Summary
Bitcoin is establishing itself as a legitimate investment asset that anyone can invest in. In fact, not just anyone, as some organizations and individuals can only participate in a way subject to regulatory oversight. Many believe that a Bitcoin ETF could serve this purpose.
Bitcoin ETFs are pools of assets linked to Bitcoin that brokers offer for trading on traditional trading platforms in the form of ETFs. This gives traditional investors the opportunity to access Bitcoin without actually owning any BTC.
Bitcoin ETFs already exist in Canada and the United States, helping to increase the popularity of digital currencies among investors. In this article, we will learn what ETFs are and what they could mean for Bitcoin.
the introduction
Bitcoin (BTC) and the cryptocurrency markets in general have come a long way. About a decade ago, use of this technology was limited to a small community of enthusiasts when you could buy 2 pizzas for 10,000 BTC.
After just a few years, we witnessed the emergence of several companies based on this industry, countless cryptocurrency projects, the emergence of decentralized finance and much more. Institutional use of cryptocurrencies is also booming — MicroStrategy has converted more than $2 billion of its balance sheet into bitcoin, and you may soon be able to buy the latest Tesla with your bitcoin.
But what are the basic elements that are still missing for Bitcoin to become an essential asset in the global macroeconomic system? Among them may be a regulatory framework that helps increase exposure of institutions and traditional investors to BTC. Some people believe that the best way to achieve this may be through Bitcoin exchange-traded funds.
What is a Bitcoin ETF?
Let's take an overview first. An ETF is an investment fund that tracks the price of an underlying asset, and ETFs are found in many different industries and asset classes. There are, for example, gold ETFs, which are funds that have been around for decades and track gold prices.
A Bitcoin ETF is simply an ETF consisting of bitcoins or assets linked to the price of bitcoin. ETFs are financial products subject to regulatory oversight, and thus ETFs in Bitcoin and other digital currencies are traded on traditional markets such as the NASDAQ or the New York Stock Exchange and not on cryptocurrency trading platforms. But this may change in the future as the lines between the traditional financial sector and the digital currency industry continue to blur.
The goal of Bitcoin ETFs is to give traditional investors who are not suited to cryptocurrency trading access to Bitcoin through a medium they are familiar with.
Why are Bitcoin ETFs important?
Bitcoin is not the easiest asset to deal with. For example, “custodial” digital currencies can be a major headache for large institutions. Goldman Sachs, for example, would not plug a wallet into a laptop and transfer $2 billion worth of bitcoins to it. Large financial institutions do not operate in the same way as individual investors — they need a sophisticated regulatory framework and financial infrastructure to be able to participate in this space.
Therefore, ETFs may have a major role to play in increasing institutional use and expanding the base of potential investors. They can increase traditional market participants’ knowledge of Bitcoin prices without worrying about the finer details associated with physical ownership of currencies.
A Bitcoin ETF can include a basket of assets such as Bitcoin, Ethereum, Tesla shares, and gold, offering investors the advantages of asset allocation.
A brief history of Bitcoin ETFs
When people generally talk about Bitcoin ETFs, they're usually talking about US ETFs, but these ETFs exist in several different markets. For example, the first Bitcoin ETF launched on a Canadian stock exchange is called the Purpose Bitcoin ETF and trades on the Toronto Stock Exchange with the ticker symbol BTCC.
However, most eyes have long been on US regulators and whether or not they will allow a US Bitcoin ETF. Finally, in October 2021, the SEC accepted an application to list the ProShares Bitcoin Strategy ETF (BITO) on the New York Stock Exchange.
Historically, most applications have been rejected due to market volatility, the unregulated nature of Bitcoin markets, and their potential for manipulation. While these concerns may be legitimate to some extent, they likely apply to many other financial markets that already have ETFs.
Much of the financial infrastructure needed for Bitcoin to become a legitimate major asset class was built during the recent market downturn. If MicroStrategy had wanted to buy billions of dollars worth of Bitcoin a few years ago, this would likely have been extremely difficult, but now the infrastructure and liquidity are in place to make those massive investments.
This continued maturation of Bitcoin markets is what likely turned the tide on the regulatory side and ultimately made way for the launch of the US Bitcoin ETF we see today.
What is a Bitcoin Futures ETF?
Not all Bitcoin ETFs are backed by BTC coins already in wallets, which is known as existing Bitcoin ETFs. Many Bitcoin ETFs, such as BITO, use BTC futures as their underlying asset.
To date, the SEC favors futures ETFs tied to Chicago Mercantile Exchange (CME) Bitcoin futures contracts, which are regulated securities. Bitcoin futures ETFs use the Bitcoin Reference Price (BRR) set by the Chicago Mercantile Exchange and not the spot price. This means that the only difference between existing Bitcoin ETFs and Bitcoin futures is the source from which they derive their prices.
Should I invest in a Bitcoin ETF?
Is a Bitcoin ETF the right financial instrument for you to invest in Bitcoin? If you want to protect your savings from the devaluation of local currencies, you may be better off buying Bitcoin.
The essence of Bitcoin is the democratization of the financial sector, although it means different things to different people. But ultimately, having direct custody of your savings gives you enormous power, and in addition, there are countless ways you can earn returns or borrow against the Bitcoins you hold.
However, there are advantages to investing in Bitcoin ETFs. If any of these benefits are useful to you, investing in Bitcoin ETFs may be a suitable investment option for you.
Concluding thoughts
Bitcoin ETFs provide investors in traditional financial markets with exposure to Bitcoin in a regulated, regulated manner and may lead to increased institutional use of cryptocurrencies within asset classes. Now that the regulatory foundations are in place in the US, we can only predict how much space investors will allocate in their portfolios to BTC.
