25 June 2021
Have you heard about Bitcoin? Well, that was a rhetorical question; who hasn’t, right? Many synonym Cryptocurrency with Bitcoin like that’s the only digital currency. However, there are over 5000 Cryptocurrencies in the market including Bitcoin - the first-ever Cryptocurrency followed by Ethereum, Litecoin, Cardano, Dogecoin, and so forth. Therefore, every Bitcoin is a Cryptocurrency, but not every Cryptocurrency is Bitcoin.
In 2009, Satoshi Nakamoto introduced Bitcoin as an alternate payment method based on Blockchain Technology, a decentralized peer-to-peer network. Bitcoin is known for its store of value, and it is also solidifying itself when it comes to investment. A decade ago, Bitcoin trading started at $0.0008 to $0.08 per coin in July 2010, and recently in April 2021, it reached its all-time high at $64,000 approximately. So it is pretty evident that apart from being used as a digital currency for transactions, it is also a profitable Investment approach.
We have established everything we need to know about Bitcoin, so fast forward, lately Bitcoin ETFs have been making the news. ETFs stands for Exchange Traded Fund, it is a type of investment fund and exchange-traded product. ETFs refer to a basket of securities that tracks an underlying asset or index; similarly, we have the very process based on Bitcoin. ETFs are used across various industries, commodities, and asset classes.
So what are Bitcoin ETFs? What are its functions and applications? What do they offer? And most importantly, do they really exist?
In this blog, we are going to discuss What are Bitcoin ETFs:
Bitcoin ETFs are exchange-traded funds that track Bitcoin’s value and trades on traditional market exchanges such as TSX, NASDAQ, or NYSE, rather than trading on Cryptocurrency exchanges. Basically, the concept enables investors to invest in Bitcoin without going through the Crypto exchange hassle.
How Do Bitcoin ETFs Work?
Bitcoin ETFs is an investment vehicle that works like the traditional ETFs wherein it tracks the underlying asset or the index; here, it tracks Bitcoin. It tracks the performance of the assets or the group of assets; consequently, Bitcoin ETFs enables investors to hold baskets of assets such as Bitcoin, Ethereum, Cardano, Tesla stock, gold, etc. Additionally, when the value of Bitcoin increases, the price of an ETF also increases and vice versa.
Bitcoin ETFs allows investors to diversify their portfolios without actually owning the asset themselves.
Bitcoin ETFs - Advantages
- Investment in Bitcoin ETFs provides leverage to Bitcoin’s price without learning about Bitcoin or going through the complicated process.
- You will not have to sign up or deal with the Cryptocurrency Exchange, considering you can directly trade through traditional exchanges.
- Through Bitcoin ETFs, you also avoid the direct risks associated with owning Bitcoin.
- It is faster, secure, and prone to fewer outages than Bitcoin purchasing from Cryptocurrency exchanges.
- Cryptocurrencies are unregulated, so many countries do not allow Bitcoin trading. In comparison, Bitcoin ETFs trading are carried on traditional exchanges and are likely to be regulated by the SEC, offering eligibility for tax efficiency in return.
- Bitcoin ETFs also eliminate the complex storage system.
- With Bitcoin ETFs, you will not have to go through the security procedures otherwise associated with Cryptocurrencies.
- You can also diversify your portfolio with Bitcoin ETFs, meaning you can hold more than one asset, and it also helps to mitigate risks.
- Traditional market exchanges are regulated; therefore, this will benefit you in diversifying your existing equity portfolio.
- You can short sell the shares with Bitcoin ETFs when the Bitcoin’s price seems like going down the hill, plus comparatively, they are more liquid.
Also Read, 7 Tips To Manage Your Crypto-Portfolio
Bitcoin ETFs - Disadvantages
- A crucial circumstance with Bitcoin ETFs is their inaccuracy with the price tracker. Even if they track the price of the underlying index or asset, they can also place multiple holding to bid for portfolio diversification. This can reflect the inaccurate pricing of Bitcoin in the ETF value because of the other holdings.
- Conventional Bitcoin trading enables you to trade with other Cryptocurrencies like Litecoin, Dogecoin, Ethereum, etc. Whereas with Bitcoin ETF trading, you cannot trade with or for other Cryptos as they are investment funds that track Bitcoin’s price.
- The management fees charged by the ETFs can be significantly high when you own a notable amount of shares for a period of time.
- Cryptocurrencies are extremely volatile and unregulated; thus, not every Cryptocurrency will make it to the ETFs.
- Since the Government regulates Bitcoin ETFs, it eliminates the benefits one can receive from Bitcoin, such as anonymity, privacy, elimination of intermediaries, and so forth. Bitcoin is also known for being a hedge unlike fiat currency, however, this will not be the case with Bitcoin ETFs.
- Bitcoin ETFs are an investment approach, so you cannot buy things ETFs, unlike the regular Cryptocurrencies.
- Bitcoin ETFs can be traded only during market time, whereas Crypto markets run 24/7.
The Status of Bitcoin ETFs
Bitcoin ETFs simplify Bitcoin investing; thus, it acts as a boon in diversifying the portfolio. However, the status of Bitcoin ETFs is unclear in several jurisdictions, so you would need to conduct thorough research before investing in Bitcoin ETFs.
The first Bitcoin ETFs, the Purpose Bitcoin ETF was launched on the Canadian stock market. The ETF trades on the Toronto Stock Exchange with the ticker BTCC. Also, the Brazilian Securities and Exchange Commission approved two ETFs in Latin America and they are expected to begin trading soon. The ETFs will be traded on B3 or Brazil’s Stock Exchange, wherein the Hashdex will have a ticker HASH11, and QR ETF will have ticker QBTC11.
On the other hand, it is ironic that Bitcoin ETFs are facing an existential crisis in the U.S. Many companies that are looking to launch Bitcoin ETFs are facing problems with the regulatory agencies. The U.S. SEC - Securities and Exchange Commission has not approved any digital currency (Cryptocurrency) for ETFs. Why? Because Cryptocurrencies such as Bitcoin are unregulated. This very factor acts as a loophole for the investors with large holdings to manipulate the Crypto market. The U.S. SEC has been reluctant with the Bitcoin ETFs proposals citing the unregulated nature of the Crypto market. The other concerns involve volatility, lack of liquidity, lack of transparency in the Crypto market. All these factors result in a lack of surveillance and making it susceptible to manipulation and fraud.
But just like how they say, “When there is a will, there’s a way”. So even though the status of Bitcoin ETFs are unclear, we have various methods to invest in Bitcoin without actually purchasing it. One is publicly traded funds and the other one would be investing in Blockchain and Cryptocurrency companies, resulting in leverage to the Cryptocurrency market.
To conclude, Bitcoin ETFs have the potential to be a game-changer. Since it is a sophisticated investment vehicle, it creates an opportunity for adoption and expands the investor base. Moreover, you can invest in Bitcoin through Bitcoin ETFs in a regulated way. So here’s to the hope of being optimistic for Bitcoin ETFs!
Disclaimer: The author’s views and opinions are for informational purposes only and do not constitute financial, investment, or other advice.