Summary
Today, Bitcoin is working hard to develop into a legal asset that the public can invest in. However, since the investment activities of some institutions and retail investors are strictly regulated, technically speaking, Bitcoin is not accessible to everyone. To address this issue, many people recommend Bitcoin exchange-traded funds (ETFs).
Bitcoin ETF is a pool of assets related to Bitcoin, which is sold by brokerages on traditional exchanges and traded in the form of ETFs. Traditional investors can invest in Bitcoin even if they do not actually hold it.
Bitcoin exchange-traded funds (ETFs) have been launched in Canada and the United States, increasing the adoption of cryptocurrencies among mainstream investors. Let’s take a look at what ETFs are and what they mean for Bitcoin.
Introduction
Bitcoin (BTC) and the entire cryptocurrency market have come a long way. Less than a decade ago, only a small group of enthusiasts were using the technology and 10,000 Bitcoins could only buy two pizzas.
A few years later, we have witnessed many successful companies in this industry, digital currency projects have sprung up, and emerging technologies such as decentralized finance have continued to enter the public eye. MicroStrategy has converted more than $2 billion of funds on its balance sheet into Bitcoin, and consumers may soon be able to use Bitcoin to buy the latest Tesla car.
However, what are the missing basic elements that prevent Bitcoin from becoming a major asset in the global macroeconomic environment? One of the difficulties may be how to allow more institutions and mainstream investors to access Bitcoin under supervision. Some people may think that Bitcoin ETF is the key to solving the problem.
What is a Bitcoin ETF?
First, let's take a look at the concept. An ETF is an exchange-traded fund, which is an investment fund that tracks the price of an underlying asset. ETFs are active in many different industries and asset classes. For example, gold ETFs that track the price of gold have been around for decades.
In short, a Bitcoin ETF is an exchange-traded fund that consists of Bitcoin or an asset pegged to it. ETFs are regulated financial products. Therefore, Bitcoin and other cryptocurrency ETFs are traded on traditional markets such as Nasdaq or the New York Stock Exchange (NYSE), rather than on digital currency trading platforms. However, this may change in the future as the boundaries between traditional finance and the digital currency industry become increasingly blurred.
The goal of a Bitcoin ETF is to allow mainstream investors who are unfamiliar with cryptocurrency trading to invest in Bitcoin through a familiar vehicle.
Why is a Bitcoin ETF important?
Bitcoin is not the easiest asset to handle. For example, custody of Bitcoin can be a headache for large institutions. After all, Goldman Sachs Group Inc. is not going to plug a hardware wallet directly into a laptop and transfer $2 billion worth of Bitcoin without hesitation. Large financial institutions operate differently from retail investors, and complex regulations and financial channels are issues that cannot be avoided before participating in investments.
As such, ETFs help increase public acceptance and expand the potential investor base by providing traditional market participants with price exposure without the hassle of actually holding digital currencies.
In addition to Bitcoin itself, a Bitcoin ETF can be a combination of a range of assets such as Bitcoin, Ethereum, Tesla stock and gold, helping investors build a diversified investment portfolio.
Introduction to Bitcoin ETF
Generally speaking, when the public talks about Bitcoin ETFs, they usually refer to ETFs in the US market. However, ETFs exist in many different markets. For example, the first Bitcoin ETF was launched in the Canadian stock market. This index fund called "Purpose Bitcoin ETF" is listed on the Toronto Stock Exchange under the symbol "BTCC".
Even so, the public has long looked to U.S. regulators to see if they would accept a U.S. Bitcoin ETF. Finally, the U.S. Securities and Exchange Commission (SEC) accepted the listing application of the ProShares Bitcoin Strategy ETF (BITO) in October 2021, and the fund officially landed on the New York Stock Exchange (NYSE).
Based on historical experience, the reasons for application rejection are usually excessive price volatility, lack of supervision, and high vulnerability to manipulation in the Bitcoin market. Although these arguments are reasonable, other financial markets that have already launched ETFs may also have such problems.
Furthermore, during the last bear market, most of the financial channels needed for Bitcoin to become a legitimate macro asset class were already built. A few years ago, MicroStrategy's plan to buy billions of Bitcoins would have been difficult to achieve. Today, after a long period of development, the infrastructure and market liquidity are sufficient to support such a large investment.
As the Bitcoin market matures, regulators are likely to change their attitude and eventually agree to launch a Bitcoin ETF in the U.S. market.
What is a Bitcoin ETF?
Not all Bitcoin ETFs are backed by Bitcoin in your wallet (called a “Bitcoin spot ETF”). Many Bitcoin ETFs, such as BITO, use Bitcoin contracts as the underlying asset.
So far, the SEC has favored contract ETFs tied to the Chicago Mercantile Exchange (CME) Bitcoin contract, which is a regulated financial security. Bitcoin contract ETFs use CME's Bitcoin Reference Rate (BRR) price instead of spot price. This means that the only difference between Bitcoin spot ETFs and Bitcoin contract ETFs is the price source.
Should I invest in a Bitcoin ETF?
Is Bitcoin ETF an ideal financial tool for investing in Bitcoin? If you just want to protect your personal savings from the depreciation of fiat currency, then you can just buy Bitcoin.
After all, Bitcoin was developed to democratize finance. The value of Bitcoin varies from person to person. The value generated by simply saving Bitcoin is already considerable. Not to mention, there are countless ways to earn income through Bitcoin mining or lending.
That being said, there are many advantages to investing in a Bitcoin ETF. If you think the returns are good, then an ETF is certainly an ideal choice.
Summarize
Bitcoin ETFs allow investors in traditional markets to access Bitcoin under regulation, and also open a new door for more institutions to apply digital currency as an asset class. As the United States lays a good foundation, we can only wait and see how many investors will build Bitcoin portfolios.
