In this article, we’re going to discuss the benefits and the drawbacks of a Bitcoin ETF and what it spells for the crypto industry. Also, we’ll discuss the differences between a Bitcoin futures ETF and a spot-Bitcoin ETF. Plus, we’ll explore some of the regulatory developments that could inform the future of crypto ETFs.
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Bitcoin ETFs
Bitcoin has become one of the most sought-after investment opportunities of the decade. Equally, exchange traded funds (ETFs) have seen an increase in popularity for investors of all types. Accordingly, a Bitcoin ETF seems like a foregone conclusion to many in the space. However, a lack of regulation is creating friction in getting a universally-appealing Bitcoin ETF to market due to skepticism from the Securities and Exchange Commission (SEC).
A Bitcoin ETF tracks the price of the most prominent cryptocurrency and enables investors to gain price exposure directly from a brokerage account. This removes the risks of having self-custody of crypto assets and promotes the adoption of Bitcoin to investors who don’t want to set up a new crypto exchange account and learn how to use it.
The mantra of “not your keys, not your coins” rings clear throughout the crypto space. This suggests that crypto investors should hold their assets in cold storage rather than with an exchange or custodian that could act as a single-point-of-failure.
Despite this, a wave of investors are eagerly awaiting the introduction of a suitable vehicle to provide a safe and convenient way of gaining exposure to crypto in the same way as they would any other asset. Moreover, investors can gain exposure to Bitcoin without needing to understand the complex security procedures.
Why Bitcoin?
Anyone who is into gold will appreciate the value of scarcity. Scarcity is one of the most sought-after properties of a currency or asset. Rarity is a commonly sought-after attribute for an investment class, from salt and seashells to art and classic cars.
One of the problems with gold is that the scarcity is dubious. New pockets of gold are discovered frequently. Also, the rate at which miners can create gold is regulated so that the asset doesn’t flood the market. Bitcoin is provably scarce. There will only be 21 million Bitcoin (BTC) ever mined. Plus, millions of these are likely lost forever.
The Bitcoin network has no single-point-of-failure or central authority to shut the network down. Also, the Bitcoin network is the most powerful computer network in existence. As such, it is incredibly difficult and costly for bad actors to attack the network.
One of the most compelling attributes of Bitcoin is the process of Bitcoin mining. Bitcoin mining is the process by which new Bitcoin enters circulation. It uses a Proof-of-Work (PoW) consensus algorithm to verify transactions on the network and requires upfront and continuing costs for expensive mining hardware and electricity. Each Bitcoin miner (or node) in the network must reach a consensus about the validity of a transaction before it can be broadcast.
This prevents bad actors from broadcasting bogus transactions as it incurs a financial loss. Moreover, each node or miner has a financial incentive to act honestly and prevent “double-spending”. Accordingly, Bitcoin is a form of sound money that is emerging as an attractive opportunity for retail and institutional investors.
What is an Exchange Traded Fund (ETF)?
An exchange traded fund (ETF) is a financial instrument that tracks indexes, sectors, commodities, and other assets. An ETF is essentially a basket of securities, which are fungible financial instruments for raising capital in public and private markets and are tradeable on a stock exchange like a regular stock. Furthermore, some ETFs track single commodities while others track expansive groups of securities, bonds, commodities, and other investments. Plus, they can cater to specific investment strategies.
One of the key benefits of ETFs is that they can be a capital-efficient way of gaining exposure to a broad range of assets without paying individual broker fees for each of them. Furthermore, ETFs trade all day instead of closing at the end of the day like regular stocks. Moreover, a Bitcoin ETF provides an efficient way of diversifying a traditional portfolio by gaining exposure to the crypto markets.
Bitcoin Futures ETF
A Bitcoin futures ETF tracks the price of Bitcoin futures contracts rather than the spot price of Bitcoin. Futures contracts are agreements to buy or sell an asset in the future at a specific price. The ProShares Bitcoin Strategy ETF (BITO) was the first to market, with the VanEck Bitcoin Strategy ETF (XBTF) and the Valkyrie Bitcoin Strategy ETF (BTF) following behind.
Despite the promising signs the Securities and Exchange Commission (SEC) has shown by approving a Bitcoin ETF, demand may be declining for a Bitcoin futures ETF. Some believe that this is partly due to the negative price action of Bitcoin in recent months. As such, speculating on the future price of Bitcoin may be too risky for many investors. Furthermore, Bitcoin futures ETFs often incur rolling costs every month. Accordingly, the Bitcoin futures ETF falls short of what many in the industry are advocating for. Moreover, investors are seeking an alternative avenue for investing in Bitcoin without such high fees.
Spot-Bitcoin ETF
Rather than tracking a future price of Bitcoin, a spot-Bitcoin ETF would track the real-time price of Bitcoin. Several proposals for spot-Bitcoin ETFs have been rejected or delayed by the US Securities and Exchange Commission (SEC). However, multiple spot-Bitcoin ETFs have been greenlit for trading on the Toronto stock exchange.
Several top analysts predict further delays for a spot-Bitcoin ETF in the US, with many predicting 2023 as the earliest potential date. Also, some skeptics suggest that anyone who wants direct exposure to Bitcoin should simply buy the asset directly from a crypto exchange.
Approval
Because the cryptocurrency markets lack regulation, the approval of a spot-Bitcoin ETF is difficult to come by. Regulators cite the potential for fraud and abuse as primary concerns for such a financial product. Furthermore, a number of big players throughout the industry have been unsuccessful in establishing a Bitcoin ETF, including the Winklevoss brothers of the Gemini exchange.
In 2018 the VanEck SolidX Bitcoin Trust ETF was put forward. This product aims to attract institutional investors with an index that relates to a group of Bitcoin trading desks. However, the VanEck SolidX Bitcoin Trust ETF proposal was withdrawn. Multiple ETF applications have been put on “indefinite hold” to “protect investors” due to concerns from the SEC over “fraudulent and manipulative acts and practices”.
This position came under fire from lawyers representing the Grayscale Bitcoin Trust (BTC). A letter to the SEC states that there is “no basis for the position that investing in the derivatives market for an asset is acceptable for investors while investing in the asset itself is not”.
In October 2021, the ProShares Bitcoin Strategy ETF began trading as the first Bitcoin ETF in the US. The fund tracks the prices of Bitcoin futures contracts trading at the Chicago Mercantile Exchange (CME) and enables investors to short sell Bitcoin. Following the successful launch of the ProShares Bitcoin Strategy ETF, several other Bitcoin ETFs have become popular. In particular, the Canadian and European ETF markets have gone from strength to strength in recent months.
Why Use a Bitcoin ETF?
A Bitcoin ETF enables investors to track the price performance of BTC without owning the underlying asset. An ETF is a convenient way of gaining exposure to Bitcoin for anyone who struggles to understand the technicalities of Bitcoin and blockchain or does not have the time or the will. Plus, an ETF allows any potential investors with concerns over the lack of regulation in the crypto markets to gain exposure to alternative assets.
Learning the core principles of blockchain and cryptocurrency is not a priority for many traditional investors. Accordingly, an ETF provides a compelling opportunity to diversify into the world of crypto regardless of technical understanding. However, it’s worth gaining at least a foundational understanding of blockchain and cryptocurrency before investing.
If you’re new to investing in crypto, be sure to check out the Crypto for Beginners course at Moralis Academy. Here, we teach students how to safely buy, sell and trade digital assets using a reputable crypto exchange. Also, save our “What are NFTs?” and “Top Games” articles for later to learn about the hottest trends in blockchain and crypto!
Bitcoin ETF or Spot-Bitcoin ETF?
For investors to see Bitcoin as a reliable investment vehicle, a certain amount of protection is necessary. Accordingly, a spot-Bitcoin ETF would offer investors a higher degree of security than a futures ETF. This is because a spot-Bitcoin ETF would require a broker to hold the underlying asset. Conversely, a futures ETF uses derivatives contracts instead of the underlying asset.
On the one hand, some see the use of futures contracts as a necessary stepping-stone. On the other hand, the declining interest in Bitcoin futures ETFs suggests that investors are looking for something closer to the real thing. Futures generally come at a premium. Furthermore, because futures contracts trade during business hours, there is often a “gap” in the price of Bitcoin from when trading ceases to when it begins again the following morning or after a weekend. This is what many in the industry refer to as the “CME futures gap”.
Bitcoin ETF Explained: Summary
A universally-appealing Bitcoin ETF could increase the adoption of cryptocurrencies and blockchain technology. Plus, it has the potential to draw a substantial amount of investment into the industry. However, a Bitcoin ETF that ticks all the boxes for regulators and institutional investors is yet to become available in all geographies. That said, regulators discussing Bitcoin and crypto at this level is something that many in the industry believe is critical to mainstream adoption. Plus, a Bitcoin ETF adds legitimacy to the asset class, which is turning heads among high-profile investors.
The cryptocurrency markets are growing exponentially. Also, the mass adoption of blockchain and cryptocurrencies is apparent sector-wide. However, to truly achieve mass adoption, big-money investors need to be on board. As such, an investment vehicle like a Bitcoin ETF will continue to encourage conversations about how we can make it easier and safer to invest in digital assets. Plus, an increase in regulation has the potential to make the crypto landscape a safer place.
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