of derision used to dismiss his ideas by the Wall Street crowd. Bogle was, though, to have the last laugh: his philosophy, initially implemented through funds established to track the S&P 500, at minimal-to-no fees, proved to be a big time winner.
ETF are an effort to profit from the Index Funds lessons, with the additional benefit that, while the latter were very expensive to trade - the whole point being that constant movement was too costly - ETF can be traded often commission-free. And, since they're indexed, they are far less expensive in transaction costs than are mutual funds.
There have been movements afoot to create a publicly traded Bitcoin ETF. The most famous efforts in this direction have been those of the infamous Winklevoss twins.
The brothers, renowned for their struggle over FaceBook, with Mark Zuckerberg, have been early adopters of Bitcoin. Estimates have their holdings in the crypto-currency at around $11 million.
Permission to establish a publicly traded Bitcoin ETF though must be provided by financial regulators. And the effort is already being pooh-poohed by bigwigs in the industry, such as Knight Capital managing director Reggie Browne.
It is true, of course, with the extreme volatility of Bitcoin of late, such efforts would seem to run counter to the original Index Fund spirit of the early ETF tradition. This might though be a case of not seeing the trees for the forest (or the forest for the trees, perhaps).
Right off the bat, sweeping claims about the viability of Bitcoin on the ETF market has to be tempered with the realization that in fact such trading opportunities already exist. SecondMarket offers a private Bitcoin Investment Trust (BIT, for short, get it?). BIT is modeled on a well established gold ETF. And, with its $25k minimum investment, it is humming right along, according to its creator, the SecondMarket CEO: the close of 2013 finds it holding $65 million.
So, it seems a bit far-fetched to allege that the digital currency's fluctuations are too rich for ETF investors, as Browne has. All this though seems to me to be missing a fundamental point. The point of a currency is as a medium of exchange, not an investment opportunity.
This is not to say that betting on (or against) anything, including a new currency, is perfectly legitimate and speculators and short selling and so on is all a necessary and valuable part of a dynamic and free market. The danger, though, of treating Bitcoin as an investment opportunity is that - unlike gold, for instance - it has been designed specifically to serve as an alternate currency.
Like any other product designed to serve a specific purpose, its features and benefits will only be revealed as tested in time. The recent volatility has been a function of financial, rather than monetary, considerations. I can only see two long term prospects.
Bitcoin pile What would an ETF Mean for Your Bitcoin Profit Calculator? Either, Bitcoin will somehow (and there are many issues to consider here) catch on and become widely used around the world - whether sanctioned by nation-states or not. Or, it will be judged by the consuming public (consumers of currency, you understand) to not provide enough benefits over so-called sovereign currencies, and will lapse into disuse.
If the former happens, the holdings of the currency will be so extensive (and exempt from the inflationary pressures of fiat currencies) that financial hiccups will cease to cause the kinds of fluctuations recently observed. If that is the result, Bitcoin ETF will indeed become the kind of secure, indexed funds which were the original inspiration behind ETF in general.
On the other hand, should we see the collapse of the currency, the truth is that it is those who bought into the currency, not for the virtues of its monetary features, but to gather its hoped for financial windfalls, that will be most hurt in the process. The big losers would be the speculators. And speculation offers the prospect of big rewards, because it presents the danger of high risk.
This is not to say that if you fervently believe in the future of Bitcoin that you shouldn't invest in an ETF and attempt to profit off your knowledge of and conviction in what you consider a great product. If though you're just trying to catch a financial wave, you have to be prepared for the fact that surfing entails a lot of being dumped in the drink.
Bitcoin ETF are an interesting prospect worth watching, but, ultimately, whatever their fortunes, they tell us little about the future prospects of Bitcoin as a currency. That story will be told, not by financial, but by monetary, and, even more importantly, by consumer markets.
About the Author:
To keep track of the wild ride of Bitcoin, follow our Bitcoin Profit Calculator . Wallace Eddington is staff writer at our website, providing a practical and unique treatment of monetary and financial issues related to Bitcoin. His recent article elaborating the role of Bitcoin address and private key is a must read for those who want to take advantage of the exciting new crypto-currency.
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