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What are Bitcoin ETFs?

19 Dec, 2023 6 min read
Bitcoin ETFs

Investors who like to be flexible and spread their money across different things while saving on costs and taxes often choose Exchange-Traded Funds (ETFs). But what's an ETF? This article is here to delve into the topic of crypto ETF meaning and what Bitcoin ETFs are, discuss their advantages and disadvantages, explore how the Securities and Exchange Commission (SEC) gives crypto ETF approval, and learn how to buy Bitcoin ETFs.

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Bitcoin ETF. What is it, and how does it work?

Let's begin our discussion of "What are Bitcoin ETFs?" by understanding the crypto ETF meaning. 

ETF shares, much like individual stocks, experience dynamic trading throughout the day, influenced by market supply and demand. In a parallel manner, Bitcoin ETFs, such as the ProShares Bitcoin Strategy ETF traded on NYSE Arca, mirror the value of BTC but operate on conventional stock exchanges rather than crypto platforms, distinguishing them from cryptocurrency exchange-traded funds.

Notably, these ETFs provide a convenient avenue for investors to engage with Bitcoin without navigating the complexities of cryptocurrency exchanges, offering a form of price leverage in the process. The Securities and Exchange Commission (SEC) in the United States, however, has consistently rebuffed multiple proposals for Bitcoin ETFs, citing SEC crypto ETF concerns over the unregulated nature of the crypto market.

Bitcoin ETF

A majority of Bitcoin ETFs adopt futures contracts to replicate the cryptocurrency's performance. This strategic use of futures empowers investors to hedge against market volatility, ensuring the ability to buy or sell a specific cryptocurrency at predetermined future prices. Alternatively, investors seeking exposure to Bitcoin without direct acquisition can explore opportunities in cryptocurrency and blockchain companies that contribute leverage to the crypto market.

An ETF in crypto tracks the price movements of an underlying asset or index. In the case of a Bitcoin ETF, the value of one share aligns with the fluctuation in BTC's value. Should the value of Bitcoin surge, the ETF's value follows suit, and conversely, during declines. Importantly, these ETFs are traded on established stock exchanges like the NYSE, highlighting their accessibility across various assets and industries, spanning commodities and currencies.

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Are crypto regulators enthusiastic about Bitcoin ETFs?

Investment giants BlackRock and Fidelity are leading the way in introducing Bitcoin exchange-traded funds (ETFs). This move could potentially make investing in Bitcoin more affordable and increase market liquidity for investors. The recent favourable stance in the Ripple case indicates a shift towards more favourable cryptocurrency regulations, which is seen as a positive sign for the Bitcoin crypto ETF approval. 

The involvement of BlackRock and Fidelity crypto regulators highlights the growing interest and confidence in cryptocurrency as an asset class. They argue that Bitcoin ETFs would provide investors with easier access to the market and the benefits of improved liquidity and reduced expenses. The developments in the Ripple case are closely watched as they could lead to a more lenient regulatory environment for digital currencies in the US, encouraging institutional participation and mainstream acceptance. 

The support from leading financial institutions could have a significant impact on the decision-making process of regulators considering Bitcoin ETF proposals. The potential endorsement of these ETFs could open up new investment opportunities for both retail and institutional investors in the cryptocurrency market.

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SEC's discussion with Bitcoin ETF issuers has reached a key stage

SEC crypto ETF

Now, let's discuss some crypto ETF news. Cryptocurrency markets are currently experiencing a positive trend as the US Securities and Exchange Commission (SEC) nears a crucial decision on spot Bitcoin exchange-traded funds (ETFs). Key players in the industry, including Grayscale Investments, BlackRock, Invesco, and ARK Investments, are actively engaged in discussions with pending applications that could reshape the landscape of crypto investments. Recent reports suggest an increased emphasis on crucial aspects such as custody arrangements, creation and redemption mechanisms, and comprehensive investor risk disclosures following a court ruling in August that questioned the SEC's rejection of Grayscale's ETF application.

If these discussions yield positive outcomes, it could mark a significant turning point in the world of cryptocurrencies, potentially leading to a surge in demand estimated at $3 billion in the initial days after crypto ETF approval. However, challenges remain, including the SEC's concerns about market manipulation and debates among issuers regarding settlement mechanisms.

The first SEC decision, which will be about ARK's application and is expected on 10 January, will set the tone for the fate of the remaining 12 applications. Despite the recent Bitcoin price rally that reflects optimism, the crypto ETF news and SEC's focus on protecting investors in a volatile market and the complex technological challenges associated with introducing Bitcoin ETFs underscore the intricacy of this significant development in merging traditional finance with digital assets.

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Advantages and disadvantages of crypto ETFs

Advantages of crypto ETFs:

  • Convenient investment. Crypto ETFs can be easily bought, held, and sold through a regular brokerage account. This eliminates the need to set up a cryptocurrency wallet or trade on unregulated exchanges.
  • Trustworthy investments. Regulated companies trade on mainstream, regulated exchanges and issue crypto ETFs. This ensures all parties have been checked and monitored to prevent market abuse and illegal activities.
  • Mitigates risks. With regulated entities holding the investments and providing custody, Crypto ETFs reduce the risk of fraud, scandals, collapses, hacks, and failures associated with unregulated crypto exchanges.
  • No risk of losing access. Unlike owning cryptocurrencies directly, there is no risk of losing access to the ETF as the buying, storing, and selling of the underlying coins are handled by the Authorised Participant and stored in the brokerage account.

Disadvantages of crypto ETFs:

  • Imperfect tracking. Different ETF structures may only partially reflect the price movements of the underlying cryptocurrencies, leading to potential discrepancies.
  • Additional costs. Crypto ETFs come with their layer of fees, including transaction costs and management fees. These expenses can be high, often exceeding 2% per year, impacting returns compared to owning cryptocurrencies directly.
  • Limited usability. Unlike owning cryptocurrencies directly, Crypto ETFs cannot be used for making payments or purchases. They only allow investors to benefit from positive price changes.

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What is ETF in crypto?

ETFs, or exchange-traded funds, are similar to mutual funds as they track the price of an asset or a group of assets. This allows investors to easily diversify their portfolios and gain exposure to an entire asset class. ETFs are traded on exchanges and can be bought and sold like stocks through a brokerage account.

Can I buy a Bitcoin ETF right now?

To buy a Bitcoin ETF, open a brokerage account with one of the many online brokers available. Once your account is open, you can purchase Bitcoin ETFs like any other stock or ETF. Search for the ticker symbol in your brokerage interface, enter the number of shares you want, and click buy. Remember that ETFs have an annual expense ratio that will be deducted from your account. It's important to remember that cryptocurrencies like Bitcoin are relatively new and volatile, so only invest what you can afford to lose and consider consulting a financial advisor before making any investment decisions.

What is the difference between ETF and cryptocurrency?

ETF vs cryptocurrency. That's often how these two distinct financial instruments are thought of. And they do have notable differences. ETFs are investment funds traded on stock exchanges representing a diverse portfolio of assets like stocks, bonds, or commodities. They allow investors to access a broader market without owning individual assets. 

On the other hand, cryptocurrencies are digital assets that operate independently through blockchain technology. Bitcoin and Ethereum are prominent examples of cryptocurrencies. 

Unlike ETFs, cryptocurrencies do not rely on traditional financial systems and lack physical asset backing. They are known for their volatility, speculative nature, and potential for decentralised applications. While ETFs are conventional investment vehicles, cryptocurrencies exist in a decentralised digital realm and are often considered alternative investments with unique qualities.


Do Bitcoin ETFs exist?

Bitcoin ETFs are exchange-traded funds that aim to mirror the price of Bitcoin by holding actual Bitcoin as their underlying asset. Some examples of Bitcoin spot ETFs include the 21Shares Bitcoin Core ETP (CBTC).

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