Since the infamous crypto winter, Bitcoin has more than tripled its previous all-time high surpassing a market capitalization of $1 trillion. With this rise, a new bout of interest in the pioneer cryptocurrency has emerged as governments, companies, and retails investors flock to buy the largest cryptocurrency in the world.
However, as an emerging technology, the technical aspects of owning bitcoin, securing private keys in a cold wallet, and making sure your funds are safe is a daunting task for most people. Fortunately, ETFs provide a perfect opportunity for investors looking to capitalize on the growing popularity of Bitcoin without necessarily owning and storing Bitcoins.
What is an ETF in the First Place?
An ETF stands for an exchange-traded fund and represents a tradeable financial instrument that derives its value from a basket of assets in a market index. Another name for an exchange-traded fund is a tracker as it tracks the market movements of assets contained within an index. For example, an ETF can be set up to track the S&P 100 index which contains the top 100 stocks in the US by market capitalization.
Similar to stocks, an ETF can be traded on an exchange hence the name “exchange-traded fund.”
Simply put, an ETF is akin to a mutual fund investment only that it brings about the flexibility that comes with marketable securities enabling the ETF to be bought and sold just like a stock.
The difference between investing in a mutual fund and investing in an ETF is that the ETF does not give ownership to the underlying assets in the index. Therefore, if you invest in an ETF that tracks the S&P100, you do not own any of the stocks contained in the index’s basket of assets. This is an advantage for ETFs as it reduces the expense of managing stocks as is the case with a mutual fund.
What’s a Bitcoin ETF?
A Bitcoin ETF, therefore, is an ETF that tracks the market movement of Bitcoin.
Rather than buy bitcoin from a cryptocurrency exchange, learn about cold and hot wallets and find a way to store the wallets safely, an investor can buy Bitcoin ETF shares and get the same exposure to Bitcoin as anyone who buys Bitcoin from a crypto exchange.
What Are the Benefits of Bitcoin ETFs?
With a Bitcoin ETF, an investor can still enjoy exposure to the Bitcoin market without the risks associated with owning the digital asset. Furthermore, the investor will be able to short the Bitcoin market if they ever believe that the price of Bitcoin is about to drop.
In a traditional crypto exchange, this level of flexibility is unprecedented. It is also significantly safer and faster to buy a bitcoin ETF from a trusted online broker than buying directly from an online crypto exchange. Most crypto exchanges lack sufficient liquidity, and some support peer-to-peer trades thus enabling counterparty risks.
The fact that Bitcoin ETFs simplify the process of investing in cryptocurrencies for regular retail investors and even institutional investors has increased demand for crypto-related financial instruments as well as increased the number of applications to the Securities and Exchange Commission for launching Bitcoin ETFs.
Bitcoin ETFs are expected to increase acceptance to Bitcoin investing as public companies such as Tesla and Square look into purchasing Bitcoin as an investment in their balance sheets.
What are the Downsides of Bitcoin ETFs?
There are several disadvantages to investing in bitcoin ETFs as opposed to buying Bitcoin.
To begin with, Bitcoin’s price moves sharply and retains a volatile trend throughout the trading period. Unlike traditional markets, the crypto market operates 24/7/365. For investors looking for exposure to Bitcoin through ETFs, this could be a downside as Bitcoin ETFs can only be traded during market trading times. An ETF investor could potentially have to wait for the market to open to offload or buy more Bitcoin ETFs increasing the risk of missing out on profits or making significant losses.
Bitcoin ETFs also charge a management fee that can be costly depending on the charges of the ETF manager. Owning bitcoin on the other hand is free. Bitcoin ETF management fee is usually paid to professionals entrusted with managing the investment on the client’s behalf.
It is also likely that a Bitcoin ETF can have other underlying assets in its holding portfolio. In such as case, if Bitcoin’s price rises by 50%, the exchange-traded fund will not accurately reflect the value of bitcoin as the ETFs final value will account for other assets in the group. Therefore, while a Bitcoin ETF might give exposure to the Bitcoin market, it might not necessarily track Bitcoin’s price accurately.
Also, owning Bitcoin on a crypto exchange or a cold wallet gives you the flexibility of being able to exchange it for other cryptocurrencies. It is impossible to do this with an ETF as the ETF is not a cryptocurrency.
Owning Bitcoin comes with decentralized control of funds, a quality that is hard to achieve with a Bitcoin ETF since an ETF is ultimately regulated and controlled by the government.
Where are Bitcoin ETFs Available?
Currently, there are no Bitcoin ETFs in the US. Although Europe has some crypto-tracking products that function like ETFs, Canada is the first jurisdiction to officially approve a Bitcoin ETF.
The Purpose Bitcoin ETF was proposed and approved in February 2021 and had an epic first-day trading at $64 million worth of shares. Apart from Purpose Bitcoin ETF, regulators in Canada have also approved a second Bitcoin ETF in the country called the Evolve Funds Group’s ETF.
Are There ETFs for Other Cryptocurrencies?
In addition to the two Bitcoin ETFs, Canada has also recently approved three Ethereum ETFs. Evolve ETFs, Purpose Investments, and CI Global Asset Management have all received approval to launch Ethereum ETFs in Canada.
QR Capital, a blockchain investment firm in Brazil, is also set to release an Ethereum exchange-traded fund after winning the market regulator’s approval.
History of Bitcoin ETFs
The journey towards the approval of Bitcoin ETF by regulators has been long and treacherous especially for companies in the US looking to launch Bitcoin ETF products for their clients.
The Winklevoss twins were among the first to launch a petition for a Bitcoin ETF back in 2013. Their petition was rejected by the SEC after which they presented another application to the regulator in 2018. It was turned down again.
The SEC mentioned the fact that Bitcoin is traded on largely unregulated exchanges as a reason for the disapproval. Apart from the Winklevoss twins, other entities that have had their proposals rejected by the SEC include Bitwise and Wilshire Phoenix. The move by Canadian and Brazilian market regulators to approve Crypto ETFs is the latest development in the history of Bitcoin ETFs and a sigh of relief to investors hungry for exposure to the crypto market.
Conclusion: Legitimizing Crypto investments
Bitcoin ETFs have come a mighty long way, and recent developments with the approval of Purpose Bitcoin ETF in Canada as well as the Evolve Fund’s Group ETF not to mention Brazil’s Ethereum ETF is a welcomed reprieve for the crypto market at large.
Across the board, investors remain optimistic about the future acceptance of Bitcoin and crypto ETFs in the U.S even as institutional capital continues to flow into the crypto space. Bitcoin ETFs present a major step towards legitimizing investment in cryptocurrencies.
