Bitcoin ETFs are one of the most talked about topics in the cryptocurrency space since 2017. They’ve been described as a tool for driving Bitcoin adoption and as a shortcut to introducing investors into the world of cryptocurrencies. In fact, the Securities Exchange Commission (SEC) has even stated that it is open to approving a Bitcoin exchange traded fund (ETF).
But what exactly do they entail? What makes them different from traditional investments like stocks and bonds? And how does the SEC decide whether or not to approve a Bitcoin ETF?
What is an Exchange-Traded Fund (ETF)?
An exchange-traded fund (ETF) is a fund or security that tracks the price movements of another asset. For example, you could invest in an ETF that tracks the performance of Apple stock. These products are often referred to as mutual funds because they are traded like stocks on public exchanges.
The main difference between ETFs and traditional mutual funds is that ETFs trade publicly while mutual funds do not. In addition, some mutual funds offer exposure to certain sectors of the market such as large cap companies or small cap companies whereas most ETFs provide diversified exposure across different types of investments.
How Does a Bitcoin ETF Work?
ETFs are financial instruments that track an index, commodity or currency. They are traded like stocks, but offer exposure to multiple holdings rather than just one. Unlike mutual funds, ETFs trade throughout the day and do not require shareholders’ approval.
The most common types of ETFs include equity ETFs, bond ETFs, commodities ETFs and hybrid ETFs. Equity ETFs invest in stock indices, while bond ETFs invest in bonds. Commodities ETFs invest in futures contracts linked to particular commodities. Hybrid ETFs combine different investment strategies into one instrument.
A cryptocurrency ETF is similar to an equity ETF, except that it invests in cryptocurrencies.
Cryptocurrency ETFs are still very rare and hard to find because they must go through a lengthy regulatory process. However, the Securities Exchange Commission recently gave the green light to two bitcoin ETF proposals—the Winklevoss Bitcoin Trust and SolidX Bitcoin Shares. Both ETFs will allow investors to gain access to bitcoin without actually buying bitcoins directly.
What Could Be the Advantages of the Bitcoin ETFs?
The Securities and Exchange Commission (SEC) has been delaying approval of the Bitcoin exchange-traded fund (ETF). This has caused many people to question whether it is possible to launch such products at all. However, there are several reasons why it might actually be worth considering launching one.
Bitcoin and other cryptocurrencies have come under increased scrutiny since the start of 2018. Many experts see them as a bubble waiting to burst. In addition, the SEC has delayed approving the Winklevoss Bitcoin Trust, which could lead to doubts over the legitimacy of the entire sector.
If you want to invest in Bitcoin, you have to do it directly via cryptocurrency tokens, which are highly volatile and hard to trade. If you want to invest in a product that allows you to gain exposure to Bitcoin without having to go through the hassle of buying individual coins, however, things look different.
There are three major types of Bitcoin ETFs: futures contracts, commodity trading advisors (CTAs), and index funds. Futures contracts allow you to speculate on future price movements while CTAs provide access to the underlying assets. Index funds are simply a collection of securities that track an index, like the S&P 500 or Dow Jones Industrial Average.
This article focuses on the second type – CTAs. They are similar to mutual funds, but instead of investing in a single stock, they invest in a basket of cryptoassets. These baskets are called crypto indices, because they resemble traditional indices.
Proponents of ETFs argue that they will help increase the visibility of digital currencies and blockchain technologies, which in turn will make it easier for mainstream institutions to enter the market.
They claim that the introduction of Bitcoin ETFs will give the public greater confidence in the industry, allowing investors to feel comfortable with investing into crypto assets.
Bitcoin ETFs vs. Direct Investments in Bitcoin
The proponents of Bitcoin ETFs argue that there are several benefits associated with the use of these products over direct investments in Bitcoins. They include:
– Easy access to funds – Investors could buy Bitcoins directly via exchanges, however, this process is quite complicated and requires a lot of work on the part of the investor. With an ETF, everything is automated; you don’t even need to open an account. You simply deposit cash into the fund and let it do the rest.
– Lower transaction costs – When buying Bitcoins directly, the buyer needs to pay fees to the exchange where he bought the coins. This cost is added to the final price of the purchase. An ETF does not charge any additional fees.
– Better liquidity – A good number of people prefer to invest in securities rather than cryptocurrencies because they feel safer with their investments. However, many crypto enthusiasts believe that the market is too volatile and risky to put their money in. Therefore, they look for alternatives like Bitcoin ETFs. These products allow investors to trade the value of Bitcoins without worrying about the fluctuations in the cryptocurrency market.
– Greater diversification – Many experts agree that Bitcoin is a great asset to add to one’s portfolio, especially since it offers greater returns than traditional assets. However, due to the volatility of the digital currency, most people choose to keep their investments in fiat currencies. By combining both types of assets, investors gain exposure to both worlds.
What Are Potential Weaknesses of the Bitcoin ETF Model?
Bitcoin ETFs have gained a lot of attention over the past few months. They offer investors exposure to cryptocurrencies without having to buy them directly. However, there are several concerns about the viability of this model.
The biggest concern is the lack of regulation surrounding cryptocurrency trading. As long as there is no clear framework governing the industry, it will remain vulnerable to fraudsters, hackers, and market manipulators.
Another major problem is the fact that most ETFs are based on the price of bitcoin, rather than the underlying technology behind the currency. This makes it difficult for financial institutions to invest in a product that does not actually exist.
In addition, many institutional investors are hesitant to invest in products that are not regulated by a government body. In the case of Bitcoin ETFs, this means that they must rely on self-regulation by the companies involved.
Finally, the question arises whether ETFs are even necessary. There are already plenty of ways to trade digital currencies without needing a fund manager. For example, you could simply open up an account with Coinbase and start buying and selling coins directly.
Differences between Bitcoin ETFs, Blockchain ETFs, ETNs and ETPs
Bitcoin ETFs are securities that trade like traditional stocks. They are designed to mirror the price movements of bitcoin, the world’s most popular digital currency. However, unlike traditional stock markets where investors buy shares in publicly traded companies, they are backed by actual bitcoins. This allows investors to speculate on the future value of cryptocurrencies without actually owning them.
Blockchain ETFs are different because they track the performance of companies that invest in the blockchain industry. Unlike Bitcoin ETFs, however, they do not hold actual bitcoins. Instead, they track the price movement of companies that use blockchain technologies. These include companies that issue tokens, offer payment solutions, provide insurance, etc.
Unlike Bitcoin ETFs, blockchain ETFs are not listed on any exchanges. Rather, they are traded over the counter.
Finally, there are exchange-traded products (ETPs). These are basically financial instruments that allow you to bet on whether the market will rise or fall. An example of an ETP is an inverse index fund. Its goal is to generate returns opposite to those of the benchmark index. As a result, an investor who buys into an ETP makes money if the market falls while loses money if the market rises.
Downsides of the Bitcoin futures ETF
The biggest problem with Bitcoin futures ETF proposals is the lack of accurate price tracking. This issue arises because the price of Bitcoin futures contracts differs from the underlying price of Bitcoin. For example, if the futures price is higher than the actual price, it indicates that the ETF is following price movements incorrectly. If the futures price is lower, however, it implies that the ETF is performing correctly. But there is another downside to the Bitcoin futures market that could affect the ETF’s performance.
How does Bitcoin spot ETF work?
Bitcoin spot ETFs allow investors to track the price of Bitcoin through a financial product rather than buying it directly. This is done by taking advantage of the fact that Bitcoin is traded in futures contracts, and therefore, the futures contract itself can be used as a proxy for the real-world cryptocurrency.
The process works like this: An investor buys a futures contract, and the exchange automatically converts it into the underlying asset — in this case, Bitcoin. Then, the investor sells the futures contract immediately, receiving cash in return. The proceeds are invested in another future contract, and the cycle continues.
In theory, this allows investors to buy Bitcoin without actually owning it.
Investing in Bitcoin ETFs
Bitcoin strategy ETFs are becoming increasingly popular among institutional investors looking to take advantage of the cryptocurrency’s surging value. A number of different companies around the world have filed paperwork to list their respective products on exchanges such as the New York Stock Exchange. These include Bitwise Asset Management, VanEck SolidX, ProShares, Direxion, Granite Shares, and Digital Currency Group.
The SEC has been reviewing the applications submitted by these firms since January 2018, but it hasn’t taken action yet. The agency plans to make a decision sometime later this year.
Meanwhile, another type of crypto fund exists that doesn’t require approval from regulators. BITO is designed to give investors access to Bitcoin without having to actually purchase the cryptocurrency. BITO is traded on the OTC Markets’ Pink Sheets, making it easier to trade than traditional cryptocurrencies. BITO is a good option for people who aren’t interested in investing in Bitcoin directly but still want some exposure to the asset.
You can buy BITO through online brokers, just like any other stock. If you decide to invest, determine how much you want to buy and set a limit for yourself. Then place a market order to buy the amount of shares you specified.