What is Bitcoin ETF? The Importance of Bitcoin ETF

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More and more people are interested and see Bitcoin as a potential investment asset. However, not every individual or organization is involved in investing in BTC. The cause can come from national legislation, not understanding the cryptocurrency market or even not believing in the value of Bitcoin. To solve those problems, the Bitcoin ETF was born as a solution to give traditional investors and speculators access to BTC through a trusted medium they may already be familiar with. So what is a Bitcoin ETF? What does it mean for BTC and the crypto market?

Before learning about Bitcoin ETFs, we will learn about the types of ETFs, a concept that has been around for a long time in the traditional financial markets.

What is an ETF?

An ETF (exchange-traded fund), also known as an exchange-traded fund, is an investment fund designed to mimic the movements of a certain set of indexes. An ETF can be understood as a basket containing different types of assets such as commodities, bonds, and stocks. Instead of investing in a certain asset class, you invest in a set of indices that include many similar asset classes.

Example: If you have money and want to invest in stocks, you find the food sector to be the most profitable. Instead of investing all of that money in food company A, you’ll invest that money in an ETF that contains all the stocks of leading food companies like A, B, C, and D. … and you can simply track the performance of all these companies through an ETF.

What is Bitcoin ETF?

A Bitcoin ETF (or Bitcoin exchange-traded funds) is a group of assets related to Bitcoin or the price of Bitcoin offered on traditional stock exchanges by brokerage firms, trading in the form of fund certificates. ETFs).

Bitcoin ETFs use the same structure as traditional ETFs to enable trading. The price of the ETF will closely follow the price of Bitcoin. As the value of Bitcoin increases and decreases, the value of the ETF will increase and decrease respectively.

This form makes it easy for investors to participate in the Bitcoin market, and at the same time attracts large investors and large funds to participate because they will not need to care about legal issues related to Bitcoin. simply buy and sell Bitcoin ETFs through traditional stock exchanges.

Bitcoin ETF Classification

When it comes to Bitcoin ETFs, many people think that Bitcoin ETFs will be backed by BTC held in a wallet. In fact, there are 2 main types of Bitcoin ETFs: Bitcoin Physical ETF and Bitcoin Futures ETF.

Bitcoin Physical ETF

Bitcoin Physical ETF, also known as Bitcoin spot ETF, is an ETF that works like ETFs in the traditional market. Fund management companies will make the purchase of BTC, investors can participate in the investment by buying shares in the ETF, these shares represent ownership of BTC, which means investors are indirectly owning BTC without incurring the risks associated with the crypto market. This also means that the value of these types of BTC ETFs will closely follow the actual value of BTC traded on the market.

There have been many Bitcoin-related ETFs approved by the SEC, however, they are mainly Bitcoin Futures ETFs, in fact there are still no Bitcoin Physical ETFs that have been authorized by the SEC to trade on the US stock markets. . However, Bitcoin Physical ETFs are more widely accepted in other countries such as Canada, Brazil, etc.

Canada: 3IQ Coinshares, Purpose Bitcoin and CI Galaxy Bitcoin
Europe: 21Shares Bitcoin ETP, BTCetc – ETC Group Physical Bitcoin, VanEck Bitcoin ETN, Iconic Funds Physical Bitcoin ETP and Bitpanda Bitcoin ETC
Brazil: QR Capital Jersey Bitcoin ETF: WisdomTree Bitcoin

Bitcoin ETF Future

Bitcoin ETF Future is a type of futures contract that is linked to the price of a Bitcoin ETF. Similar to other Bitcoin futures contracts, the buyer of a Bitcoin ETF Future contract commits to buying or selling a Bitcoin ETF at a fixed price at a specific time in the future.

The biggest difference here is that behind the Bitcoin ETF Spot is that there must be a real amount of Bitcoin to guarantee the amount of shares issued to the market. With Bitcoin ETF Future, there is no need for that. Therefore, Bitcoin ETF Future does not have a big impact on the price and supply of Bitcoin in the market and that is why everyone is waiting for the Bitcoin ETF Spot.

A few examples of Bitcoin Futures ETFs: ProShares Bitcoin Strategy ETF (BITO), Valkyrie Bitcoin Strategy ETF (BTF), VanEck Bitcoin Strategy ETF (XBTF), Global X Blockchain & Bitcoin Strategy ETF (BITS), ProShares Short Bitcoin ETF (BITI)…

Why Does the SEC Approve Bitcoin Futures ETF Instead of Bitcoin ETF?

The reason is that there are better investor protections in the futures ETF market than in spot ETFs.

Being a futures-based ETF, that means it will be an actively managed fund. The fund issuer will trade Bitcoin futures and the success of the fund will depend on their trading strategy.

For now, the proposed Bitcoin futures ETFs will only include long (long) positions. That means the companies behind the ETF will only be able to take bitcoin long positions and will not be able to take any short positions. There are many other companies trying to launch inverse bitcoin futures ETFs – for short positions – but they have yet to be approved by the SEC.

One key difference in the eyes of the SEC is that while Bitcoin spot trading in locations is not federally regulated, Bitcoin ETF futures futures trading on the Chicago Mercantile Exchange is regulated by the Securities and Exchange Commission. Commodity Futures (CFTC).

Advantages and disadvantages of bitcoin ETF

Advantages

Convenience: Bitcoin ETF was born with the purpose of making it easy for many people to invest in Bitcoin without having too much knowledge of blockchain technology, or complicated operations to buy real Bitcoin on exchanges. electronic money.

Increased liquidity: Tradedable Bitcoin ETFs bring in a whole new group of investors, which may include institutional investors indirectly involved in the cryptocurrency market.

Solve the legal issue: Some institutional investors such as pension funds or wealth management firms may be subject to rules not to invest directly in Bitcoin. However, with a Bitcoin ETF, they have easier access to Bitcoin even if they don’t hold Bitcoin directly.

Security: For inexperienced investors in the crypto market, using Bitcoin wallets or cryptocurrency exchanges may face high risks of loss such as coin/token hacking, forgetting or leaving reveal private key, don’t know how to use wallet…

Tax Optimization: In countries that have enacted crypto laws like the US, investing directly in Bitcoin may be subject to higher taxes than trading an ETF as a stock on the stock market.

Disadvantages

Management Fees: ETFs typically charge an annual management fee for the activities they provide. Compared to the one-time fee (even 0%) when trading on some crypto exchanges, owning shares in a Bitcoin ETF can lead to high management fees over time.

Trading Time: ETFs can only be bought and sold during market opening hours, unlike crypto markets that operate 24/7. If the value of Bitcoin fluctuates greatly, you will have to wait until the market is open to trade.

Loss of payment functionality: Bitcoin can be used as a means of payment in a few countries, but a Bitcoin ETF of course cannot be used directly for payments, which results in instant loss of payment.

ETF price differs from Bitcoin’s real value: ETFs track the price of a group of underlying assets under management, so sometimes the ETF price doesn’t always match the fund’s net asset value.

Security Risk: Bitcoin ETFs must store their Bitcoin balances on exchanges. If these platforms are hacked or something goes wrong, the ETFs could lose their Bitcoins or be reduced in value. For example, there is a high chance that Blackrock will use Coinbase’s custody service and what if Coinbase Custody has problems?

Impact of Bitcoin ETF on the market

Bitcoin ETFs allow investors to diversify their investments easily without having to directly own the assets the fund tracks. Since there is no direct investment in BTC, there is no need to worry about the complicated security and storage procedures associated with crypto assets or related legal issues. With such advantages as above, the approval of Bitcoin ETF makes it easier for large funds and institutions to invest in the cryptocurrency market, thereby expanding the market more making investing in crypto more and more popular. more in the future.

Conclusion

Bitcoin ETF is one of the big steps forward in bringing cryptocurrency to traditional investors as well as promoting the legalization of crypto around the world. However, Bitcoin ETFs are still in their early stages and there are many hurdles ahead. One of them is that the SEC is still delaying the acceptance of the Bitcoin Physical ETF. It is possible that in the future, we will see a further expansion of the Bitcoin ETF market in both quantity and nature.