Tag: ETFs

South Korea planning to launch its own digital currency over blockchain?

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South Korea is one of the fore runners when it comes to technology and its applications. The country enjoys a rich technological heritage with well-regulated and generous venture capital backing. Owing to this favorable set-up, South Korea has become the home for diverse tech startups that have gone on to become market giants across the globe. Even in the case of cryptocurrencies and Blockchain, all these observations are consistent. After achieving superior levels of expertise in digital assets and blockchain, the authorities are now planning to launch a national digital currency. While this move certainly is gutsy, let’s look into whether South Korea is actually prepared enough to handle it:

History of Cryptocurrencies:

When it came to cryptocurrencies, South Korea has always kept an open mind and has been liberal about the proceedings. Right from 2010, there has been liberal regulation of Bitcoin and startups based on the cryptocurrency evolved effortlessly. The transition from traditional finance to evolved Fintech happened with little friction. Even Public fund managers were able to incorporate Bitcoin indicating the kind of regard Bitcoin has been enjoying.

korea-exchange

Out of one such instance, came the first ever Exchange traded fund (ETF) of Bitcoin across the world. While in USA, Winklevoss brothers are finding it difficult to get their ETF approved, Korea was able to launch it. The Korea Exchange, official exchange of South Korea would be hosting this ETF along with other products it offers.

Merchant Adoption:

The merchant adoption in the country is rising and is evident in the way the exchanges have launched adoption schemes. Since 2014, Coinplug has been building Bitcoin infrastructure in Korea with over 7,000 ATM machines. They have introduced okBitcard, which allows buying Bitcoins instantly over the counter. This facility is available at over 24,000 convenience stores.

korbit-logo-blue-background-02  coinplug

Apart from Coinplug, Korbit has a very strong presence in Korea with over 10,000 ATM machines and 50 banking institutions. These banking institutions can receive remittances from bitcoin senders. The service provided by Korbit for these payments, ‘BitWire’,  received good response.

Setting up the currency:

At 12th annual FinTech Demo Day in Seoul, the chairman of South Korea’s Financial Services Commission (FSC), Yim Jong-yong, announced his department’s plans to lay groundwork for spread of digital currency.  The FSC did not reveal any details as to what form or technology the digital currency will use. The government and the local financial industry players will launch pilot projects this year with Blockchain. The work would involve setting up new National cryptocurrency on the framework of Blockchain.

The department is offering three trillion won ($2.65 Billion) in funding over the next three years, to financially support the development of the fintech sector in South Korea.

Why to Think Twice About Investing in Bitcoin ETFs

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What are ETFs?

An ETF is a type of fund, traded on stock exchanges, that hold assets tracking the value of an index.  Authorized participants, which are generally large financial institutions, buy and sell large creation units of the ETF to break up and distribute in smaller quantities.  ETFs were created in 1993 as a tool for investors to track the value of market sectors, niches, and trading strategies.  

Why ETFs? Why Bitcoin?

ETFs can help reduce costs, improve liquidity, strategize against capital gains taxes,  diversify portfolios, and improve transparency for investors.

Financial professionals are racing to be first to market with an ETF for emerging market sectors.  Bitcoin has grown to the point of receiving this attention.  Leading the charge are the Winklevoss brothers, who introduced Bitcoin ETFs to the SEC in 2014.  If readers are interested in the prospectus, it’s available on the SEC website.

Drawbacks of a Bitcoin ETF

Although the benefits of ETFs have contributed to their rising popularity, ETFs have drawbacks that can be exaggerated in their developmental stages.  In 2011, Fidelity published a piece on the drawbacks of ETFs.  Of those that Fidelity listed, buying high and selling low, management fee creep, and tracking error seem as though they could be particularly pronounced when evaluating a Bitcoin ETF.

shutterstock_280312850Buying high and selling low describes the spread between bid and asking prices for ETFs.  If this spread is
high, the cost of purchasing (or the benefit of selling) may not accurately reflect the value of the ETF.  In an ETF with few transactions, it’s likely that the spread will be greater than in an ETF with regular, or practically constant transactions as the curve of people’s willingness to sell/buy will be smoother.

Management fee creep describes the administrative costs of ETFs.  In a developing fund, the costs of marketing could be reflected in the management fees.  Given the uncertainty and slow adoption of Bitcoin across traditional financial markets, marketing costs could be higher for a Bitcoin fund.

Tracking error describes the deviations in a fund’s investment performance from the index that it tracks.  Given the volatility of Bitcoin, it could prove difficult to accurately align with the indexes of choice.  This can be a cost to investors.

Broader Implications for Bitcoin

If the Winklevoss Bitcoin ETF is approved, it would signal faith in Bitcoin from the U.S. federal government.  This faith could improve investor confidence and the value of Bitcoin itself.  As a byproduct of a legitimizing a cryptocurrency investment vehicle, Bitcoin investment would likely be subject to a greater degree of scrutiny from the federal government and regulatory agencies.  This could incentivize greater transparency for other methods of Bitcoin investment, improving access to the Bitcoin market.

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