Bitcoin ETFs are exchange-traded funds that track the rate of the pioneering cryptocurrency and let traders buy/ sell the securities on any stock exchange all through the day. They can either be physically settled or cash-settled. So, the investors either get actual bitcoin or fiat currency upon exiting. Bitcoin ETFs mimic the rate of the most common digital currencies in the world. It lets investors buy the ETF without even going through the complex process of bitcoin trading itself.
How Does the Bitcoin ETF Work?
An ETF is an excellent investment fund that can track the price of any underlying index or asset. ETFs are now available for many industries and assets ranging from currencies to commodities. Bitcoin ETFs also work in the same way. The rate of one share of an ETF fluctuates with the bitcoin’s price. If the value of bitcoin increases, the value of the ETF will also increase, and vice versa. However, the Bitcoin ETF does not trade on cryptocurrency exchanges. They trade on market exchanges such as the TSX or NYSE.
Advantages of Bitcoin ETFs
Tax Efficiency: Since Bitcoin is decentralized and unregulated, most pension funds and tax havens do not permit buying bitcoins. However, Bitcoins ETF trading will get regulated by bodies like the SEC and entitled to tax efficiency.
Diversification: ETFs can hold over one asset. A Bitcoin ETF, for example, can include Bitcoin, Facebook stocks, Apple Stocks, and more. They offer investors the chance to mitigate risks while diversifying their portfolios. By trading on regulated market exchanges, Bitcoin ETFs can allow investors to diversify their current equity portfolios.
Convenience: Investing in Bitcoin ETFs offers leverage to the rate of bitcoin without needing to learn how bitcoin works, without taking the risk of owning a bitcoin directly, and without signing up for an exchange. A Bitcoin ETF will simplify the procedure of investing money in Bitcoin.
Disadvantages of Bitcoin ETFs
Limits to Crypto Trading: Bitcoins can also be traded for many other cryptos, like Litecoin, XRP, Ethereum, and more. Bitcoin ETFs are not eligible to be traded for other cryptocurrencies because a Bitcoin ETF isn’t crypto but an investment fund that can track the rate of Bitcoin.
Management Fees: ETFs charge management fees for offering convenience. Hence, owning a large number of shares in Bitcoin ETFs can result in higher management fees.
ETF Inaccuracy: While an ETF can track the rate of an asset, it can also have many holdings in one bid only to diversify your portfolio. This recommends that a rise of 50% in Bitcoin’s price may not be reflected accurately in the ETF’s value because of its other holdings. Though an ETF offers leverage to a bitcoin price, it can or cannot be a precise price tracker.
The Road to Bitcoin ETF Approval
Companies who want to launch their Bitcoin ETFs will have to run into issues with the regulatory agency. Many people like the famous Tyler and Cameron Winklevoss had a petition to introduce a Bitcoin ETF, but it was turned down in 2017 by the SEC. The reason for refusal was that Bitcoins are traded on unregulated exchanges. It makes them susceptible to manipulation and fraud. However, with their efforts, the Winklevoss brothers got a patent for their company known as Winklevoss IP LLP that allowed them exchange-traded funds and products on June 19, 2018.
The Winklevoss brothers aren’t the only crypto enthusiasts looking to launch their Bitcoin ETF. There are many more like them. Although The SEC hasn’t approved any bitcoin ETF so far, investors are quite optimistic. This is because the cryptocurrency market has moderated, and the regulators have seen the lack of drama around bitcoin futures across many global exchanges. So, the SEC has opened up many Bitcoin ETF applications for public comments. Most commenters are voicing approvals for this new product. If bitcoin ETFs are launched, they will notice early success since both traditional investors and crypto enthusiasts will participate. The rise of these ETFs will also fuel gain in bitcoin. Moreover, many digital currencies are tied closely to bitcoin performance. Hence, gains will be seen across the whole cryptocurrency market.
Do Bitcoin ETFs Exist?
Presently, there is no Bitcoin ETF. It is mainly because of Bitcoin’s and the crypto market’s unregulated nature. It makes it simple to manipulate the bitcoin market. Hence, the SEC has blocked many proposals for new Bitcoin ETFs since the crypto market is unregulated. Though there is no Bitcoin ETF, public traded funds exist that let you invest your money in Bitcoin. Shares in these funds refer to a big pool of money that is invested in the cryptos.
Though Bitcoin ETFs are not approved so far, there are chances that they will be launched shortly, with both traditional investors and crypto traders showing their interest in them. They will come with an excellent opportunity. However, If you want to make good profit from Bitcoin then you must know about the Bitcoin Trading Bots. They are automated trading softwares or platforms that can help you to make massive profits from Bicoin trading.
1. What Are the Pros and Cons of Trading ETFs?
The pros of trading ETFs include:
- You do not need to store cryptocurrency safely yourself.
- Stock exchanges tend to be more liquid than cryptocurrency exchanges. It makes it simpler to buy/sell ETFs.
- There are clear tax guidance and implications for the traditional financial products compared to the digital assets.
- Buying ETFs through online brokers is faster, safer, and less risky than buying cryptos from a cryptocurrency exchange.
The cons of trading ETFs include:
- You can hold Bitcoins for free, but ETFs come with a management fee.
- You can buy and sell ETFs only during the market’s trading time, whereas the cryptocurrency market works 24/7.
- ETFs need you to count on 3rd party custodians.
- Purchasing ETFs, you need to complete KYC checks. However, you can buy bitcoins anonymously.
2. Who Can Invest in ETFs, and How Do You Trade Them?
Anybody can invest in ETFs. You need to create a brokerage account online, or you can also download a mobile trading app. From there, you can buy/ sell a wide variety of ETFs.
3. How Do I Buy and Sell ETF Units?
You need to set up an online brokerage account to buy and sell ETF units. It is as simple as that.