Bitcoin ETF is a term which is making rounds across newsrooms quite frequently over the past couple of weeks. Let us take a closer look and try to understand what an ETF is – and then to take a look at Bitcoin ETFs, as well as a quick round-up of why Bitcoin ETFs are in the news these days.
What is an ETF?
In order to understand what a Bitcoin ETF is, one needs to know what ETFs are. ETF stands for Exchange Traded Fund. In the simplest of words, an ETF is basically an investment fund. However, it is quite different from other existing options such as mutual funds, etc. This is an investment fund which tracks the prices of an asset such as gold, oil, etc. An ETF can also comprise of various stocks. To put it in even simpler words, it is a basket of assets grouped and tracked together.
ETFs are allowed to be traded on stock exchanges – making it easier for investors to sell and purchase 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 do not have a huge market cap, but would still like to invest in a niche asset class – ETFs have proven to be a good option in the past. Moreover, ETFs are more liquid than compared to mutual funds – making it easier to buy and sell them.
Finally, in order to understand ETFs, it must also be known that the asset which is 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 latest context – cryptocurrencies. The rising demand for Bitcoin ETFs has now made it quite essential for crypto-traders to know what a Bitcoin ETF is.
What is a Bitcoin ETF?
Now that you know what an Exchange Traded Fund is – let us take a closer look at Bitcoin ETF and how a Bitcoin ETF functions. However, before we head forward, it must be known that as of this writing there are no Bitcoin ETFs in existence. There has been a massive public demand and a number of corporations have tried to create them – but before Bitcoin ETFs can come into existence, they need to be approved by the US Securities and Exchanges Commission (SEC).
The concept that has been proposed, however, is that Bitcoin ETFs would (like regular ETFs) purchase a certain amount of Bitcoins – and the funds would then be distributed among the shareholders in the form of shares. Most proposed Bitcoin ETF ideas have been around tracking the price of Bitcoin via Bitcoin Futures contracts instead of tracking Bitcoin prices via crypto-exchanges.
However, the SEC has turned down the idea of creating Bitcoin ETFs – stating that there are a number of liquidity and valuation issues that still need to be addressed when it comes to cryptocurrencies. The SEC has further pointed out that the liquidity on Bitcoin Futures contracts is as well as trading volumes – too low. Hence, Bitcoin ETFs have been turned down for the moment.
Bitcoin ETFs are Not the Same as Blockchain ETFs
It must also be understood that a Bitcoin ETF is not the same as Blockchain ETF. Blockchain ETFs track the price of companies which are investing into the blockchain technology, or are making use of the blockchain technology. Based on the performance of the shares of these companies, the shareholders of Blockchain ETFs gain or lose money. At the beginning of this year, Canada SC approved one such Blockchain ETF.
However, a Bitcoin ETF is completely different as the asset here in itself is the Bitcoin – unlike in Blockchain ETFs where blockchain is not an asset, but instead stocks of the companies which invest in blockchain tech are assets. Blockchain ETFs are considerably less volatile than cryptocurrency based ETFs and the SEC doesn’t really have problems with it.
Given the volatility and speculatory nature of bitcoin prices, the SEC is not so confident on the idea of Bitcoin ETFs at the moment – but it appears that it would become reality in due time as big names have been insisting on setting them up. As the demand for Bitcoin Exchange Traded Funds rises, it would be interesting to see if the SEC finally caves into public demand.
Vitalik Buterin too, has supported Exchange Traded Funds – but has pointed out that there should be easier ways for public to purchase them. However, the most active voice demanding Bitcoin ETFs is that of the Winklevoss twins – two of the most legendary names in the world of cryptos. The Winklevoss twins have been rejected twice by the SEC – but could they be lucky in their third attempt?