Bitcoin ETF is a term that has been floating around newsrooms quite frequently in recent weeks. In this article we will take a look and try to understand what an ETF is – and then take a look at Bitcoin ETFs, plus a quick summary of why Bitcoin ETFs are in the news these days.
What is an ETF?
To understand what a Bitcoin ETF is, you need to know what ETFs are. ETF stands for Exchange Traded Fund. In the simplest terms, an ETF is basically an investment fund. However, it is quite different from other options like mutual funds, etc. It is an investment fund that tracks the prices of an asset like gold, oil, etc. An ETF can also include multiple stocks. To put it simply, it is a basket of assets that are grouped together and tracked.
ETFs can be traded on stock exchanges – making it easier for investors to buy and sell them. One of the biggest advantages of an ETF over other types of funds, such as mutual funds, is that ETFs are relatively cheaper. For investors who don’t have a large market cap but still want to invest in a niche asset class – ETFs have proven to be a good option in the past. Additionally, ETFs are more liquid than mutual funds – making them easier to buy and sell.
Finally, to understand ETFs, it should also be known that the asset being tracked is actually owned by the ETF. The ownership of that asset is then divided into shares. Be it stocks, gold, oil – or in the most recent context – cryptocurrencies. The growing demand for Bitcoin ETFs has now made it quite essential for crypto traders to know what a Bitcoin ETF is.
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What is a Bitcoin ETF?
Now that you know what an Exchange Traded Fund is – let’s take a look at a Bitcoin ETF and how it works. However, before we move forward, it’s important to know that as of this writing, there are no Bitcoin ETFs in existence. There has been a massive public demand for them and several companies have tried to create them – but before Bitcoin ETFs can exist, they need to be approved by the US Securities and Exchange Commission (SEC).
The proposed concept, however, is that Bitcoin ETFs (like regular ETFs) would buy a certain amount of Bitcoins — and the funds would be distributed among shareholders in the form of shares. The most proposed Bitcoin ETF ideas have been to track the price of Bitcoin through Bitcoin futures contracts, rather than tracking Bitcoin prices through cryptocurrency exchanges.
However, the SEC has rejected the idea of creating Bitcoin ETFs – stating that there are several liquidity and valuation issues that still need to be addressed when it comes to cryptocurrencies. The SEC further pointed out that the liquidity of Bitcoin futures contracts is as high as the trading volumes – very low. Hence, Bitcoin ETFs have been rejected for the time being.
Bitcoin ETFs are not the same as Blockchain ETFs
It should also be understood that a Bitcoin ETF is not the same as a Blockchain ETF. Blockchain ETFs track the price of companies that are investing in blockchain technology or that are using blockchain technology. Based on the performance of the stocks of these companies, shareholders of Blockchain ETFs make or lose money. Earlier this year, the Canadian SC approved one such Blockchain ETF.
However, a Bitcoin ETF is completely different, as the asset here is Bitcoin – unlike Blockchain ETFs, where blockchain is not an asset, but the stocks of companies investing in blockchain technology are assets. Blockchain ETFs are considerably less volatile than cryptocurrency-based ETFs and the SEC doesn’t really have a problem with that.
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Conclusion
Given the volatility and speculative nature of bitcoin prices, the SEC is not so confident in the idea of Bitcoin ETFs at the moment – but it seems that it would become a reality in due time, as big names have been pushing to set them up. As the demand for Bitcoin Exchange Traded Funds increases, it would be interesting to see if the SEC finally sticks to the public demand.
Vitalik Buterin has also supported exchange-traded funds – but has pointed out that there should be easier ways for the public to buy them. However, the most vocal call for Bitcoin ETFs has been the Winklevoss twins – two of the most legendary names in the crypto world. The Winklevoss twins have been rejected twice by the SEC – but could they get lucky on their third try?