Ever wondered how Bitcoin’s (BTC) value skyrocketed to over 65,000 USD from almost nothing? Apart from being a unique kind of money in many different ways, Bitcoin’s highly volatile nature is what grabs the attention of many investors, fintech folks, and crypto enthusiasts alike.
In November 2021, BTC did it again. It reached another impressive record of over 67,000 USD, which is this year’s all-time high (ATH). A month earlier, Bitcoin also reached a skyrocketing price of around 60,000 USD, which is when the news about Bitcoin exchange-traded funds (ETFs) surfaced in the crypto space.
Some crypto enthusiasts say ETFs may have affected the recent bull run and ATH. But what is an ETF and how does it work? More importantly, what is a Bitcoin ETF and what does its approval mean for investors and traders in the crypto world? Let’s dive in.
What is an ETF?
An exchange-traded fund (ETF) is a type of fund that holds multiple types of assets, unlike stocks where you can only hold one. This investment vehicle tracks an asset or a group of assets’ market performance and can be traded on exchanges. ETFs may include different types of investments such as stocks, bonds, commodities, currencies, and more.
Here, the ETF provider creates a basket—a collection of multiple securities—that includes different types of assets. If you want to invest in ETFs, you can buy a share of the basket created by the provider. Think of it as buying portions or shares of a company.
What is a Bitcoin ETF and how does it work?
Now that we understand what an ETF is, let’s discuss what a Bitcoin ETF is and how it works. Bitcoin ETFs mirror the price of BTC, which means its value would fluctuate with the price of the coin. If Bitcoin price soars, so does the ETF. The same scenario applies when BTC’s value suddenly goes down.
Interestingly, you can engage and invest in ETFs without really owning Bitcoin—no need to worry about understanding every intricate detail of BTC and how trading works. Apart from that, ETFs cut out the need for complex storage and minimize potential issues when dealing with security procedures required by crypto investors.
What does Bitcoin ETF approval entail?
If you’re going to search for “Bitcoin ETF” on the Internet, you’ll see that Bitcoin ETFs are now in a good position. However, if you were to look at news from a couple of years ago, Bitcoin ETFs weren’t welcomed as much by financial regulators, particularly the Securities and Exchange Commission (SEC).
Among the possible reasons behind this is that BTC is a decentralized asset that’s highly traded on many unregulated exchanges, which makes it susceptible to fraud and other malicious activities. Different groups and firms faced some concerns with regulatory agencies and turned down petitions to launch Bitcoin ETFs. An example of this is the Bitcoin ETF called the Winklevoss Bitcoin Trust, which the SEC declined in 2017.
However, recent reports have shown that the SEC is set to finally give Bitcoin ETFs the green light. For some crypto enthusiasts, Bitcoin ETFs would be more widely accessible for individuals looking to invest in BTC but not in the actual cryptocurrency. This gives them a regulated alternative to the said digital coin.
Now, the question is this: What does the Bitcoin ETF approval mean for folks in the crypto space? Clearly, this is a significant move for the SEC. ETFs are much better known and understood by many investors outside the crypto community. This makes Bitcoin ETFs an ideal vehicle for traditional traders and investors looking to kickstart their journey on the cryptocurrency market.
The benefits and drawbacks of a Bitcoin ETF
Since Bitcoin ETF is an investment vehicle, it would be possible for investors to short sell shares of the ETF. This means they can bet that the price of Bitcoin will go down in a certain time period. Depending on how you look at it, shorting BTC can be good or bad.Let’s talk about the other advantages and disadvantages that come with it. Let’s begin with the good side.
Pros of Bitcoin ETFs
- It’s generally safer and more convenient – With Bitcoin ETFs, you don’t need to know all the technical and complicated stuff about BTC and take on the risks of owning fractions of it. Simply put, Bitcoin ETFs simplify the way you invest in BTC.
- It validates cryptocurrencies as a serious form of investment – Because of price volatility, cryptocurrencies were once regarded as unreliable. However, as more people began to unlock new financial opportunities with BTC, their understanding of digital currencies widened. BTC ETFs would likely be regulated by the SEC when traded on traditional exchanges, making them a valid asset for investment.
- It’s more ideal for traditional investors – Earlier, we mentioned that ETFs are much more popular and understood in the investment world. This is what makes Bitcoin ETFs ideal for traditional investors who are planning to get started on cryptocurrency in a way they know.
- It offers diversification – With ETFs, you can hold more than one asset. This allows you to diversify your portfolio and explore potential opportunities with different assets. A former president of the New York Stock Exchange (NYSE) even believes that Bitcoin should be a part of any portfolio.
Cons of Bitcoin ETFs
- It has higher fees – Since ETFs run on regulated platforms, management and processing fees are usually charged for the transactions. This means that you could pay higher management charges when you own a significant amount of shares over time.
- It offers limited options compared to numerous cryptocurrencies available – It’s important to note that a BTC ETF isn’t always eligible to be traded for another digital currency, unlike an actual Bitcoin that can be exchanged for Ethereum (ETH), Tether (USDT), and thousands of other cryptos in the market.
- It’s new and untested, making it not ideal for beginners – Bitcoin ETFs are relatively new and there’s still much to learn about it. If you’re new to cryptocurrency and the investment world in general, learning the ropes of either would help you better understand how ETFs and Bitcoin work together and how you can use them to discover new financial opportunities.
- You don’t actually own Bitcoin – ETFs only mirror the price of different assets. This means that if you invest in Bitcoin ETFs, you’re not holding an actual BTC.
The future of Bitcoin ETF
Bitcoin ETFs have experienced being blocked by regulators before. Still, as the crypto world continues to grow and Bitcoin unceasingly gains popularity, it’s no doubt that crypto ETFs will gain attention and get entirely accepted over time. What are your thoughts on Bitcoin ETFs? Let us know in the comments!
*The content of this article is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. You should carry out your own independent verification of facts and data, do your own research and may want to seek professional advice before making any decisions.