The biggest names in finance have cut their teeth on Bitcoin Exchanges Traded Funds (ETFs) and crypto ETFs more generally. Since 2018, a plethora of US players have attempted to register a Bitcoin ETF with the Securities and Exchanges Commission (SEC), but without success. Yet, this type of product would be extremely beneficial to the digital asset market, according to an analyst from Morningstar.
A crypto ETF to reduce market volatility?
Amy Arnott, portfolio manager for Morningstar, spoke out about the adoption of digital assets and the usefulness of a crypto ETF, in an interview for Business Insider :
“What I would really like to see is a diversified index fund dedicated to crypto in the form of an ETF […]The SEC still hasn’t approved ETFs in the U.S., which makes it very difficult for mainstream investors to gain exposure to crypto […] There seems to be a lot of internal debate at the SEC as to whether they should move forward with this – it’s a big trend and a lot of investors need to have access to it, but they need to protect investors.”
Amy Arnott, portfolio manager for Morningstar
According to the Morningstar analyst, a crypto ETF could mitigate market volatility and attract risk-averse investors. This analysis seems rather simplistic to us, though based on consistent assumptions.
When an investor buys or sells an ETF share, it does not create volume on the underlying asset(s). Therefore, if the majority of investors are positioned in an ETF during a decline, their orders will not feed the ongoing decline. However, the risk profile of a crypto ETF is exactly the same as that of the cryptoassets that make it up. Therefore, a crypto ETF is just as risky and volatile as the rest of the crypto market.
“Regulatory risk is a huge issue – it’s the driving factor behind much of the volatility in recent months. If governments around the world crack down on crypto in general, or Bitcoin and Ether in particular, that would be a major negative player.”
Amy Arnott, portfolio manager for Morningstar
In June, SEC Commissioner Hester Peirce said a crypto ETF was long overdue. However, the SEC continues to reject ETF proposals, meaning investors who want to buy cryptocurrencies have no choice but to gain direct exposure to digital assets from a crypto exchange platform.
Bitcoin, Ethereum and Cardano, the future Big Three of the cryptosphere?
During her curation with Business Insider, Amy Arnott also touched on the topic of digital asset pricing and fair value. According to the analyst, it is difficult to assign a fair value to its assets, as they do not generate revenue. In fact, in traditional financial analysis, a large part of the value of an asset is derived from the cash flow it generates. For a bond, it will be the interest rate; for a stock, it will be the dividend or the company’s cash flow.
“The fact that the ether has a utility purpose should provide some sort of floor price, but I’m not sure what that price should be […] A lot of people talk about a network effect whereby these currencies become more valuable as they are used and there are more interdependencies and connections.”
Amy Arnott, portfolio manager for Morningstar
Finally, Arnott has raised the possibility of a “Big three” emerging in the crypto ecosystem with Bitcoin, Ethereum and Cardano. By the end of the year, Cardano plans to launch decentralized financial services and smart contracts. Once these features are up and running, Cardano will offer capabilities substantially similar to Ethereum. In 2021, Cardano’s ADA has already grown 600% to date, from $0.18 to $1.26.
