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Strategies & Market Trends : Bitcoin
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To: Elroy who wrote (958)1/14/2024 9:40:53 AM
From: Elsewhere  Read Replies (1) of 963
 
There has been a lot of excitement about the Bitcoin ETFs which were finally introduced in the past week. Apparently many people found it difficult in the past decade to acquire Bitcoin (although it's very easy - done in five minutes). ETFs are products which are more familiar especially for US investors. - I don't know the exact details how the companies operating the ETFs are handling ETF trading. They can add or retire ETF shares and they are supposed to keep the underlying in sync with ETF shares. The point is - you have to trust that the ETF companies are fulfilling their fiduciary duties. This is the age-old problem in the financial markets: you delegate your responsibility to some financial institution which is supposed to represent your interests faithfully. Often this works but sometimes it doesn't (keyword: Lehman). There is a famous essay by Nick Szabo: "Trusted Third Parties are Security Holes". The point of Bitcoin is: if you operate your wallet yourself then you have cryptographic (mathematical) proof that any amount of Bitcoin you have purchased is actually owned by you. If you buy an ETF you have to study the fine print and hope for the best if bad times come around - that the issuer can follow and does follow the rules outlined in the ETF prospectus.

Regarding rehypothecation there's a decent description on Wikipedia:

en.wikipedia.org
It is about financial institutions working creatively with the underlying/collateral. Instead of keeping a 1:1 relationship between the underlying asset and the ETF share this ratio is lowered. For gold ETF shares there is, I think, a relationship of 20 paper shares per ounce of physical gold. If all customers of ETF shares would decide to convert their ETF share to "real" gold the whole house of cards would collapse.
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