Bitcoin ETFs Explained
The value of Bitcoin is growing constantly, as it is becoming a viable investment asset that anyone can invest in. Technically, no one can participate in the program, as some institutions and individuals can only participate in a highly regulated manner. Some believe that an ETF will be able to fulfill this purpose.
Bitcoin ETFs have already been introduced in Canada and the U.S., a move aimed at increasing cryptocurrency adoption among investors. Now, let's take a closer look at what an ETF is and what it could mean for Bitcoin.
Introduction
The Bitcoin market and cryptocurrency markets have come a long way. The technology behind this payment system has not been around for more than a decade, when it was only used by a small group of enthusiasts, and the price was around 10,000 BTC for two pizzas.
Several years later, and we have seen many businesses successfully developing on top of this industry, numerous cryptocurrency projects, the birth of DeFi, and much, much more. There has also been a booming institutional adoption. MicroStrategy has converted more than 2 billion dollars worth of assets from their balance sheet into Bitcoins, and you may soon be able to purchase your next Tesla using Bitcoins.
But what are the remaining building blocks before Bitcoin will be regarded as an important component of the global macroeconomic environment? One of the ways to do this would be to provide a regulated exposure for institutions and much more traditional players. Some say the best way to do it is through an ETF.
What is a Bitcoin ETF?
Here's a quick overview. A ETF tracks the price of an underlying asset and is traded on a stock exchange. There are different ETFs in different industries and asset classes. For instance, gold ETFs have been around for decades and they are designed to track the price of gold. A Bitcoin ETF would also work that way - its price would be based on the price of bitcoins.
Unlike cryptocurrency exchanges, ETFs are regulated financial instruments, and thus, they trade on traditional markets like the NASDAQ or the NYSE and not on cryptocurrency exchanges of any kind. It could change in the future, however, as the boundaries separating the traditional finance industry from the world of cryptocurrency continue to blur.
Why is a Bitcoin ETF important?
Well, it's true that Bitcoins aren't the easiest assets to deal with. A large institution may experience some serious headaches when it comes to custody matters, for example. Goldman Sachs will not conveniently plug a hardware wallet into a laptop and, without any other delay, simply move $2B of Bitcoin to it. Large financial institutions do not operate in the same way as individual investors. In order for them to be able to participate in this space, they need a complex regulatory framework and a complex financial plumbing system.
In this regard, an ETF can go a long way towards increasing adoption as well as expanding the pool of potential investors. In the traditional markets, it could enable participants to have price exposure without having to worry about all the nitty-gritty of having to own the coins.
The Bitcoin ETF can also hold other assets in addition to bitcoin. Suppose that an ETF for Bitcoin was to hold a basket of assets, such as Bitcoin, Ethereum, Tesla stock, gold, and so forth. As a result, investors might be able to benefit from some diversification.
A brief overview of Bitcoin ETFs
Most of the time when people talk about Bitcoin ETFs, they are usually referring to the ETFs that trade on US markets. However, ETFs are available in many different markets. A Bitcoin ETF, which was the first to be launched on the Canadian exchange. This is an ETF that trades on Toronto Stock Exchange under the ticker BTCC called the Purpose Bitcoin ETF.
Even so, the majority of attention was focused on whether the US regulators would allow, or not, the launch of a US Bitcoin ETF. Consequently, in October 2021, the SEC accepted a request from ProShares to list their Bitcoin Strategy ETF (BITO) on the New York Stock Exchange (NYSE).
Due to the volatility of the Bitcoin markets, the lack of regulation associated with them, and their apparent vulnerability to market manipulation, most applications have been rejected. It appears that some of these issues are true to some extent, but it is probably also true for many other financial markets that already have ETFs.
During the last bear market, Bitcoin built a great deal of the financial infrastructure needed to be considered a legit macro asset class. A few years ago, if MicroStrategy had wished to purchase billions of Bitcoin, it probably would have been extremely difficult. Fortunately, both the infrastructure and the liquidity are now available and ready to handle even large investments.
With this ongoing maturation of the Bitcoin markets, regulation likely turned the tide for the US regulators, and it eventually paved the way for the US Bitcoin ETF we see today.
What is a Bitcoin futures ETF?
Some Bitcoin ETFs are not backed up by Bitcoin that is actually held within wallets, as those are known as Bitcoin Physical ETFs. A number of Bitcoin ETFs use BTC futures contracts as their underlying asset, such as the BITO.
So far, the SEC has given preference to futures ETFs linked to the Chicago Mercantile Exchange (CME) Bitcoin futures, a security already regulated by the SEC. An ETF that trades bitcoin futures uses a price that is based on the CME's Bitcoin Reference Rate (BRR), as opposed to the spot price. In other words, the only difference between an ETF with a Bitcoin Physical component and an ETF with a Bitcoin futures component is where the price is derived from.
Should I invest in a Bitcoin ETF?
Could a Bitcoin ETF be the right investment instrument for you if you want to invest in bitcoin? If you're an individual who wants to prevent their savings from being wiped out by the weakening of fiat, then you might be better off just investing in Bitcoin instead.
Ultimately, Bitcoin is about democratizing the process of finance. However, it is worth noting that Bitcoin actually means many things to different people. The most important thing is assuring that you have direct custody of your savings. Moreover, there are numerous ways that you can earn a yield on your Bitcoin or use your Bitcoin to borrow money.
It must be said, however, that there are advantages to investing in Bitcoin ETFs, so if you think about these benefits, then an ETF can also be a good option.