Bitcoin ETFs are exchange-traded funds that allow investors to buy Bitcoin and trade it on traditional market exchanges. How does it work? What are the advantages? Read this article to find out!
If you follow the crypto news you probably heard the buzz around Bitcoin ETFs. This instrument has been introduced to the stock market decades ago and only now is reaching the crypto industry.
In this article, we will explain what Bitcoin ETF is and how the market receives it after a long-awaited release.
What is an ETF?
ETF stands for Exchange-Traded Fund. In simple words, it is a type of security that has been issued by an investment fund. ETF tracks the price of an underlying asset or index, and, as the name suggests, trades it publically on the stock exchange. Today, ETFs are available for several assets and across many industries, ranging from commodities to currencies.
The most popular example is Standard & Poor’s 500 ETF (SPY), which tracks the S&P 500 Index. This index represents the basket of the top 505 publicly traded companies by market capitalization. A single ETF can contain many types of investments, including stocks, commodities, bonds, or a blend of different assets.
There are also blockchain ETFs (not to be confused with the Bitcoin ETFs) which represent the basket of exclusively blockchain-based companies. They have been on the market for a few years and the most popular examples include the Siren Nasdaq NexGen Economy (BLCN) and the Amplify Transformational Data Sharing (BLOK).
Advantages of an ETF
Unlike an investment fund, such as the Unit Investment Fund (UIF), you can trade ETFs in the same way as stocks. Thus, transactions in ETF shares can be carried out throughout the whole trading day and their price can vary depending on the supply and demand ratio and the activity of market participants.
ETF shares are usually more liquid than investment fund units, and they also may be traded on foreign exchanges. In addition, margin trading is allowed with ETFs.
Similar to traditional ETFs, Bitcoin ETF is an exchange-traded fund that uses BTC as an underlying asset. This means that the fund is buying the main cryptocurrency and selling it to investors in the form of publicly traded shares. There can be two types of funds — cash-settled or physically settled. In the latter case, the investor will receive the physical Bitcoin rather than cash on the exit.
Okay, but why so much buzz around Bitcoin ETFs if you can just register on the exchange or buy BTC directly?
Bitcoin ETF pros
In addition to the general ETF advantages listed above, Bitcoin ETFs have several benefits over traditional exchange-traded funds.
Convenience: barriers for traditional stock investors are erased. Investing in BTC ETFs does not require traders to go through all the hassle of setting up a wallet, registering on the crypto exchange, and worrying about safety of funds. Also, investors are not exposed to the risks of exchange hacks, fraud, and phishing attacks. These instruments may be of interest to traditional investors who do not want to dive into all the technical aspects of owning crypto.
If you want to buy Bitcoin in a traditional way but it feels too complicated, check out this guide. It explains 4 simple steps of bying your first BTC in plain English.
Regulations and taxes: In many countries Bitcoin is unregulated or carries an unclear status. This may lead to taxation and regulatory problems for investors. On the other hand, a Bitcoin ETF is traded officially on traditional stock exchanges, which means that it is regulated by respected institutions and eligible for tax efficiency.
Want to know whether your country welcomes or hates Bitcoin? This Bitcoin Regulation Guide will set it clear.
Asset diversification: Just like in traditional markets, crypto ETFs can represent a basket of multiple cryptocurrencies. For example, an ETF can consist of BTC, ETH, ADA, DOT, and USDT. Funds can also mix them with non-crypto assets, providing investors with a diversified basket to minimize the risks.
Bitcoin ETF cons
Despite its clear advantages, Bitcoin ETFs also have some negative sides, some of which go against the fundamental principles of cryptocurrencies.
Ownership: When you own a cryptocurrency you own it by all means, and there is no authority that can take it from you. This is not the case with Bitcoin ETFs, since it is traded on the public stock exchange and is government-regulated by definition.
Untradable for crypto: If you own Bitcoin you can exchange it for any of the thousand available coins on the market through the crypto exchanges in just a few clicks. However, since ETF is just an investment fund that tracks the price of BTC, it will be harder and more expensive to trade it for ETH, USDT, or any other crypto asset.
Fees: The convenience of using ETFs also has a downside — you have to pay the management fees to the fund that you invested in. Over time this may result in huge expenses if you own a sizable amount of publicly traded Bitcoin shares.
First Bitcoin ETFs
At the end of February first two Bitcoin ETFs launched on the Canadian stock exchange.
Purpose Bitcoin ETF (BTCC) was the first Bitcoin fund in North America and in the world to achieve ETF status. It sold an impressive $400 million worth of shares in its first two trading days. A week after launch, however, the volume of Purpose ETF plummeted to $17 million.
In the first week, BTCC raised over $590 million in assets — a resounding success for any ETF, much less a Canadian one with a small market. However, the drop in volume after a dizzying start underscores how quickly investors lose interest in new toys, especially those related to cryptocurrencies.
Just a day after Purpose launched their publicly traded Bitcoin shares, a second Canadian ETF, Evolve Fund Group (EBIT), entered the market. The fund sold over $35 million in shares and plummeted to approximately $3 million in the first trading week. As a tool to attract investors, Evolve went as far as to lower the management fees from 1% to 0.75%. Thus, this instrument is cheaper than BTCC, which trades at a 1% expense ratio.
While the first two Bitcoin ETFs were entering the Toronto Stock Exchange, other countries were playing catch up. On March 19th, the Brazilian Securities and Exchange Commission approved two publically traded Bitcoin funds. One is backed purely by Bitcoin, and the other is a blend of 6 cryptocurrencies, including BTC.
What’s next for Bitcoin ETFs
The crypto market has been buzzing around Bitcoin ETFs for a few years already. Many experts believed that it will be the beginning of a new era for Bitcoin, promising the BTC price to moon after ETF instruments enter the crypto markets. So far, this did not happen.
The first wave of interest was the combination of delayed demand, Bitcoin’s rise to new all-time highs, and the migration of investors from other cryptocurrency instruments. However, keep in mind that traditional investors are still studying the new product. They have to get used to it before they feel safe to use ETFs as an instrument on an everyday basis.
The main question for Bitcoin ETFs right now lays in the jurisdiction of the US government, specifically the Securities and Exchange Commission (SEC). Crypto community and traditional traders are waiting for the SEC to approve the first ETF on the American public stock exchange. So far, all proposals regarding Bitcoin ETFs have been rejected by the SEC.
However, the positive case of ETF in Canada and Brazil, and the new crypto-savvy chairman in the SEC may be the ground for the long-awaited BTC ETF introduction to the US markets. Will it change the game and boost the BTC price to new all-time highs? It’s hard to say, since, throughout the years of waiting, many institutional investors already figured out their paths into crypto without ETFs. It will definitely increase Bitcoin’s adoption, but only time will tell whether it will be a game-changer.