Are you interested in getting exposure to the exciting potential of Bitcoin without the need for direct ownership, security procedures, or secure storage?
A Bitcoin Exchange-Traded Fund (ETF) offers that opportunity, allowing you to trade Bitcoin indirectly through the ETF.
Did you know that currently, Bitcoin ETFs have limited options when it comes to what they can hold?
They can only invest in Bitcoin Futures contracts or stocks of companies and other ETFs with Bitcoin-related exposure.
These ETFs can assist and offer investors the advantage of not having to manage their own Bitcoin.
That eliminates potential intimidation for novices and reduces the associated risks depending on your chosen approach.
There are several Bitcoin ETFs available; it is worth noting that all of them derive their value from the prices of Bitcoin spot markets Futures contracts.
However, it is essential to note that the Securities and exchange commission (SEC) is diligently evaluating whether to eventually approve ETFs directly holding Bitcoin.
The SEC would ensure careful consideration of potential market impacts and regulatory concerns.
Bitcoin ETF Explained: What Is a Bitcoin ETF?
A Bitcoin ETF is an Exchange-Traded Fund that tracks the value of Bitcoin or different assets tied to its price.
Unlike a cryptocurrency exchange, an ETF is traded on traditional exchanges.
A company buys Bitcoin, turns it into a security, and then sells or trades it on an exchange.
If you’re an investor looking to buy shares of Bitcoin, consider Bitcoin ETFs.
By doing so, you can track Bitcoin’s performance without the hassle of setting up and managing a crypto wallet or dealing with cryptocurrency exchanges.
It’s a convenient alternative for Bitcoin investing.
So, one great thing about a Bitcoin ETF is that it provides a regulated and familiar investment structure.
As an investor, you can easily track Bitcoin’s price changes within established financial markets.
Notably, the Bitcoin ETF progress in the U.S. remains an ongoing issue.
The SEC has repeatedly rejected ETF proposals, so there isn’t any ETF directly representing a specific cryptocurrency.
However, the first Bitcoin ETF in the U.S., the Proshares Bitcoin Strategy ETF (BITO), won SEC approval in October 2021.
It is now listed on the New York Stock Exchange.
Spot Bitcoin ETFs are still awaiting approval from the SEC.
In 2013, the Winklevoss brothers proposed the Winklevoss Bitcoin Trust as an example of a Bitcoin ETF.
However, their proposal was ultimately rejected by the SEC.
Blackrock, Fidelity, Invesco, and VanEck, and other major financial institutions have submitted applications to the U.S. Securities and Exchange Commission (SEC) to launch ETFs.
Currently, the United States has not yet approved a spot Bitcoin ETF.
However, investors buy Bitcoin Futures ETFs instead.
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Common Types of ETFs
Check out six common types of ETFs:
Equity ETFs: These ETFs invest in stocks from various countries, sectors, styles, and sizes. They have the ability to track broad market indexes like the S&P 500 or focus on specific niches such as technology or dividend stocks.
Fixed Income ETFs: These ETFs allocate funds to a diverse range of bonds and debt securities issued by governments, corporations, or municipalities. They can have different maturities, credit ratings, and interest rates.
Commodity ETFs: These ETFs invest in physical commodities, such as gold, silver, oil, and agricultural products. Some of them may utilize Futures or Options contracts to track the prices of these commodities.
Currency ETFs: These ETFs invest in foreign currencies like the Euro, Yen, and the Pound. Additionally, they utilize derivatives as a hedge against currency fluctuations. By doing so, investors can access various regions and economic conditions.
Multi-asset ETFs: These Exchange-Traded Funds (ETFs) offer investors a diversified portfolio by investing in a combination of stocks, bonds, commodities, currencies, and other assets. You can buy and sell excessive fund allocations across asset classes and risk levels.
Alternatives ETFs: These ETFs invest in digital assets or strategies that are not commonly found in traditional portfolios, such as real estate, private equity, hedge funds, or leveraged and inverse positions. They have the potential to offer higher returns and carry more risk than conventional ETFs.
Currently, as of June 2023, there are four Bitcoin Futures ETFs available for trading in the United States: ProShares Bitcoin Strategy ETF (BITO), Valkyrie Bitcoin Strategy ETF (BTF), VanEck Bitcoin Strategy ETF (XBTF), and Invesco Bitcoin Strategy ETF (BTCF).
How Does a Bitcoin ETF Work?
ETFs can offer investors portfolio diversification by holding multiple assets.
In the case of such ETFs, the price per share fluctuates with the Bitcoin price.
If the price of Bitcoin rises, the unit price of the ETF also increases, and vice versa.
However, it is important to note that these ETFs trade on traditional stock exchanges like the New York Stock Exchange (NYSE) rather than cryptocurrency exchanges.
Want to understand how such ETFs work?
Take a look at the following points!
They’ll give you a clear idea of how these ETFs function.
- The organization sponsors the ETF, creates it, and buys the underlying asset it represents.
- When it comes to ETFs, legal agreements are made with big brokers, who act as authorized dealers for the fund.
- The authorized dealers purchase significant blocks of shares directly from the ETF. Then, they sell these shares to individual and institutional investors through a stock exchange.
- When investors trade shares, they typically do so freely within a specific price range that reflects the underlying value of the fund’s assets.
3 Structures of ETFs
There are three distinct ways in which ETFs can be structured:
Exchange-Traded Open-End Fund: A common type of ETF that holds a portfolio of assets and distributes income and capital gains to shareholders. These funds have the flexibility to utilize derivatives and engage in securities lending for enhanced returns.
Exchange-Traded Unit Investment Trust (UIT): A type of early ETF with a fixed asset portfolio and doesn’t reinvest dividends. One interesting thing about UITs is that they cannot use derivatives or securities lending.
Exchange-Traded Grantor Trust: A type of ETF that holds either a single commodity or a basket of commodities. Interesting fact: it’s taxed as collectibles and even distributes K-1 forms to shareholders.
Recommended Read: Can the IRS track crypto?
Is a Bitcoin ETF better than owning Bitcoin?
There isn’t a straightforward answer to this question.
Each investor has their own unique needs and expectations.
For instance, a Bitcoin ETF doesn’t necessarily imply Bitcoin ownership, but it still provides the necessary exposure to price movements.
Additionally, an ETF can be particularly beneficial for retail investors who prefer a more passive approach to price exposure, those who have reservations about Bitcoin, or traders seeking convenient portfolio diversification.
In contrast, if you are looking for regular trading, using BTC as a currency, or exploring the world of cryptocurrencies, you might find owning Bitcoin advantageous.
Owning Bitcoin directly offers several advantages over a potential Bitcoin ETF.
You have full control and freedom over your Bitcoin holdings instead of relying on an ETF provider to manage them.
Additionally, by skipping the ETF route, you can avoid incurring management fees that may eat into their overall returns.
You can purchase Bitcoin from various sources, including exchanges, brokers, and ATMs.
However, it is important to verify one’s identity before conducting these transactions.
Furthermore, there are Bitcoin Futures ETFs available for Bitcoin.
Although they offer price exposure, it might not be enough for everyone’s needs.
Embracing Bitcoin as a decentralized blockchain technology is better realized by directly engaging with the actual Bitcoin rather than through derivative products like an ETF.
Why Should You Buy a Bitcoin ETF Instead of Bitcoin?
You have diverse needs and expectations.
While a Bitcoin ETF does not grant ownership of BTC, it does provide exposure to its value.
If you prefer a hands-off investment approach but still seek to diversify your portfolio, investing in a Bitcoin ETF may be more suitable than purchasing Bitcoin directly.
The Bitcoin ETF offers a convenient way for you to enter the world of Bitcoin without the complexities of setting up a cryptocurrency exchange account.
Additionally, the Bitcoin ETF provides leverage to the value of Bitcoin. If the price of Bitcoin increases, so does the value of the Bitcoin ETF, and vice versa.
When considering investing in a Bitcoin ETF, one important factor to remember is the elimination of direct ownership risks associated with Bitcoin itself.
After choosing a Bitcoin ETF, you can avoid such risks.
However, it’s important to note that Bitcoin ETFs charge management fees for the convenience they offer.
Benefits and drawbacks of a Bitcoin ETF
Here are some benefits and drawbacks of ETFs for investors looking to diversify their portfolios.
Benefits of a Bitcoin ETF
Easy access: A Bitcoin Exchange-Traded Fund (ETF) enables investors to purchase easily and trade shares of the fund on a regulated exchange without opening accounts at crypto exchanges. This eliminates the need for them to navigate the complexities associated with directly acquiring, storing, and safeguarding Bitcoin.
Lower fees: An ETF is expected to have lower fees compared to other investment options like the Grayscale Bitcoin Trust (GBTC), which charges an annual fee of 2%. That makes an ETF a more cost-effective choice for gaining exposure to Bitcoin.
Tax efficiency: A Bitcoin ETF would provide enhanced tax efficiency compared to direct ownership of Bitcoin. Investors would be subject to capital gains tax only when they sell their shares, rather than incurring taxes for every transfer or expenditure involving Bitcoin.
Diversification: An ETF focused on Bitcoin could offer you a way to diversify your portfolio by adding exposure to the cryptocurrency market. That would allow you to benefit from its growth potential while managing risk and volatility levels effectively.
Liquidity: The liquidity of the Bitcoin market would be enhanced by introducing a Bitcoin ETF. This would enable more investors to participate in price discovery and trading activities related to the asset.
Regulatory oversight: An ETF would adhere to the regulations enforced by the SEC and other governing bodies. This implementation would foster increased transparency, accountability, and investor protection within the market.
Recommended Read: Who regulates bitcoin in the US?
Drawbacks of a Bitcoin ETF
Premium/discount risk: An ETF has the potential to trade either above or below its net asset value (NAV), depending on demand for its shares and the underlying Bitcoin. This disparity could lead to favorable arbitrage opportunities or potential losses for investors.
Tracking error: A Bitcoin ETF would likely encounter tracking error, which refers to the variance between its performance and that of its benchmark (Bitcoin). This discrepancy can stem from factors like fees, expenses, rebalancing, and market conditions.
Counterparty risk: An ETF may encounter the risk of counterparty default. This refers to the possibility that any of the parties involved in the fund’s operations, such as the custodian, Futures broker, or exchange, could fail to meet their obligations or declare bankruptcy.
Regulatory uncertainty: An ETF would potentially face regulatory uncertainty as the SEC and other authorities in the US have yet to approve any direct or indirect ETFs. Delays, rejections, or changes in regulations could impact its viability and appeal.
The Future of Bitcoin ETFs
You’ve probably noticed that Bitcoin and other cryptocurrencies can be incredibly volatile.
Their prices often swing dramatically in short periods.
You’re unsure what the future holds for these assets.
Since its inception, Bitcoin has seen tremendous price fluctuations, surging to over $69,000 per BTC, only to drop below $18,000 in a matter of eight months.
Should you consider cryptocurrencies, especially Bitcoin, as viable long-term investments?
The decision rests solely with you.
Nonetheless, seeking guidance from a financial advisor before making any investment choices is always advisable.
Recommended Read: Learn the differences between CBDC vs Bitcoin
The Bitcoin Exchange-Traded Fund (ETF) presents an attractive option for investors looking to participate in the potential of Bitcoin without directly owning it.
These ETFs offer regulated investment structures, mitigating risks and providing comfort for newcomers.
Although direct ownership grants control and avoids management fees, ETFs offer convenient access and diversification.
However, the future of Bitcoin ETFs remains uncertain due to regulatory challenges and market volatility.
As with any investment, seeking professional advice and carefully considering individual needs and expectations is crucial.