Bitcoin ETFs promise significant potential gains but also notable risks.
Freshly approved by federal regulators, bitcoin ETFs — Exchange-Traded Funds — allow investors to buy an asset that tracks the price movement of bitcoin.
Fidelity, BlackRock and a host of other top investment firms have already begun to offer the product.
Bitcoin ETFs promise major potential gains but also notable downsides, presenting investors with a wide range of outcomes that will test their tolerance for risk.
Investors could capitalize on a possible rise in the price of bitcoin if a flood of money into Bitcoin ETFs vaults the cryptocurrency into mainstream markets, they said.
However, investors should be prepared to weather the asset’s considerable volatility as well as uncertainty stemming from its association with issues of fraud and mismanagement in the wider crypto industry, they added.
“It’s going to be a volatile ride,” Bryan Armour, the director of passive strategies research at financial firm Morningstar, News. “You have to know that going in and make sure you’re okay with that.”
Some analysts said the new products could unleash a flow of investment and trigger a major spike in the price of Bitcoin, supercharging the most well-known and successful digital asset.
A Bitcoin ETF would elicit more than $14 billion of investment inflows within its first year on the market and as much as a 74% price increase over that period, Galaxy Digital, a crypto management and research firm, said in a report in October.
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A run-up in price would follow some previous bull runs for bitcoin, including a rise of nearly 70% over the past six months. But the cryptocurrency has also undergone periods of major decline.
The price of bitcoin experienced a decline of at least 45 percentage points four times in the past five years, Armour said on Wednesday in a report for Morningstar.
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The acceptance of Bitcoin ETFs among a wide swathe of investors could smooth out some of the volatility but that outcome may not come to pass, Armour told News.
“If adoption becomes wider and the market becomes more mature, the price will become more stable,” Armour said. “For now, I don’t see it stabilizing.”
The crypto industry entered this year bruised after a series of high-profile collapses and company scandals.
Sam Bankman-Fried, formerly one of the industry’s most prominent figures, could serve decades in prison after he was convicted on fraud charges in a federal trial. Changpeng Zhao, the founder and former CEO of major cryptocurrency exchange Binance, faces a jail sentence of up to 18 months after he pleaded guilty to federal charges of money laundering.
In a statement on Wednesday, Securities and Exchange Commission Chair Gary Gensler affirmed the agency’s decision to approve Bitcoin ETFs but offered a note of caution about cryptocurrency.
“We did not approve or endorse bitcoin,” Gensler said. “Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto.”
James Butterfill, head of research at digital asset management firm CoinShares, rebuked concerns about bitcoin tied to potential manipulation or fraud.
The green light to trade Bitcoin ETFs gives them the “regulatory stamp approval,” Butterfill said.
Ultimately, investors considering Bitcoin ETFs should consider the role a potentially risky asset should play in their wider portfolio, analysts said.
“You shouldn’t allocate more to Bitcoin ETFs than you’re willing to lose,” Armour told News.
Callie Cox, an analyst at the investment company eToro who tracks cryptocurrencies, said each individual should weigh Bitcoin ETFs within his or her own financial goals.
“You have your own hopes and dreams for your portfolio, so you should see how it fits,” Cox said.
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