What is a bitcoin (ETF)?

— 4 minute read

What is a bitcoin (ETF)?

To answer that, we need to take a step back. A financial instrument known as an exchange traded fund, or ETF, monitors the value of a single asset or a group of assets. Its primary advantage is that it allows investors to diversify their portfolios without actually owning any of the assets. A gold ETF, for example, would monitor the value of the gold assets it represents. A crypto ETF, on the other hand, would monitor the value of one or more crypto assets, whereas a bitcoin ETF would track the value of bitcoin alone. enter image description here

ETFs, on the other hand, are traded on standard stock exchanges rather than cryptocurrency platforms.

In some places, Bitcoin ETFs are already available. This year, many of these funds were launched in Canada, Brazil, Europe, and Dubai. The SEC's approval, on the other hand, is the holy grail for cryptocurrency enthusiasts, since it would accelerate the adoption of crypto ETFs around the world while also giving cryptocurrencies more respectability. Not only is SEC certification important because the United States has the world's largest and most sophisticated financial market. Because China has been tightening down on crypto miners and traders since May, it currently accounts for the greatest percentage of global bitcoin mining.

What are crypto ETFs and how do they work? permalink

The key advantage of crypto ETFs is that they function exactly like standard ETFs. They are available in two varieties:

Physically-backed permalink

To develop a physical-backed crypto ETF, an asset management firm must purchase actual coins from the market, just as it would with a standard ETF. It can then create a fund to represent the value of the crypto assets it owns and list it on a stock exchange for trading. The value of your investment rises in tandem with the value of the fund's digital currency.

Futures-backed: Shares in this sort of ETF are based on crypto futures contracts rather than actual coins. A futures contract is nothing more than an agreement to buy or sell an item at a predetermined price at a future date. Because there are no tangible assets to safeguard, these are less riskier than physical-backed ETFs. The SEC is apparently prepared to approve this form of bitcoin ETF. enter image description here

Benefits of Crypto ETFs permalink

Convenient: The primary benefit of ETFs over direct investing in crypto is that investors don't have to deal with the underlying asset. While cryptocurrency exchanges have made it easier to buy and trade cryptocurrency in recent years, issues such as setting up digital wallets and knowing how private and public keys work still stand in the way of widespread crypto adoption. Crypto ETFs allow investors to participate in the new asset class while maintaining their current brokerage accounts.

Cheaper permalink

Purchasing a big number of bitcoins is a time-consuming and complicated process that entails opening accounts with many cryptocurrency exchanges and keeping multiple digital wallets. Crypto ETFs provide you with indirect exposure to a variety of crypto assets through a single investment. In addition, ETF fees are typically lower than those of traditional managed funds.

The disadvantages of crypto ETFs permalink

Limited options: There are now just a few such funds accessible to invest in. However, if the SEC decides to allow crypto ETFs, things might soon change. At the asset level, too, a lack of choice is a worry. To reduce risk, traditional ETFs hold a diverse range of securities.

A bitcoin ETF would by definition be regulated by a government, and investors wouldn’t actually be buying any crypto either.