Are ETFs the better cryptocurrency?

According to a recent survey, cryptocurrencies are better known among the German population than ETF savings plans. Hardly surprising, given the meteoric rise of this relatively new asset class triggered a modern gold rush. But as the saying goes: “All that glitters is not gold”. Maybe those selling the scoops for gold-digging are actually profiting the most. In any case, most crypto investors are in the market because of a get-rich attitude and not because they see cryptocurrency as a better payment system or believe in the power of decentralization. ETFs seem a little less exciting, but perhaps they are the kind of cryptocurrency we are actually looking for.?

A brief introduction to ETFs and cryptocurrency

To set a level playing field, the abbreviation ETF comes from the English language and stands for Exchange Traded Funds. ETFs are mostly passively managed index funds that track an index such as the S&P 500 or the DAX. However, there are also ETFs on other asset classes such as commodities, gold and, yes, more recently, cryptocurrencies. Cryptocurrencies are based on decentralized data storage and, as the name suggests, cryptographically encrypted transmission protocols. The most well-known cryptocurrency is Bitcoin, which was launched in 2009.??????

ETFs and cryptocurrencies have achieved such dominance in the financial system that it is impossible to imagine a world without them. According to the online portal Statista, $7.7 trillion were invested in ETFs worldwide at the end of 2020. By comparison, according to TradingView, the current market capitalization of all cryptocurrencies is $2.0 trillion. Well, the number of zeros is already the same.?

But a substantial difference exists

ETFs are used to broadly invest in companies that produce goods, commodities and services that we all consume and use. You can have your personal opinion about companies like Apple, Microsoft, Alphabet, Amazon, and Facebook, but these companies are a relevant part of our everyday lives. As a result, these companies generate measurable profits, in which one participates as a shareholder. Alone the above mentioned companies generated $172 billion in profits last year. On the other hand, the transparent measurement of profits from cryptocurrency projects is less easy to do. Of course, there are exciting use cases here as well. However, the extent to which these will yield significant profits in the future remains very questionable at this point. The future is traded on the stock exchange, and cryptocurrencies are no different for the time being, but the fundamental values speak in favor of ETFs.?

Decentralization at the core

Cryptocurrencies are decentralized and thus fundamentally different to currencies issued by central banks. The independence from larger powers due to sophisticated game-theoretical approaches is incredibly smart. In the case of the best-known cryptocurrency Bitcoin, there are currently over 11,000 so-called nodes that contribute to the network’s decentralization. This makes it virtually impossible for individual stakeholders to make changes to existing systems.?

ETFs, on the other hand, are issued by investment companies and therefore centrally. But with ETFs, money is invested in various companies that act autonomously, and with that can also be seen in a somewhat more abstract way as a form of decentralization. For example, an ETF on the MSCI World, is composed of 1,583 companies, all of which contribute to price determination and do so according to clearly defined rules in advance. Going one step further in this line of argumentation, the companies themselves are subject to the metaphorical expression of the "Invisible Hand" by the Scottish economist Adam Smith and are ultimately determined globally by us humans via our consumption.??

Cryptocurrencies are already means of payment, ETFs not yet

While some merchants worldwide already accept cryptocurrencies as a means of payment and various companies issue bank cards on cryptocurrencies, there is currently no possibility to pay directly with ETFs. However, with the appropriate interest at the merchant, it is conceivable in principle that one could pay with ETFs as well. The ETFs would then simply be sold proportionally in a transaction at the merchant, and the equivalent value would be credited to the merchant. Compared to cryptocurrencies, this has the significant advantage that payment can be made directly with productive capital, since the capital was invested in companies up until the transaction occurred.?

In emerging markets with inflationary or highly volatile currencies, cryptocurrencies such as stablecoins (where the price is pegged to an underlying asset) can become an interesting alternative. But in principle, couldn't ETFs do the same? Isn't it also theoretically possible to link a national currency to a reference portfolio? For example, a currency directly pegged to the Nasdaq or the German DAX? Compared to cryptocurrencies, such a currency would have the advantage of linking performance to corporate earnings. Of course, there is a capital market risk embedded into it, but cryptocurrencies have volatility as well.

Opinions differ on the social benefit

ETFs are a selective reflection of the capital market, and the capital market is used to finance companies. If a company goes public or carries out a capital increase, it usually raises money that can be used to finance growth. This creates jobs, which in turn leads to higher consumption and thus to more jobs. A spiral is set into motion that produces positive social benefits. Cryptocurrencies also have a form of capital raising with Initial Coin Offerings for example. Still, so far, it has produced less measurable results and way more fraud.

What will the future look like

The presented thoughts tried to connect old-fashioned ETFs with the hot buzz around cryptocurrencies. Both financial products will have an interesting future ahead, but helping more people invest in an easy, transparent, and user-centric way while empowering payments with productive capital via ETFs seems like the clearer win-win for society.