IMPACT OF BITCOIN ALGORITHM TRACKING ETF FLOWS ON TOKEN'S SWINGS IN ASIA
INTRODUCTION
Cryptocurrency derivative products that currently exist are futures and options. Both of these products require a highly volatile asset to be executed, this is related to the level of leverage in the derivatives. In a quite volatile situation, the price of an asset moves quickly and significantly through a range. If the movement of price is assessed that will bring benefits, it can be open positions to buy or sell derivatives. But this is still difficult to realize because futures and options are agreements to buy or sell an asset with a predetermined price at a certain time.
The hedging product in an asset is divided into two methods, i.e., short selling an asset and buying derivatives of an asset. But because cryptocurrencies are digital assets, short selling an asset is an impossible thing to do. Selling borrowing can execute a short selling an asset whereas there is no mechanism of selling borrowing in cryptocurrencies. This makes the first method difficult to realize. Because of that, the emergence of a derivatives product for cryptocurrencies becomes the main alternative.
Currently, cryptocurrencies are known as an asset with a very high price fluctuation. Investment in cryptocurrencies is divisible into several areas such as trading and Initial Coin Offering (ICO). Price fluctuations can change the investor's fund in a short time. This makes cryptocurrencies investment instruments with high risk and return. Due to the high level of price volatility, the emergence of hedging products and speculation of the decline and appreciation of an asset price are required.
OVERVIEW OF BITCOIN ALGORITHM TRACKING ETFs
Algorithm tracking exchange traded funds (ETFs) are a tool used by investors to capture the price of an underlying asset without actually having to buy the asset itself. The investor essentially borrows the ETF to sell it at a high price and later purchase it again at a lower price, returning the amount of ETF shares borrowed and profiting the difference. If the investor buys an ETF, it is to hold it long-term in hopes that the value of the shares will appreciate, yielding a higher value than initially purchased. There are many kinds of ETFs with different objectives, whether it is to increase value or to look for steady long-term gains. The objective is typically defined in the investment company's prospectus and the ETF will undergo a change in investment style if the investment company changes the objective of the ETF.
Bitcoin algorithm tracking ETFs help investors by tracking the price of BTC (XBT) using the fund's native currency. If an investor wants to capture the price of bitcoin to earn a profit, he or she would exchange native currency to BTC in hopes that the price of BTC today will be lower than the price of BTC in the future in order to buy more native currency with the BTC at a later time. This investor has to be cautious about BTC's price volatility as to not lose native currency value. Typically, the investor would like to capture the price of bitcoin using an ETF so that if the price of BTC is lower than the price at which he bought the BTC, he can sell the
BTC to buy back native currency, thus profiting the difference and having captured a short-term gain in native currency value. However, if BTC loses value compared to native currency, the investor will have lost value. This can also be used the opposite way if the investor thinks that BTC will increase in value compared to native currency.
IMPORTANCE OF ETF FLOWS IN THE CRYPTOCURRENCY MARKET
The price of Bitcoin has increased in popularity, especially last year towards the end of the year till this year, it's on the major news headlines. With the price of Bitcoin reaching an all-time high of above $60,000. "What caused this to happen?" is the question that is asked. There are many ways to answer this question but one major impact the price of Bitcoin was influenced by the introduction of the ability to track Bitcoin ETFs. According to Jian Wei of Vontobel Asset Management Asia, ETFs can be counted as an entry for institutional investors into the world of cryptocurrencies. This is a very valid point as institutional investors are unable to actually buy Bitcoin to invest in at the start. With this introduction and knowledge of what an ETF is, they are able to invest into Bitcoin for the ETFs as it is a lower risk way to get into Bitcoin without actually investing into Bitcoin and upsetting their clients. This helps with the price change of Bitcoin as seen on the graphs, ETFs were introduced around January of 2020, there was not exactly a sudden spike however there was a gradual increase in price. At the same time, Bitcoin was and still is a very volatile asset and the price swings of Bitcoin have caused investors to make huge profits and huge losses. This destroyed the confidence of many investors whom their clients to be in the safe side of investment without the worry of large losses. With more news headlines and introduction of ETFs, investors will be willing to attempt to invest into Bitcoin as they can see that there are attempts into making the cryptocurrency world a safer environment for investments. This will in turn change the demand for Bitcoin and the ETFs, hence moving the prices and increasing the confidence of investors.
SIGNIFICANCE OF TOKEN'S SWINGS IN ASIA
It is crucial to understand the importance of what the Bitcoin algorithm does for the US public market. It tracks ETF flows on the token, as the press and many investors often have a misconception that the ETFs are tracking the price of Bitcoin. Up until now, all activity for the algorithm of ETFs has been focused on the USD price of the cryptocurrency. It was not until the recent launch of Bitcoin futures that the regulated boards had an instrument to start speculating on the cryptocurrency itself. A true game changer for cryptocurrency, having an investable asset such as an ETF on a regulated exchange would provide easier access for retail investors and significantly increase the liquidity of the cryptocurrency. But the most important impact is what this means for the price of the cryptocurrency. Due to the fact that there are no Bitcoin ETFs and cryptocurrency is not an asset on any traditional finance market, this essentially provides a way for institutional money to speculate long and short on the cryptocurrency.
When considering 232 cryptocurrencies with a market cap of $543,895,133,411, the behavior of institutional investors and the potential impact from ETFs is a daunting task for a write-up, with limitless possible scenarios and impacts across the various coins. However, as this is a write-up for the Bitcoin algo, we will be focusing on what this means for the price of Bitcoin.
