All You Need To Know About Bitcoin ETFs

by | Dec 7, 2021

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This article is an introduction to ETFs in Bitcoin and the comparison to their counterparts in the traditional finance system. Before we get our heads into Bitcoin ETFs, let us first understand what ETFs mean in the world of traditional finance.

What is an ETF?

An ETF (Exchange-Traded Fund) is an asset that can be structured in such a way that it tracks the performance of a particular asset or a group of assets (like stocks, bonds, currencies, commodities, etc.) and can be sold and bought in any exchange platform just like a regular stock without actually owning the underlying asset.

An ETF can track multiple underlying assets according to the needs of its users thus allowing an investor to invest in a wide range of sectors by purchasing only a single ETF. Diversification can differ according to the type of ETF.

Unlike mutual funds, ETFs can be traded throughout the day on any common exchange platform hence increasing their liquidity. Apart from offering very low expense ratios and efficient time management, ETFs also decrease the number of broker charges that an investor might have to pay if they trade individual stocks.

What Is a Bitcoin ETF?

Well, a cryptocurrency ETF is structured to trace the price of a particular digital currency or a group of digital currencies (here the given cryptocurrency acts as the underlying asset of the ETF). Thus allowing investors (mainly from the trade finance community) to trade the ETF without actually directly dealing with cryptocurrencies. Similar to any other cryptocurrency ETF, as the name suggests, Bitcoin ETF tracks the performance of Bitcoin.

Bitcoin ETF should not be confused with blockchain ETF. Unlike Bitcoin ETFs, blockchain ETFs trace the stock market performances of companies that have invested in blockchain technology. To understand the major differences between these two types, it is necessary to understand the fact that Bitcoin is a type of cryptocurrency whereas blockchain is the technology beneath it.

Spot Bitcoin ETF and Futures Bitcoin ETF 

In the case of Spot Bitcoin ETF, the exchange settlement of the cryptocurrency is done immediately. The trader has direct control over their Bitcoin as the Bitcoin is in the physical custody of the investment firm launching the ETF. The firm buys Bitcoin, keeps them in its custody, and sells the shares of the ETF, allowing investors to own a share of that ETF. Thus indirectly getting exposure to Bitcoin price movements without dealing with the hassle of self-custody Bitcoin in a wallet and managing private keys.

In the case of Futures Bitcoin ETF, however, the concerned participants agree to buy or sell Bitcoin ETF at a fixed price on a fixed date depending on whether the trader is long or short. This type of contract helps the trader to hedge and lock in profits in the volatile market of Bitcoin. In this type of ETF, traders can hedge against a sizable position in the spot market even with low-sized contracts because of the high leveraging power of this type of ETF.

Advantages and Disadvantages of Bitcoin ETF 

Buying and storing Bitcoins can be a complicated process for users who are not familiar with the technology on which it runs. Through Bitcoin ETFs, traders can now trade Bitcoin without having to worry about managing their cryptocurrency and the related security issues. By using ETF, traders can also bypass cryptocurrency exchanges and trade through the traditional exchanges and markets. 

Apart from this, Futures Bitcoin ETF allows traders to short sell their shares if they think there will be a drop in the price of Bitcoin in the future. There is, however, no such advantage while trading directly in Bitcoin. Cryptocurrency ETF thus allows any traditional trader to interact with the world of digital currencies in an environment they are already familiar with. Thus marking the beginning of the acceptance of cryptocurrencies in the traditional finance market.

According to the United States Securities and Exchange Commission (SEC), the lack of regulation in the case of digital currency makes it susceptible to fraud and manipulation. In the US, though Spot Bitcoin ETF has not yet been approved, only Futures Bitcoin ETF has recently received approval. 

On the 19th of October, 2021, ProShares Bitcoin Strategy ETF launched the first-ever futures Bitcoin ETF shares under the name of BITO which will track Bitcoin (BTC/USD) through futures contracts traded at the Chicago Mercantile Exchange (CME). Canada and some of the European countries have already approved the trade of both spot and futures Bitcoin ETFs.

Final Words 

With the recent introduction of the Bitcoin ETF into the world of finance, it would be interesting to see which way this revolution takes its turn. It certainly will onboard a big pool of traditional investors to digital assets who’ve been skeptical and weren’t ready for self-custody of assets such as Bitcoin and other cryptocurrencies.

Head of Content Marketing @ HyperLinq. His love for Chai and mountains precedes everything. Often wonders about things like, "why $1 earned through leverage feels 100x better than $1 earned selling your time?"

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