Carefully! Lots of text.
Bitcoin is gradually turning into a legal investment asset. However, some institutional investors and individuals require a legal framework to be able to invest. And many believe that a Bitcoin ETF can solve this problem.
Bitcoin ETFs are pools of Bitcoin-related assets that are created on traditional exchanges by brokerages to trade as ETFs. This way, traditional investors gain access to Bitcoin without actually owning BTC.
Bitcoin ETFs are already available in Canada and the US, allowing more investors to gain exposure to cryptocurrencies. Next, we will explain what an ETF is and what it means for the future of Bitcoin.
Introduction
Bitcoin (BTC) and the cryptocurrency markets have come a long way. Ten years ago, only a small community of enthusiasts used this technology, and 10,000 BTC could only buy two pizzas.
All this time, the industry has been actively developing: many successful companies, cryptocurrency projects, DeFi technology and much more have appeared. MicroStrategy has invested more than $2 billion in Bitcoin, and very soon this cryptocurrency can be used to buy the latest Tesla model.
Why can’t Bitcoin still become one of the main assets on the international market? One reason is the lack of a regulatory framework that would increase the accessibility of BTC to institutions and traditional investors. According to some, the best way to solve this problem is to use a Bitcoin ETF.
What is a Bitcoin ETF?
First, let's look at the tool itself. An ETF is an exchange-traded fund, which is an investment fund that tracks the price of an underlying asset. ETFs exist in different industries and for different types of assets. An example is gold ETFs, which have been around for decades and track the price of gold.
A Bitcoin ETF is simply an exchange-traded fund consisting of Bitcoin or assets related to the price of Bitcoin. ETFs are regulated financial products, and therefore Bitcoin ETFs and other cryptocurrency ETFs are not traded on cryptocurrency markets, but on traditional markets such as NASDAQ or the New York Stock Exchange (NYSE). However, in the future, as the boundaries between traditional finance and the cryptocurrency industry blur, everything may change.
The purpose of a Bitcoin ETF is to provide investors who do not wish to trade cryptocurrency with access to Bitcoin through a vehicle they are familiar with.
Why is Bitcoin ETF important?
Firstly, Bitcoin is not the simplest asset. For large institutional investors, storing Bitcoin can be a real problem. For example, Goldman Sachs will not be able to simply connect a hardware wallet to a laptop and transfer $2 billion worth of bitcoins to it. The fact is that large financial institutions operate differently than individual investors: they require a complex regulatory framework and financial system to have a presence in the crypto space.
This is why ETFs can play an important role in popularizing cryptocurrencies and expanding the base of potential investors. They will allow participants in traditional markets to earn on exchange rate changes without physically owning coins.
A Bitcoin ETF can hold a range of assets, including Bitcoin itself, Ethereum, Tesla shares, and even gold, giving investors the benefit of diversification.
A Brief Overview of Bitcoin ETF
When talking about Bitcoin ETFs, it usually refers to US ETFs. However, ETFs exist in other countries. For example, the first Bitcoin ETF, called the Purpose Bitcoin ETF, was launched on the Canadian stock market and trades on the Toronto Stock Exchange under the ticker symbol BTCC.
And yet, for a long time, almost all attention was focused on US regulators and their approval of the American Bitcoin ETF. Finally, in October 2021, the Securities and Exchange Commission (SEC) accepted an application to list the ProShares Bitcoin Strategy ETF (BITO) on the New York Stock Exchange (NYSE).
Factors previously cited as reasons for the refusal included volatility, the unregulated nature of Bitcoin markets, and a clear tendency toward market manipulation. To some extent this is true. However, similar shortcomings also apply to many other financial markets where ETFs already exist.
Additionally, most of the financial systems that could make Bitcoin a legitimate macro asset were created in a bear market. If MicroStrategy had wanted to buy billions of dollars worth of Bitcoin just a few years ago, it would likely have been extremely difficult. Today, infrastructure and liquidity make it possible to make even such significant investments.
The development of the Bitcoin market likely changed the minds of regulators and ultimately led to the creation of a Bitcoin ETF in the United States.
What is a Bitcoin Futures ETF?
Some Bitcoin ETFs are backed by Bitcoin in wallets - these are called physical Bitcoin ETFs. Many Bitcoin ETFs, such as BITO, use BTC futures contracts as the underlying asset.
Until now, the SEC has favored futures ETFs linked to Bitcoin futures on the Chicago Mercantile Exchange (CME), i.e., regulated financial products. Bitcoin futures ETFs are based on the CME's Bitcoin Reference Rate (BRR) rather than the spot price. This means that the only difference between a physical Bitcoin ETF and a futures Bitcoin ETF is the pricing.
Should you invest in a Bitcoin ETF?
Is a Bitcoin ETF a suitable financial instrument for investing in Bitcoin? If you want to protect your savings from the declining value of fiat currencies, then perhaps you should just buy Bitcoin.
After all, Bitcoin is about democratizing finance. Of course, everyone uses it for different purposes, but direct access to your savings in any case remains a definite advantage. In addition, users can earn income or take out loans secured by bitcoins.
Considering all of the above, investing in a Bitcoin ETF still has a number of advantages. If you're interested in them, ETFs may be a good choice.
Summary
A Bitcoin ETF allows investors in traditional markets to gain exposure to Bitcoin in a regulated space. All this could contribute to the widespread adoption of cryptocurrencies as an asset class among institutional investors. Taking into account the fact that all the necessary conditions have already been created in the United States, we can only guess how much BTC investors will be able to use in their portfolios.