Over the years, cryptocurrency has revolutionized the world of finance; therefore, digital assets like Bitcoin have enraptured both global investors and financial institutions as an innovative way to grow their wealth. This has led to the emergence of several financial opportunities, including the proposal to implement financial instruments like ETFs in Bitcoin.
What is a Bitcoin ETF?
Bitcoin ETFs are exchange-traded funds that let investors track Bitcoin prices and purchase them on the stock market rather than on cryptocurrency exchanges. Brokerages on stock exchanges offer crypto assets as ETFs so that investors can easily buy and sell them for profits without owning them directly.
History Of Bitcoin ETFs
2023 marks 10 years since the Winklevoss Twins, Cameron, and Tyler, first proposed Bitcoin ETFs named the “Winklevoss Bitcoin Trust”. At the time of the filing, Bitcoin was trading at nearly $90, but due to the early development of the cryptocurrency market, their filing was rejected twice by the Securities and Exchange Commission (SEC).
Former SEC Chairman Jay Clayton expressed concerns about the lack of rules and surveillance to prevent manipulative techniques in digital currency exchange venues. The custody of Bitcoin and the state of its futures markets were also sticking points for the SEC. However, filings for Bitcoin ETFs increased in 2021 with the appointment of Gary Gensler as SEC Chairperson, who expressed openness to considering Bitcoin ETFs, particularly futures-based ETFs traded on the Chicago Mercantile Exchange (CME).
Approving several U.S. Bitcoin mutual funds that invested in Bitcoin futures raised expectations for a futures-based Bitcoin ETF. The ProShares Bitcoin Strategy ETF (BITO) became the first U.S.-listed Bitcoin ETF, attracting $1 billion in assets within two days. However, after an initial surge, BITO’s assets dropped as Bitcoin experienced a significant decline in value.
The Rise Of Bitcoin ETFs
On June 15, 2023, Blackrock, the largest asset management firm, applied for Bitcoin spot exchange-traded funds (ETFs). The news created a positive atmosphere within Wall Street as the asset management giant may finally convince the SEC to approve ETFs that track the current market prices of cryptocurrencies like Bitcoin, known as spot prices.
On Monday, July 3, 2023, Blackrock resubmitted its filing through Nasdaq to include necessary details missing in its initial submission. In the new filing, Nasdaq named Coinbase as its potential sharing partner to prevent fraud and increase transparency.
How Do Bitcoin ETFs Work?
An ETF is designed to track the price of Bitcoin. For this to occur, a traditional exchange will purchase a Bitcoin futures contract, hold it, and then sell the fractionalized Bitcoin through broker-dealers. This makes Bitcoin tradable on the market like stocks.
Similar to other ETFs, you can either short or long Bitcoin ETFs as you would on any cryptocurrency exchange to generate profit amidst price fluctuations and leverage market volatility to your investment advantage.
Additionally, Bitcoin ETFs charge a specific amount to maintain asset efficiency, just as other ETFs require investors to pay custody and management fees. The payment ensures that your portfolio is organized and lets you safeguard your assets in the hands of experts.
Bitcoin ETFs vs.Traditional ETFs: How Do They Differ?
Bitcoin operates on a decentralized network. Unlike some other ETFs where investors can get dividends as returns on their investments, Bitcoin ETFs do not allow that due to Bitcoin’s decentralized nature.
What Is A Bitcoin Futures Contract?
A futures contract is a standardized legal contract between two parties who are unknown to each other to buy or sell an asset at a specific price and date in the future. Similarly, a Bitcoin futures contract occurs when both parties agree to buy and sell a contract unit of Bitcoin at a particular price and date in the future.
Advantages Of Bitcoin ETFs
Several factors can contribute to the development of Bitcoin ETFs as a groundbreaking investment. Investors prefer them due to their potential benefits. Some of the advantages of Bitcoin ETFs include:
Accessibility
Due to investors’ familiarity with ETFs, buying and selling Bitcoin ETFs on regulated exchanges is effortless without the stress of investing in the cryptocurrency directly or owning them. Unlike investing in Bitcoin directly, Bitcoin ETFs prevent you from worrying about the complexities of cryptocurrency.
Security
Every cryptocurrency exchange requires you to have a wallet; however, these wallets are vulnerable to attackers, which could result in a gruesome loss of funds. Even in a decentralized wallet, you are prone to losing your BTC to wallet drainers, and if you mistakenly forget your seedphrase, you will automatically lose all your assets. However, owning Bitcoin ETFs limits your chances of being vulnerable to most attacks since the holdings also control your wallet access.
Liquidity
Bitcoin ETFs are good liquidity drivers in the cryptocurrency market. Investing in them could make buying and selling easier for traders, increasing Bitcoin volume and reducing the bid-ask spread.
Disadvantages Of Bitcoin ETFs
Despite the potential benefits of Bitcoin ETFs, they also have some potential downsides. Although we may discover more of them in the future, the disadvantages of Bitcoin ETFs include:
Volatility
Cryptocurrencies are volatile assets that may fluctuate in price. An innovation like the Bitcoin ETF is susceptible to such risk, causing assets to rise and fall in price, which may impact the long-term Return On Investment (ROI).
Lack Of Ownership And Control
Investing in Bitcoin ETFs rather than buying BTC directly doesn’t give you full ownership and unlimited access to your funds. As an investor, you do not fully own a Bitcoin; instead, you have an indirect stake in it. Unlike owning your wallet and private keys, the ETF holdings control access to your investment, which can sometimes prevent you from buying and selling your investment when you want to.
Regulatory Risks
Since Bitcoin ETFs are still developing, some governments might be skeptical about this new financial instrument. In the long run, it might lead to several bans in multiple countries, triggering Bitcoin’s price to fall.
Conclusion
Bitcoin ETFs are a newly emerging financial instrument that allows investors to easily access the cryptocurrency. Although they appear to be a high-potential investment opportunity in the future, government rejections might prevent them from going mainstream.
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