How to Start with Cryptocurrency | Episode 9: Financial Derivatives of Cryptocurrency [Shutao Fudou]

The cryptocurrency market, still in its infancy, is characterized by fast-changing regulations, environments, and policies around it in various countries, which can cause prices to swing significantly. This time, let’s learn about cryptocurrency ETFs, a material that has attracted attention as a driver of price movements, from Mr. Shutaro Fudoushu.

※This article is a re-edited version of an article from FX攻略.com July 2019 issue. Please note that the market information written in the body is different from the current market conditions.

Shutarou Fudoushu (Fudōshūtārō) Profile

Foreign exchange instructor and author. He has released seminar DVDs and interview CDs through a publisher. In addition to giving talks at financial exchanges, stock exchanges, FX brokers, and investment trusts companies, he writes for magazines and serves as a school lecturer for FX and stocks.

Official site：Shutarō Fudōshūtārō's “Behind the News Coverage”
twitter：https://twitter.com/syutaro_fudo

A type of derivative: ETFs

Investment trusts are heavily advertised on Japanese television, so you may be familiar. Many Japanese investment trusts are financial products that diversify investments across multiple stocks and bonds, but they can only be bought and sold at certain securities firms or limited sales companies, and they incur corresponding fees.

Among investment trusts, there is a product called ETF (Ex change Traded Fund). ETFs, as the term “exchange-traded funds” in Japan suggests, are investment trusts listed on a securities exchange or a financial instruments exchange. Therefore, ETFs can be bought and sold through the exchange, and their fees are relatively low.

Now, there are commodities such as crude oil, agricultural products like corn, or precious metals like gold, whose prices are driven by futures. ETFs, in addition to those futures products, are financial instruments that fluctuate in price in proportion to indices such as the Nikkei 225 (Nikkei Stock Average) or the TOPIX (Tokyo Stock Price Index). The various investment products that underlie their prices are called “underlying assets,” and financial products made from these underlying assets are called derivatives, but ETFs are a kind of derivative.

Is there a possibility that cryptocurrency ETFs will be approved?

Since last year, several financial institutions have reported that cryptocurrency-based ETFs would be listed on the US CBOE. CBOE stands for the Chicago Board Options Exchange, one of the world's largest. However, in the United States, the Securities and Exchange Commission (SEC), which is responsible for securities, has not approved applications for cryptocurrency ETFs. As of the time of writing this manuscript, there has been no information suggesting the SEC would approve cryptocurrency ETFs.

To safely trade cryptocurrency ETFs, first the cryptocurrency that serves as the underlying asset must be defined and trading rules must be established. It is said that there are thousands of different cryptocurrencies, and more new technologies will yield new cryptocurrencies, and there are reports that cryptocurrencies with entirely different purposes will be studied. Therefore, in my personal view, I speculate that the SEC cannot create unified trading rules because it cannot finalize a single definition for cryptocurrencies as a whole.