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Bitcoin ETFs (Exchange-Traded Funds) Explained

ETF (Exchange-Traded Fund)
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If you haven't heard about the Spot Bitcoin ETF, you've probably been living under a rock. This event is a major milestone in the cryptocurrency world, bringing together traditional finance and decentralized finance. It validates the leading cryptocurrency and the wider DeFi movement. If you want to know more, keep reading.

If you know what ETFs are, you can skip this first bit.

What Are ETFs?

An ETF is an investment security that pools funds and functions like a mutual fund. ETFs follow specific indexes, sectors, commodities, or other assets. Unlike mutual funds, ETFs can be bought or sold on a stock exchange, like regular stocks. They can track the price of a single commodity or a diverse collection of securities. Some ETFs are designed to follow specific investment strategies.

ETFs have low fees because trades occur between investors, not directly with the fund company. This eliminates the need for the fund company to handle your order, provide you with the same documents, or enter the market to execute your order. As a result, costs are significantly reduced.

Quick Recap

  • An exchange-traded fund (ETF) is a collection of securities that can be purchased and sold on an exchange, just like a stock.
  • ETF share prices change frequently throughout the day as investors buy and sell the ETF. This is in contrast to mutual funds, which are only traded once a day after the market closes.
  • ETFs can include various types of investments, such as stocks, commodities, or bonds. Some ETFs focus on U.S.-based holdings, while others have an international focus.
  • ETFs provide cost-effective investment options with lower expense ratios and reduced broker commissions compared to purchasing individual stocks.

So now you understand ETFs a little better, we will now give you an update as to where things are at, explain what the much anticipated Spot Bitcoin ETF is, how it differs from other types of ETFs, what it means for you, who is offering it and how you can invest…

Status Quo

The SEC has approved previously Bitcoin futures ETFs, including the ProShares Bitcoin Strategy ETF. Other companies like VanEck, Valkyrie, Simplify Asset Management, and GlobalX have also launched bitcoin futures-linked ETFs (see below for differences between spot and futures-based ETFs).

The SEC has not yet approved a spot bitcoin ETF, citing concerns related to investor protection, market manipulation, and other regulatory issues. Several companies, such as BlackRock, WisdomTree, and Fidelity, have submitted applications for spot bitcoin ETFs and are awaiting approval.

The US Securities and Exchange Commission will decide on Spot Bitcoin ETF applications by Wednesday (Jan 10, 2024). Bitwise has the lowest fee of 0.24% for its proposed ETF, while Grayscale's Bitcoin Trust has the highest fee of 1.5%. It is unlikely that Grayscale will be able to maintain such a high fee with market competition. Stay tuned.

As of Jan 9, 2024, the price of Bitcoin has steadily risen in the past 30 days, currently approaching $47,000. This increase is likely due to the anticipated Spot Bitcoin ETF, which signals the recognition and acceptance of Bitcoin as a popular investment among the public and large financial institutions.

So what, exactly, is a Bitcoin ETF and how will I be able to invest?

A bitcoin ETF is a financial product that allows investors to track the price of bitcoin without owning the asset. It's like investing in a gold ETF, where you're betting on the price without owning physical gold.

A spot bitcoin ETF allows traditional investors to participate in the cryptocurrency market without the need to directly buy or handle cryptocurrencies. This regulated option has gained popularity among retail and institutional investors due to its simplicity and security.

Like other ETFs, investors can buy this product through established platforms and smartphone apps. For instance, BlackRock offers iShares ETFs, which can be purchased through platforms such as eToro, Interactive Brokers, Trading 212, Charles Schwab, Fidelity, Robinhood, and more.

It is important to note that all the press activity is around Spot Bitcoin ETFs. Currently, there are no spot bitcoin ETFs available in the U.S. The Securities and Exchange Commission (SEC) has hindered the launch of these ETFs. However, there are existing ETFs that are linked to bitcoin futures. So what is the difference?

What are the types of bitcoin ETFs?

There are two main types of bitcoin ETFs: spot and futures.

Spot Bitcoin ETF

A bitcoin spot ETF is an exchange-traded fund designed to offer investors direct exposure to the current market price of bitcoin.

The term "spot" refers to the immediate or current price of the underlying asset, which is bitcoin itself. A bitcoin spot ETF typically holds actual bitcoin as its underlying asset and aims to closely track the real-time price of bitcoin.

To be clear, there are spot bitcoin ETFs available, like the 21Shares Bitcoin Core ETP (CBTC), but these are all located outside of the U.S. The significance around all the press speculation is that U.S. regulators will approve a Spot Bitcoin ETF in U.S.A. - the world’s largest economy.

Futures Bitcoin ETFs

Futures ETFs do not physically hold bitcoin. Instead, they utilize bitcoin futures contracts to obtain exposure to the cryptocurrency. A bitcoin futures contract enables investors to speculate and make predictions on the future price of bitcoin.

Futures-based bitcoin ETFs can exhibit different behavior compared to spot bitcoin ETFs. There may be costs involved in rolling over or settling futures contracts. Certain futures-based bitcoin ETFs are specifically designed to offer leveraged or inverse exposure to bitcoin's price. This allows investors to magnify both gains and losses.

Regulations and product offerings can change over time, so it's important to keep yourself updated on the latest developments in the bitcoin ETF market, including any new product types that may emerge. Additionally, the availability and structure of bitcoin ETFs may vary by country and region due to regulatory factors and market demand.

Why are investors interested in bitcoin ETFs?

The demand for a bitcoin ETF is driven by the desire for easy access, convenience, and exposure to bitcoin as an asset class. Here are some key reasons for people's interest in bitcoin ETFs:

  1. Accessibility: ETFs are traded on stock exchanges, making it easy for mainstream investors to buy, own, and trade bitcoin-related assets through their brokerage accounts. This accessibility is especially appealing to investors unfamiliar with cryptocurrency exchanges or reluctant to use them.
  2. Regulatory scrutiny: A bitcoin ETF would be regulated, providing investor protection and transparency. This can reduce concerns about fraud and market manipulation in unregulated cryptocurrency markets.
  3. Portfolio diversification: Investors see bitcoin as a diversification tool. By using an ETF, they can include bitcoin in their portfolios without needing to directly hold and manage digital assets.
  4. Widespread approval: The bitcoin ETF indicates acceptance and integration of cryptocurrencies into traditional finance.

In Conclusion

The Spot Bitcoin ETF is a highly anticipated development in the cryptocurrency market, bridging the gap between traditional finance and decentralized finance. While Bitcoin futures-based ETFs have already been approved, the approval of a spot Bitcoin ETF by the U.S. Securities and Exchange Commission (SEC) remains pending. This approval would mark a crucial step in validating Bitcoin as a mainstream investment asset. Investors are attracted to Bitcoin ETFs due to their ease of access, regulatory oversight, portfolio diversification benefits, and the signal they send about the acceptance of cryptocurrencies in traditional finance.

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