A Bitcoin ETF (Exchange Traded Fund) is a simple, legal way to trade the price of Bitcoin that is accessible in markets that investors are familiar with.
Three years after the “crypto winter 2018”, Bitcoin has almost tripled its all-time high of US $ 20,000 and exceeded its market capitalization of US $ 1 trillion. To date, it is the largest cryptocurrency in the entire crypto market, valued at more than $ 2 trillion.
With more mainstream popularity than ever before, there are plenty of newbies interested in buying Bitcoin. But many crypto enthusiasts still view buying Bitcoin on an exchange as an intimidating and opaque process. The technical aspects of Bitcoin holdings – like crypto wallets, Bitcoin addresses, and private keys – leave newcomers confused and some investors scared.
All of this has increased the appeal of the Bitcoin ETF. While Canada currently has 3 Bitcoin ETFs, the US has yet to approve funds for trading.
What are ETFs?
An ETF is a publicly traded investment vehicle that, like a stock, tracks the performance of an underlying asset or index rather than a company.
ETFs are a way for investors to gain exposure to the value of an underlying asset such as gold or oil.
ETFs are traded on a traditional exchange and their value increases as the asset increases and decreases when it falls.
The first ETF was launched in 1993 and gradually gained popularity as a way for retail investors to invest in a basket of assets at the same time. If you want to invest in the 500 largest companies in the USA at the same time, you can buy shares in the S&P 500 ETF.
The Bitcoin ETF works just like any other ETF. Investors buy shares of an ETF through whatever broker they buy the shares from and can trade them the same way they would trade Apple or Tesla shares.
The Bitcoin ETF tracks the current price of Bitcoin and will respond closely to Bitcoin price movements.
Why is a Bitcoin ETF needed?
Why don’t investors buy Bitcoin?
To most casual retail investors, Bitcoin and crypto in general still seem risky.
Regulations aside, owning Bitcoin requires holding a Bitcoin wallet and trustworthy exchanges, which is still uncharted territory for those unfamiliar with the space and requirements.
Holding Bitcoin puts the security burden on you so it is your responsibility to keep your private keys safe (unless you want to hand them over to an exchange). This means buying a hardware wallet to protect bitcoins or to keep private keys safe. You also need to learn how to file a tax return for the sale of bitcoin that made capital gains.
With a Bitcoin ETF, investors don’t have to worry about private keys, storage or security. They own stocks of the ETF like their own and can get involved in the cryptocurrency market without having to buy and hold.
And in a word, it’s an extremely attractive proposition for many institutional investors who are both casual and connoisseur.
This is why so many other hedge funds and investment firms have filed for Bitcoin ETF approval with the U.S. Securities and Exchange Commission (SEC) – there are at least seven Bitcoin ETF applications from high-profile institutions as of April 2021, such as the Example Treue, VanEck, SkyBridge Capital, Bitwise …
Gemini co-founders Cameron and Tyler Winklevoss open with application Winklevoss Bitcoin Trust (Bitcoin Winklevoss Trust) in 2013. In 2018, the US Patent and Trademark Office granted the Winklevoss brothers a patent for “exchange-traded products”. But the SEC has yet to approve their ETF or other funds.
How does Bitcoin ETF work?
A bitcoin ETF is managed by a company that buys and holds bitcoin, the price of which is fixed to the bitcoin held in the fund. The company lists the ETF on a traditional exchange and investors trade the ETF like any other security. Bitcoin ETFs also offer new types of trading opportunities, including short, where investors can bet against Bitcoin.
But there are also some important differences between Bitcoin ETFs and other ETFs.
First, some ETFs, like the S&P 500 ETFs, represent equity, so you get a reduction in the dividends that each of the ETF’s companies pays to shareholders. If Tesla pays a dividend and you own shares in an ETF that includes Tesla, you will receive a (smaller) dividend. Bitcoin is decentralized, so this won’t happen with a Bitcoin ETF.
Second, like other ETFs, you pay a fee to the company that provides the ETF. However, with a Bitcoin ETF, your dividends are used to pay custody fees and manage the purchase and storage of Bitcoin as the basis for the ETF.
A brief history of the evolution of the Bitcoin ETF
July 2013: Winklevoss Bitcoin Trust submits its first Bitcoin ETF proposal.
June 2018: SEC rejects Winklevoss second Bitcoin ETF proposal.
October 2019: SEC rejects Bitwise’s Bitcoin ETF proposal.
February 2020: Wilshire Phoenix is the newest project SEK rejected the Bitcoin ETF project.
September 2020: The world’s first Bitcoin ETF is listed on the Bermuda Stock Exchange.
December 2020: VanEck submits its latest Bitcoin ETF proposal after withdrawing its previous proposals before being formally rejected several times.
February 2021: Canada’s first Bitcoin ETF launches, the Purpose Bitcoin ETF (BTCC). Two more funds were also approved in the same month: Evolve Bitcoin ETF (EBIT) and CI Galaxy Bitcoin ETF (BTCX).
What is special about the Bitcoin ETF?
The Bitcoin ETF is expected to take the confidence and general acceptance of investing in Bitcoin to new levels in the United States. In 2020 and 2021, major public companies like Square and Tesla bought Bitcoin as an investment on their balance sheets, which has led to higher adoption – but the death of cryptocurrencies is still viewed as a gamble or even a gimmick by many conservative investors.
SEC approval of a Bitcoin ETF will make it easier for institutional investors to speculate on the price of Bitcoin. Functionally, it brings Bitcoin to Wall Street, where a Bitcoin ETF is traded on the same trading venues as Tesla stocks, bonds, gold, oil, or other traditional assets.
And that could give the Bitcoin price a huge boost.
Cannabis ETF became popular for the same reasons as the Bitcoin ETF. Just like cryptocurrencies, the cannabis industry is viewed as risky and insecure by traditional investors, but they still want a chance to capitalize on it.
Why hasn’t the SEC yet approved a Bitcoin ETF?
Since 2017, the SEC has repeatedly rejected Bitcoin ETF proposals.
The SEC’s main argument is that the price of Bitcoin can be easily manipulated by the market. And even if a Bitcoin ETF is based exclusively on the prices of the largest exchanges, it can be manipulated on less reputable exchanges with more lax security.
Other common concerns that the SEC frequently cites include a lack of transparency in the crypto market and a potential lack of liquidity.
But all of this only happened under outgoing President Jay Clayton.
In April 2021, Gary Gensler, a blockchain professor who teaches at MIT, was officially approved by the U.S. Congress as chairman of the SEC, sparking a new wave of optimism that the SEC is about to approve a Bitcoin ETF.
Heaven, earth and now there is human and harmony for Bitcoin ETF.
The future of Bitcoin ETFs in the US
Of course, just because Gensler understands crypto doesn’t necessarily mean he’ll endorse crypto as chairman of the SEC. However, that doesn’t stop investors from hoping that Gensler will lay the groundwork for Bitcoin ETFs.
Anthony Scaramucci, director of SkyBridge Capital hedge fund who served as White House communications director under President Donald Trump, said in March:
“I hope that with the introduction of Gary Gensler as head of the committee and my understanding of him, we may have an ETF by the end of the year.”
SkyBridge is one of the companies that has a bitcoin fund for its own clients. This is not an ETF, but they plan to convert that fund into an ETF if and when the SEC approves a Bitcoin ETF.
Another company, Grayscale Investments (the largest US crypto asset company), also offers listed investment products that are linked to certain cryptocurrencies, such as the Grayscale Bitcoin Trust (GBTC). In April, Grayscale confirmed its intention to convert Bitcoin Trust into a Bitcoin ETF if and if the SEC allows.
Mark Yusko, CEO of Morgan Creek Capital Management, believes the approval decision for the US Bitcoin ETF “will come”. Morgan Creek also invests in Bitwise (the company that filed the ETF).
The SEC’s nod will be an important step in determining Bitcoin’s ability to be viewed as a legitimate investment by the same traditional investors who have turned it down for years.
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