If there is anything in the crypto space that can become one of the reasons for the crypto market to rise like a phoenix from the ashes soon, it is Bitcoin ETFs. Various experts claim that the Bitcoin ETF will bring a strong bull run like never before. But some expressed centralization concerns that these ETFs can bring.
Regardless of which of their predictions turns true, one certain thing is; knowing everything about Bitcoin ETFs is a must for every crypto enthusiast.
Keeping that in mind, we have created this blog. It includes all the possible questions that pop up in your head about Bitcoin ETFs.
So, let’s dive in and discover everything about this new financial jargon.
Let’s begin with the basics by understanding ETFs quickly to avoid getting lost in the shuffle.
What is an ETF?
ETF stands for Exchange Traded Funds, meaning those investment funds which you can trade on a stock exchange. Depending on their type, these funds can comprise several assets, bonds, and commodities like mutual funds. For example, the funds of a stock ETF will be invested in stocks. Similarly, the funds of a Gold ETF will be invested in Gold-related companies and bonds.
Unlike mutual funds that change their value only once a day after the market trading closes, the price of ETFs changes every second, like regular stocks. Anyone with a legitimate demat account can invest in an ETF. When you purchase or sell an ETF, you have to pay a fee similar to what you pay for buying or selling stocks. This way, ETFs mix the simplicity through which you trade equities with the diversification benefits of mutual funds. If put, an ETF tracks the performance of a particular asset or a group of assets like mutual funds, but investors can sell, buy or trade it like regular stocks.
What is a Bitcoin ETF?
Bitcoin ETF is the short form of Bitcoin Exchange Traded Funds.
It is a financial product that aims to track the value and price movement of Bitcoin. A bitcoin ETF can be bought, traded, and sold on traditional stock market exchanges instead of Crypto trading platforms. It works similar to mutual funds. But the only difference is that, unlike mutual funds, Bitcoin ETFs are backed with Bitcoin price and performance.
One important thing to remember here is that Bitcoin ETFs may not necessarily own Bitcoin themselves. They usually own Bitcoin-related assets like future contracts and shares in Bitcoin-centric companies. Here, a future contract means a contract that obliges an institution to buy or sell Bitcoin-related assets at a predetermined price at a specific time in the future.
If the Bitcoin ETF is backed by Bitcoin future derivatives (Financial agreements that require parties to purchase or sell Bitcoin at a fixed price and date in the future), it is called Bitcoin futures ETF. If a Bitcoin ETF is backed by actual Bitcoin price, it is called a Bitcoin Spot ETF. When the price of Bitcoin fluctuates, the value of Bitcoin ETF may fluctuate too. This way, the investors in Bitcoin ETFs can speculate on Bitcoin price and benefit from it without owning it.
The concept of ETFs is not new because many different ETFs exist prominently in the traditional equity market. Some most popular ones exist for assets like Gold, oil prices, and Sensex.
Bitcoin Futures ETFs exist in many countries like Brazil, Canada, Dubai, Switzerland, and the USA. However, Bitcoin Spot ETFs are yet to get approvals from the regulating authorities of many equity markets. If you keep an eye on the Crypto news lately, you must have seen headlines where top US-based financial institutions recently filed for Bitcoin Spot ETFs. It is the key reason for Bitcoin Spot ETFs to gain immense traction in 2023. We will know more about it in the following sections.
What is the Need for a Bitcoin ETF?
What is the need for a Bitcoin ETF? It is the question that comes to every sane mind for Bitcoin ETFs. After all, buying a Bitcoin ETF instead of Bitcoin makes less sense.
However, there are many legit reasons for investors to be highly interested in the Bitcoin ETF that we can imagine.
Firstly, many investors feel insecure about exposing their funds to the crypto market. Yet, they wish to invest in a fast-growing asset like Bitcoin due to its incredible performance over the decade. Thus, they prefer Bitcoin ETFs that they can trade in traditional investment markets without involving any cryptocurrency exchange.
Another reason behind investors preferring Bitcoin ETF over Bitcoin is the professional management of Bitcoin ETFs. Since a team of industry experts manages a Bitcoin ETF, it becomes easier for investors to bet on the digital asset. Their familiarity with the equity markets makes it convenient for them to opt for Bitcoin ETFs over Bitcoin.
The risk of losing wallet passwords, accounts getting hacked, or storing private keys lies in buying Bitcoin from crypto exchanges. Since Crypto is a relatively new sector and its adoption has not officially become mainstream, such fear is prevalent among investors. The catastrophic fall of FTX, Terra LUNA, Celsius network, and other prominent crypto players have amplified this fear even more. Due to that reason, they seek to avoid this burden by choosing to invest in Bitcoin ETFs.
Portfolio diversification is another reason for paving the need for Bitcoin ETFs. An ETF can allow you to bet not just on Bitcoin price but also on its related stocks and other assets as part of its package. Thus, investors get an option to diversify their investment in the crypto market, which is not possible by purchasing Bitcoin directly from the crypto market.
The last reason behind the appeal of Bitcoin ETF is the lack of crypto regulations at the current time. Multiple governments have shown an oppressive stance on decentralized assets by imposing high taxes and TDS. However, equity markets enjoy full support from authorities due to their regulated nature and prolonged existence. It makes Bitcoin ETFs tradeable on the stock market more attractive than Bitcoin traded on the crypto market.
Thus, in layman's terms, Bitcoin ETFs are an extremely appealing proposition for many regular investors due to their simplified functioning, regulated environment, and familiar trading ecosystem.
History of Bitcoin ETFs
This idea of a Crypto backed ETF is not a newfangled one but instead an old-timey. A decade ago, in 2013, the Winklevoss brothers, Cameron and Tyler Winklevoss, submitted their application for the first-ever Bitcoin Trust fund. The SEC (Securities and Exchange Commission) in the USA rejected their proposal twice, stating concerns about the risky nature of cryptocurrencies. Since then, SEC has discarded almost all Bitcoin Spot ETF requests, citing “inadequate investor protection” in the crypto market. In fact, in 2018, SEC rejected a whopping 9 Bitcoin ETF proposals in a single day.
Not long ago, in October 2021, SEC approved the first Bitcoin Futures ETF request (not Bitcoin spot ETF) for ProShares Bitcoin Strategy ETF (BITO). It was the first Bitcoin Futures ETF traded on NYSE (New York Stock Exchange). However, the SEC has not approved even one Bitcoin Spot ETF request.
It is worth mentioning that while SEC, based in the USA, has been constantly rejecting Bitcoin Spot ETF requests, many other countries have embraced them. For example, Canada has allowed several crypto-centric Spot ETFs to trade on its Toronto Stock Exchange. The most popular ones are 3iQ Coin Shares, Purpose Bitcoin, and CI Galaxy Bitcoin, which handle funds of billions of dollars.
Other countries like Germany and Switzerland have also allowed multiple Bitcoin ETPs (Exchange Traded Products) backed directly with Spot BTC. One popular among them is 21Shares Bitcoin ETP, which exposed 100% to Bitcoin and enjoyed higher popularity than its multi-asset counterparts.
However, the crypto world has its eye set on the Bitcoin spot ETF status in the United States. The reason behind it is the large size of the American investment market and the geopolitical dominance of the country.
What Made Bitcoin ETFs Popular Again in 2023?
Bitcoin ETFs have been one of the most discussed topics in the crypto verse this year. They surfaced in the discussion when Blackrock, the top multinational investment company in the USA, applied for Bitcoin ETF on June 15. According to Wikipedia, Blackrock is the world's largest asset manager, owning $8.59 trillion worth of assets under management. The interest of such a big financial institution in Bitcoin ETFs instantly made headlines.
Many other prominent American fund managers like Fidelity, Invesco, WisdomTree, Bitwise, Valkyrie Investments, Ark Invest, VanEck, and many others followed the exact footprints of Blackrock by applying for Bitcoin ETFs one after another.
Such bombardment of top players was the key reason Bitcoin Spot ETFs became the hot topic in the crypto space. According to Bloomberg’s senior ETF analyst, Blackrock has a 50% chance of getting approval for the SEC over its Bitcoin ETF request. The impeccable record of Blackrock 575 approved ETFs, with only 1 rejected, is also a key reason behind the high chances of it getting approval on Bitcoin ETF. The recent win of Ripple against the SEC is another green flag raising the chances of the SEC accepting the ETF requests this time.
As soon as the news of big financial institutions applying for Bitcoin ETFs surfaced on the internet, Bitcoin price surged over 17%, rising from $27000 to $31,000 in a few hours. SEC has a deadline of 240 days to decide on the Bitcoin ETF request. According to this math, the new Bitcoin Spot ETFs could be available just before the beginning of the next Bitcoin halving in 2024. The combination of ETF approval and Bitcoin halving can lead to a meteoric rise for Bitcoin and the entire crypto market.
Why do Investors Prefer Spot Bitcoin ETFs Over Bitcoin Futures ETFs?
The key reason investors like Bitcoin Spot ETF more than its futures counterpart is the direct association of the former with Bitcoin price. Generally, the futures ETF has an 85% exposure to the underlying asset, and the remaining 15% goes to other asset classes. However, Spot ETFs track the price of their underlying assets more closely.
Another reason behind Spot ETF gaining more popularity is that it involves lesser maintenance costs than its future counterparts. The correlation between Bitcoin spot ETFs with Bitcoin is slightly closer and stronger than Bitcoin futures ETFs.
What are the Drawbacks of Bitcoin ETFs?
Here are the most worrisome drawbacks associated with Bitcoin ETFs-
- Bitcoin ETFs come with some management fees that investors give to asset managers. This fee is generally higher than the platform fees that different exchanges charge to let you buy Bitcoin.
- Bitcoin ETFs give no ownership to their investors on Bitcoin. You can not exchange a Bitcoin ETF with some other cryptocurrency like you can with Bitcoin.
- Since Bitcoin ETFs operate in the traditional market, they come with limited trading hours. Thus, if there is a price movement in BTC overnight, you can not do anything about it until the market re-opens. You can not trade them on weekends or after the market closes. On the other hand, the Bitcoin market works 24/7.
If reading that made you willing to buy Bitcoin, you can do that here.
Wrapping Up
In the ever-evolving landscape of cryptocurrencies, the emergence of Bitcoin ETFs has ignited excitement and scepticism. The necessity for Bitcoin ETFs stems from multifaceted reasons. Investors seek security, professional management, portfolio diversification, and refuge from the uncertainties of direct cryptocurrency ownership. Additionally, the appeal lies in the more regulated environment of traditional equity markets, offering a familiar and regulated setting. Amidst historic SEC rejections, the recent popularity of Bitcoin ETFs driven by influential financial giants like Blackrock signals a turning point. With the potential for SEC approval and the upcoming Bitcoin halving, a meteoric rise for Bitcoin and the crypto has become possible.
You May Ask
How do I buy Bitcoin ETFs in India?
Unfortunately, the Indian stock market has not listed any Bitcoin ETFs based in India. Thus, Indian investors need to opt for global crypto ETFs that allow the participation of foreign investors. Those opting for this avenue must adhere to the Indian Government-sanctioned liberalized remittance scheme (LRS) to comply with regulations.
Are Bitcoin ETFs a good investment?
Bitcoin ETFs can be a favourable investment choice, offering exposure to Bitcoin's potential without direct ownership. They provide regulated access for traditional investors, although risks and returns should be evaluated based on individual goals and market conditions.
