The clamour for a Bitcoin Exchange-traded fund (ETF) finally got a headway in October 2021 with the approval and launch of 3 bitcoin ETFs. The ProShares BITO, which was released on Oct. 19 and became the first approved bitcoin ETF in history. It was followed by Valkyre Funds’ and VanEck’s financial products released on Oct. 22 and Oct. 26 respectively. Bitcoin ETFs provide a vehicle through which institutional investors gain exposure to the digital asset.
The bitcoin ETFs being traded use BTC futures contracts to offer a high correlation with the price of the world’s first digital currency. These products provide valuable keys in unlocking trillions of dollars available in investors’ demand for bitcoin. With the US ETF market alone accounting for roughly $6.5 trillion in assets under management (AUM), bitcoin ETFs offer investors a generous slice of the market.
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Growing Interest in bitcoin ETF
An ETF is a type of investment fund that tracks the performance of a specific asset or group of assets. ETFs enable investors to diversify their holdings without really owning the assets. They offer a simple alternative to purchasing and selling individual assets for owners who focus on profiting from these asset’s price, rather than physically owning them. Aside from bitcoin ETFs, other ETFs include SPDR S&P 500 ETF (SPY), iShares Russell 2000 (IWM), SPDR Gold Shares (GLD), etc.
Bitcoin ETFs have seen growing interest over the years as more institutional investors look for ways to invest in cryptocurrencies. As Bitcoin prices continue to grow, more investors want to gain exposure to it in a regulated manner. This contrasts the unregulated nature usually associated with all forms of digital assets.
US Greenlights BTC ETFs
The first-ever bitcoin ETF application was in 2013 by the Winklevoss twins. Since then, the approval of any bitcoin ETF of any form in the US has faced regulatory delays from the Securities and Exchange Commission (SEC). The regulatory body cited the volatile nature of Bitcoin prices and the potential for price manipulation in the unregulated crypto ecosystem.
In 2021 however, the SEC finally approved bitcoin ETFs to be traded on the New York Stock Exchange (NYSE). This move pushed the prices of Bitcoin up, ensuring that the crypto asset recorded a new all-time high price of $69,000. On its first day of Trading, the ProShares Bitcoin Strategy ETF gained 2.59% to close at $41.94 with a valuation of over $1 billion. It is the fastest asset to achieve that valuation ahead of Gold which took three days to hit the mark.
The Proshares bitcoin ETF was approved after implementing futures pricing at the Chicago Mercantile Exchange (CME). The CME is governed by the Commodity Futures Trading Commission (CFTC) and poses no regulatory risk to the SEC. Other spot price bitcoin ETFs face possible rejection over their pricing and unregulated bodies that control it.
Investors around the world, however, prefer Spot- priced ETFs. It accurately tracks the price of its underlying asset much more than the futures-based counterpart and does so at a much lower cost.
The successful performance of the currently listed bitcoin ETFs has made investors more optimistic and confident. This may lead to the SEC approving any number of the numerous fillings made to it.
Crypto ETFs Launched in Canada And Europe
Before the approval of bitcoin ETFs in the US, Canada and some European countries already offered bitcoin ETFs. On the Toronto Stock Exchange, several crypto-focused ETFs with billions of dollars in assets under management are available. The top three crypto-related ETFs with the highest AUM are all linked with the spot price of bitcoin. The futures alternative has a miserly $7.6 million in AUM, clearly showing investors preference. Three of the most significant funds are 3iQ Coinshares, Purpose Bitcoin, and CI Galaxy Bitcoin; Purpose is the largest, with $1.2 billion in AUM as of Oct. 13.
A very similar situation is playing out In Europe. In Germany and Switzerland, investors are flocking to physically backed exchange-traded products (ETPs). The 21Shares bitcoin ETP, which is 100% exposed to spot BTC, is listed on the Swiss Exchange and various German exchanges. It has a market capitalization of about $500 million, and like the Canadian ETFs, has 100% exposure to spot bitcoin price. The demand for these bitcoin ETPs is substantially greater than its crypto indexes and multi-asset counterparts, the largest of which has $215 million in AUM.
One of the more recent entrants into the bitcoin ETF market, Brazil, also chose the spot-based alternative. QR Capital’s bitcoin ETF trades on the São Paulo exchange and has an AUM of $41 million.
Benefits of bitcoin ETFs
Bitcoin ETFs offer several advantages that make them superior investment vehicles. These include:
An ETF can hold multiple assets at the same time, for example, bitcoin, Apple stocks, Facebook stocks, and other assets. This allows investors to reduce risk and diversify their portfolios. Similarly, a bitcoin ETF would allow investors to diversify their existing equity portfolios by trading on a regulated market exchange.
- Tax effectiveness
Because bitcoin is unregulated and decentralized, most of the world’s tax havens and pension funds do not permit bitcoin purchases. On the other hand, a bitcoin ETF trading on traditional exchanges would be regulated by the SEC and be eligible for tax breaks.
Investing in bitcoin ETFs exposes an investor to bitcoin without learning how it works, signing up for a cryptocurrency exchange, or taking on the risks of directly owning this digital asset. Bitcoin ETFs make it easier to invest in bitcoin and bear no risk of losing all the assets if the owner forgets the password to the wallet.
Despite these advantages, bitcoin ETFs also have their flaws.
- Management fees
ETF providers typically charge management fees in exchange for their services. This means that owning a significant number of shares in a bitcoin ETF may result in high management fees over time.
- Inaccuracy in ETFs
While ETFs track the price of an underlying asset, they can also hold multiple assets to diversify the portfolio. However, because of this, the value of the ETF will most times not reflect a percentage increase in bitcoin’s price. As a result, while an ETF provides leverage to the cost of bitcoin, it may or may not be an accurate tracker of its price.
- Cryptocurrency trading restrictions
Investors can exchange bitcoin for other cryptocurrencies such as Ethereum, Litecoin, and XRP, among others. The nature of bitcoin ETFs makes it impossible to trade them against other cryptocurrencies.
- Inadequate bitcoin ownership
Bitcoin acts as a hedge against central banks, fiat currencies, and stocks. Through its independence from regulation, bitcoin offers a means of mitigating financial system risks. Bitcoin also protects users and investors by enabling them to maintain their privacy via the blockchain. On the other hand, bitcoin ETFs are pure mainstream financial products which fully depend on conventional financial system and possess no advantages mentioned above.
Bitcoin can attract the next generation of clients.
The launch of bitcoin ETFs marks the beginning of a whole new era of crypto investments. Despite the increasing number of clients investing in cryptocurrency or becoming “crypto curious,” most existing investors still have little or no crypto assets in their portfolios. Due to regulatory backing of new mainstream financial products based on digital assets, more people will look to gain exposure to this actively developing new market.