ETF: Sign Language for Crypto Medium

Cryptomania is conquering the world. While governments are trying to figure out what to do (surprisingly, there has not been any extraordinary international conference yet), investors actively switch to the new crypto reality. By the way, these are not institutional, but incidental, single investors: entrepreneurs with some spare assets, youngsters longing for something new, people with some experience of gambling on the stock exchange or currency markets and those without any.

According to the basic stock broking postulate, if random people are attracted to an asset, it is about to crash. However, it looks like it is time for brokers to review their postulates. The total of cryptocurrency capitalization, which has exceeded 150 billion US dollars by the end of summer, is already comparable to a real sector of the economy. Note that it is happening now when crypto world regulation mechanisms have not been developed and adjusted. It takes off from here.

Generally speaking, we are at an interesting point in the process. It is the clash of two worlds: the miners unaware of any stock trading rules, and investors, not so good at blockchains. Each of them has their own interests: the first wish to bring more significance to their developing crypto world. The latter are looking for a promising alternative tool for risk diversification in the traditional financial platforms. Both have one interest in common, which is to earn some money. Sharing the same interest, the third, and the largest group is joining the previous two: it is the people who have discovered easy money. But it creates a big problem. These three groups have no language in common. Like Indians and conquistadors, miners and stockbrokers are learning a new sign language. One of such languages is exchange-traded funds or ETF.

An Exchange Traded Fund is not a new tool, but it is starting to gain popularity. It has once brought the stock market a new lease of life by solving the problem similar to the current one: it attracted a wide circle of non-professional members with small equities to stock trading. The idea is easy. You see the relentless growth of stock indexes based on a long emitter list. It does not even matter that within the list some of them lose positions and others add value. The common indicator is historically growing, let it be SP, Dow Jones, NASDAQ, Hong Kong Hang Seng or even Russian MICEX. As an investor, you want to have a mirror portfolio of SP500, but you have no capacity to buy all these shares at a time? OK, then ETF is for you. Purchasing a share of this fund, you buy a share of a block consisting of an index set of shares. Of course, not all ETF are index-bound. There are some industry funds, aggregating, for instance, emitters from non-ferrous metallurgy or oil sector. There are ETFs bound to national share index of different countries. There are bonds, currency, raw material, real estate ETF and so on.

Here is the main idea: providing a ready, block solution for every taste. This is the first, but not the only advantage of ETF. The second, consequent one is the wide portfolio diversification, as your small share may accumulate dozens of various emitters. The next advantage of ETF is based on the “exchange” component of its name. Yes, this fund is an exchange fund in the full meaning of the word, since it is not a deposit and not a mutual investment fund. Here the “invest and wait for result” principle does not dominate (though it is also possible); ETF shares are traded every minute. It is a high liquidity product. Their status opens the opportunity of trading on all main stock exchanges of the world from an ordinary broker’s account. Two other major advantages are the low entrance threshold and full structure transparency. The ETF portfolio composition either does not change or changes very seldom. You are always sure of what you purchase.

As an initially diversified product, ETF shares are not sensitive to fluctuations. But if they fall, the whole market crashes. But it is an exception. In the majority of cases, ETF investors can account for the investment growth correlated to economies. The only difference is in the income scale. National funds grow together with the GDP, within 2-6% per year. Bond based ETF consistently earns its 6-12%. The funds tracking such classic stock exchange indexes as SP can provide 10-30% of income growth. Industry-based ones, as usual, are more volatile. If they catch, let’s say, the wave of tumultuous IT development, the return is extraordinary. And when the oil market recesses, the return of carbohydrate ETF reduces (but hardly ever reaches zero). Your investor’s talent is to pick the right ETF bet.

There is around one thousand to choose from. The largest investment companies of the world have already established ETF subdivisions, realizing profits of the tool in attracting clients. For example, a quarter of all assets managed by the giant BlackRock consists of the exchange-traded funds: over one and a half trillion dollars. Before that, the BlackRockers created iShares, distributing ETF products all over the world. Today the share of the company constitutes 40% of the funds invested in the world’s exchange funds. The legendary Vanguard Group also owes its success to betting on index funds. Now it holds 160 funds in the US alone and 120 more all around the world. However, the largest ETF is American SPDR. One of the first to launch, in 1993, it actually holds the monopoly for SP500 index (it is still called the SPY, tracking the index), one of the most transparent ones, popular among investors. As a result, capitalization of only one SPDR fund exceeded 150 billion dollars.

But stop. This familiar figure returns us to the initial topic. The total cryptocurrency capitalization exceeded the same 150 billion dollars. Do you see what we mean? The emergence of ETF specializing in blockchain technologies, collecting portfolios of different cryptocurrencies growing all together is already inevitable. The ETF format is perfect for that. No matter whether you are a miner or an experienced trader, you can never be sure what the BTC or Ethereum rate will be like in several days. One crypt is an enemy for the investor. But a package of several cryptocurrencies demonstrates moderate, but consistent growth. If bitcoin falls, the miners shift to litecoin ensuring its growth. Switching between crypts is extremely relevant, speaking the brokers’ language. It makes sense to hold a portfolio of different cryptocurrencies, and, if there appears a professional ETF found ready to deal with that, demand for its service is going to be high.

Bitcoin has already tried to do this in the US on its own, but the US Securities and Exchange Commission did not approve of the ETF bound to BTC. As it said, the international regulation was not ready for this. But it is clear that the conservative opposition dam is about to break under the stream of enthusiasts. The governments cannot prohibit cryptocurrency circulation. Everything they can do is take a break and try to figure out how to ride the wave growing into a tsunami. Cryptocurrency payment is still prohibited in the majority of countries. It leads to the forced exchange losses of the crypto community; it pushes many people to live double life, having a fiat budget separate from crypto savings. The latter is growing to a great extent. The governments are aware of that, just like they are aware of the blockchain technologies’ becoming the source of investment for a real economic sector. So, if we still need to guard the border between the common economy and the crypto medium searching for new monetary levers, until this time we at least should not prevent development within the crypto world. ETC can become the tool satisfying the interests of both states, institutional investors, and common citizens. On one hand, it is regulated by the legislation, but on the other hand, it provides people with the mediated, fiat, access to the crypto world. And the question is not whether ETF for coins will be approved or not; the question is which jurisdiction will be the first to do it.

Until quite recently, stock brokers used to speak of cryptocurrencies with jealousy and despise, claiming they have no future for they have no real basis. They used to say that they can only grow with speculation. But in reality, bitcoin and its successors have a stronger basis than GDP, plants and factories, which is the people’s trust. Trust is the most valuable asset today. The brokers have enough experience and intuition to recognize it on time. The governments yet need to arrive at such understanding.

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