Bitcoin ETF: Everything You Need To Know
With the advancement of blockchain in finance, cryptocurrencies have paved their way to the world of finance quite easily, and now is one of the most discussed topics of financial analytics.
The most popular cryptocurrency to be used and discussed is Bitcoin, as it is the largest cryptocurrency available in the market by market capitalization.
Anyone interested in financial exchanges already has an idea about Exchange-Traded Funds (ETFs). Exchange-traded funds are regulated financial instruments that can hold a variety of assets.
The potential of an ETF that follows bitcoin is the biggest chance for this sort of link for cryptocurrency fans and investors wanting to profit on the rising popularity of exchange-traded funds (ETFs).
Investors can buy and sell ETF shares in the same way they would equities. But, ETF shares can be purchased and sold at any time during market trading hours, unlike mutual funds.
In this article, we will discuss everything about the Bitcoin ETF including its definition, working, its approval, and the risks that come along with it.
But, before we understand what Bitcoin ETF is, it is important to clear out this given question:
What is an ETF?
ETFs are a type of investment fund that allows you to track the performance of an asset or group of assets — from publicly traded companies and commodities to entire industries. Investors can use these to diversify their holdings without exposing themselves directly to the asset. Mostly, ETFs are a collection of assets (like stocks) that have been grouped together for a specific theme (growth, stocks in the tech sector, etc.).
VOO, for example, is a single ETF that tracks the performance of the S&P500, an index representing the 500 largest publicly traded companies in the US.
For investors who want a simplified investment solution, and are only focus on gains and losses, ETFs can provide a credible alternative. ETFs are fully regulated and can be bought through various online brokerage platforms and apps.
How does a Bitcoin ETF work?
As we know by now, an exchange-traded fund (ETF) is a type of investment instrument that follows the performance of a certain asset or group of assets. ETFs allow investors to diversify their portfolios without having to hold the assets. ETFs are a simpler option to buying and selling individual assets for those who want to focus just on profits and losses.
Traditional ETFs allow investors to readily diversify their holdings since they target larger baskets of names with something in common — for example, a focus on sustainability or equities representing the video game industry and associated industries.
A bitcoin ETF is a fund that tracks the price of the world’s most popular digital currency. This allows investors to invest in the ETF without having to go through the time-consuming process of trading bitcoin.
Furthermore, because the ETF would not be directly invested in bitcoin, holders will not have to worry about the complicated storage and security protocols that cryptocurrency investors must follow. With bitcoin future ETF, the price mimicked is that of bitcoin futures, and not the actual bitcoins.
The ETF’s value is derived, in essence, from the price fluctuations of bitcoin futures. In this case, the ETF’s issuer must have holdings in the bitcoin futures market and tie the ETF’s price to those bitcoin futures contracts. So, it is better to invest in Bitcoin Futures ETF as it is safer and more predictable.
So, why not just invest in crypto?
Why go through the ETF route at all?
Well, there are some legitimate reasons for that:
· Since you are not holding actual Bitcoins, you won’t need to worry about public addresses, private keys, crypto wallet storage, etc.
· ETFs are an investment vehicle, which is why investors should be able to short their positions if they believe that BTC will drop in the future.
· Even though cryptos are pretty well-known, ETFs are better understood across the investment world. A traditional investor will be much more at ease with ETFs than go through the crypto learning curve.
· Unlike with actual Bitcoin or other cryptocurrencies, you can hold a crypto ETF in a registered tax-sheltered account.
Pros and Cons of Bitcoin ETFs
The benefits of investing in a Bitcoin ETF over a direct investment in the underlying asset are numerous. On the flip side, however, there are some drawbacks.
Pros of Bitcoin ETFs
Convenience — Perhaps the greatest merit of a bitcoin ETF over direct investments is that average investors don’t have to handle the underlying asset. Crypto is quite hard to understand, and most of the platforms that allow you to buy and store your assets have less than stellar track records. Additionally, most cryptocurrency exchanges also have dubious regulatory policies, which raises the risk for its investors. As a result of Bitcoin ETFs, investors may gain exposure to the new market using their existing brokerage accounts. This way, they do not have to worry about the safety and security of the assets they hold
Flexibility — speculators need to be able to take advantage of both market rallies and corrections. As a result of investing through the spot market, you will not be able to profit from a falling asset’s value. In this case, it’s known as short selling or “going short.” However, with a Bitcoin ETF, you have the option of going long or short.
Regulations — ETFs are highly regulated financial assets, and bitcoin ETFs are no exception. Not only can regulators monitor and analyze the performance of a Bitcoin ETF on public platforms, they can also provide protection against price manipulation within the ETF markets. However, the underlying asset’s price, in this case, Bitcoin, can still be manipulated through unregulated crypto exchanges.
Cons of Bitcoin ETF
Bitcoin ETFs are not without faults. Compared with direct investments in Bitcoin, here are some of the cons of these funds.
Management fees — ETF fund issuers charge a management fee usually between 0.4% and 1.5% annually. There is no fee involved in storing Bitcoin on a cryptocurrency exchange or a private wallet.
Exchange limitation — it is easy to exchange your ‘physical’ digital assets that you directly hold. If you have some Bitcoin in your wallet, you can easily swap it for some Ether or Litecoin or any other asset supported on your platform of choice. This is not the case with a bitcoin ETF. Arbitrage speculators can thus take advantage of price differences between trading pairs across various platforms. This is not possible when dealing with bitcoin ETFs.
Price discovery errors — ETFs track the performance of underlying assets. This could be indices or actual assets held in reserves. Sometimes, the net asset value (NAV) of the fund lags behind the actual value of the assets they track. Other times, the price difference could be caused by market volatility.
The Long Winding Road to Bitcoin ETFs
The likes of Gemini and VanEck have long tried (for the last 3 years) to bring Bitcoin ETFs into the USA, but the SEC. has repeatedly thwarted their applications.
Finally, in February 2021, Purpose Investments got the all-clear to bring in the world’s first Bitcoin ETF from the Ontario Securities Commission (OSC). In just one month, they managed to cross $1 billion in assets under management.
Following this, Brazil and Chile have also greenlit their respective Bitcoin ETFs. On the other hand, Canada has managed to deploy a second Bitcoin ETF and four Ethereum ETFs, thoroughly cementing its lead in the global crypto ETF market.
Why Should Crypto Users Care About A Crypto ETF?
An ETF would make it much easier to invest in bitcoin. An ordinary person wouldn’t have to navigate a bitcoin exchange to gain exposure to bitcoin. Instead, they would just buy a share of an ETF — similar to how you’d buy any stock or ETF today using your trading account. A bitcoin ETF would help users avoid setting up a wallet, choosing an exchange, maintaining a storage solution, and performing all of the other steps needed to buy bitcoin. More importantly, a bitcoin ETF would also be the first major seal of approval for cryptocurrencies: it would be the first signal from a major US regulator that cryptocurrencies like bitcoin were acceptable investments.
What next?
Bitcoin ETFs coming to the market are seen as inevitable. The case in favor of such exchange-traded funds has grown ever since Bitcoin burst onto the scene, as these financial instruments could be included.
In the meantime, those who are itching for exposure in this market might want to start looking at ETFs that track blockchain companies, and others that are involved in this emerging technology. That’s because it is highly likely that these firms would see an upside to their share prices if Bitcoin embarks on a parabolic bull run.
Alternatively, those who have an interest in Bitcoin might have to suck it up and buy some until an exchange-traded fund comes along. Although this doesn’t offer all of the advantages associated with an ETF, many crypto-focused platforms have been vying to make it much easier for everyday consumers to purchase BTC for the first time.
No one knows what the future holds. This time next year, we might be able to offer a guide that looks at how to trade a Bitcoin ETF. But as things stand, it seems that US regulators need a lot more convincing that these funds can be offered safely and responsibly.
