An ETF stands for an exchange-traded fund and represents a tradable financial instrument that derives its value from a basket of assets in a market index. Another name for an exchange-traded fund is a tracker as it tracks the market movements of the assets contained within an index. For example, an ETF can be set up to track the S&P 100 index which contains the top 100 stocks in the United States by market capitalization.
Similar to stocks, an ETF can be traded on an exchange, hence the name “exchange-traded fund”.
Simply put, an ETF is similar to an investment in mutual funds only because it offers the flexibility that comes with tradable securities that allow the ETF to be bought and sold just like a stock.
The difference between investing in a mutual fund and investing in an ETF is that the ETF does not give ownership to the underlying assets in the index. Therefore, if you invest in an ETF that tracks the S&P100, you do not own any of the securities in the index’s asset basket. This is an advantage for ETFs as it reduces the expense of managing stocks as in the case of a mutual fund.
Table of Contents:
What is a Bitcoin ETF?
A Bitcoin ETF,
therefore, is an ETF that tracks the movement of the Bitcoin market.
Rather than buying bitcoin from a cryptocurrency exchange,
learning about cold and hot wallets, and finding a way to store wallets safely, an investor can buy Bitcoin ETF stocks and get the same exposure to Bitcoin as anyone buying Bitcoin from a crypto exchange.
What are the advantages of Bitcoin ETFs?
With a Bitcoin ETF, an investor can still enjoy exposure to the Bitcoin market without the risks associated with owning the digital asset. In addition, the investor will be able to go short the Bitcoin market if he believes that the price of Bitcoin is about to fall.
In a traditional crypto exchange, this level of flexibility is unprecedented. It is also significantly safer and faster to buy a bitcoin ETF from a reputable online broker than buying directly from an online crypto exchange. Most crypto exchanges lack sufficient liquidity and some support peer-to-peer trades, thus allowing counterparty risks.
The fact that Bitcoin ETFs simplify the process of investing in cryptocurrencies for regular retail investors and even institutional investors has increased the demand for cryptocurrency-related financial instruments and increased the number of requests to the Securities and Exchange Commission for the launch of Bitcoin ETFs.
Bitcoin ETFs are expected to increase acceptance of Bitcoin investments as public companies like Tesla and Square look into buying Bitcoin as an investment in their balance sheets.
What are the downsides of Bitcoin ETFs?
There are several disadvantages to investing in bitcoin ETFs compared to buying Bitcoin.
To begin with, the price of Bitcoin moves sharply and maintains a volatile trend throughout the trading period. Unlike traditional markets, the cryptocurrency market operates 24/7, 365 days a year. For investors seeking exposure to Bitcoin through ETFs, this could be a downside as Bitcoin ETFs can only be traded during market trading periods. An ETF investor could potentially have to wait for the market to open to download or buy more Bitcoin ETFs increasing the risk of losing profits or incurring significant losses.
Bitcoin ETFs also charge a management fee that can be expensive depending on the ETF manager’s expenses. Owning bitcoins on the other hand is free. The management fee of Bitcoin ETFs is usually paid to the professionals in charge of managing the investment on behalf of the client.
It is also likely that a Bitcoin ETF may have other underlying assets in its holding portfolio. In that case, if the price of Bitcoin increases by 50%, the exchange-traded fund will not accurately reflect the value of bitcoin since the final value of the ETFs will represent other assets of the group. Therefore, while a Bitcoin ETF might give exposure to the Bitcoin market, it may not necessarily track the price of Bitcoin accurately.
Also, owning Bitcoin on a crypto exchange or cold wallet gives you the flexibility to be able to exchange it for other cryptocurrencies. It is impossible to do this with an ETF since the ETF is not a cryptocurrency.
Owning Bitcoin comes with decentralized control of funds, a quality that is difficult to achieve with a Bitcoin ETF since an ETF is ultimately regulated and controlled by the government.
Where are Bitcoin ETFs available?
Currently, there are no Bitcoin ETFs in the United States. Although Europe has some crypto-tracking products that work like ETFs, Canada is the first jurisdiction to officially approve a Bitcoin ETF.
The Purpose Bitcoin ETF was proposed and approved in February 2021 and had epic trading on the first day at $64 million shares. In addition to the Purpose Bitcoin ETF, regulators in Canada have also approved a second Bitcoin ETF in the country called Evolve Funds Group’s ETF.
Are there ETFs for other cryptocurrencies?
In addition to the two Bitcoin ETFs, Canada also recently approved three Ethereum ETFs. Evolve ETFs, Purpose Investments and CI Global Asset Management have all received approval to launch Ethereum ETFs in Canada.
QR Capital, a blockchain investment firm in Brazil, is also set to release an Ethereum exchange-traded fund after gaining approval from the market regulator.
History of Bitcoin ETFs
The journey to Bitcoin ETF
approval by regulators has been long and treacherous, especially for companies in the United States looking to launch Bitcoin ETF products for their clients.
The Winklevoss twins were among the first to launch a petition for a Bitcoin ETF in 2013. Their petition was rejected by the SEC, after which they filed another application with the regulator in 2018. It was rejected again.
The SEC mentioned the fact that Bitcoin is traded on largely unregulated exchanges as a reason for disapproval. In addition to the Winklevoss twins, other entities that have seen their proposals rejected by the SEC include Bitwise and Wilshire Phoenix. The move by Canadian and Brazilian market regulators to approve crypto ETFs is the latest development in the history of Bitcoin ETFs and a sigh of relief for investors hungry for exposure to the cryptocurrency market.
Conclusion: Legitimize investments in cryptocurrencies
Bitcoin
ETFs have come a long way, and recent developments with the approval of the Purpose Bitcoin ETF in Canada and the Evolve Fund Group ETF, not to mention Brazil’s Ethereum ETF, is a welcome respite for the cryptocurrency market in general.
In general, investors remain optimistic about the future acceptance of Bitcoin and crypto ETFs in the US, even as institutional capital continues to flow into the crypto space. Bitcoin ETFs represent an important step towards legitimizing cryptocurrency investments.
