What’s the Deal With Bitcoin ETFs?

04 Aug 2020

There is always something that gets investors excited, expecting BTC to pump when certain things happen that could spark a wave of adoption: PayPal potentially exploring Bitcoin, halving events, public figures expressing support. Another example is the creation of Bitcoin ETFs. It’s been a bumpy road with financial regulators often stopping BTC ETFs from launching, but there are a few currently trading.

ETFs give investors exposure to an asset without having to own the asset. It seems completely counterintuitive to the original motives behind the creation of Bitcoin, giving individuals ownership of their own assets without the intervention of centralized authorities like banks and governments. So why is there so much noise around BTC ETFs? First, let’s look at what an ETF is and how it works.

ETFs Explained

ETF stands for exchange-traded fund. As the name implies, it is a fund that can be traded on an exchange like a stock. An ETF holds a basket of securities like stocks, bonds, commodities, giving investors exposure across those assets with a single trade. It is one of the easiest ways to instantly diversify your portfolio, however, when you invest in an ETF you don’t own the underlying assets.

An ETF is constructed by the fund provider, and this entity owns the underlying assets and designs a fund that tracks the performance of those assets. Shares of that fund are sold to investors on an exchange. Even though investors don’t own the basket of securities held by the ETF, they usually do receive dividends for the stocks that make up the index.

There are many different types of ETFs, with varying strategies, industry focus, geographic spread, risk, number of holdings, expense ratio, and so on. For example, there is an ETF for investing in the gaming industry (ESPO), clean energy sector (QCLN), specific economies like that of Nigeria (NGE), or an ETF entirely dedicated to a single asset like gold (GLD).

ETFs trade at market-determined prices that differ from the assets it tracks – the GLD share price is not the same as the price of gold, but their movements are intended to be the same.

Bitcoin ETFs are new to the game. For years, financial regulators have blocked requests for BTC ETFs but today a few similar products are trading actively on the markets.

Grayscale Investments launched the Grayscale Bitcoin Trust (GBTC), which tracks the underlying value of Bitcoin. New York-based ARK Investment Management piggybacks off Grayscale by holding GBTC with a 2% holding in its ARK Next Generation Internet (ARKW) ETF.

Canadian asset manager 3iQ launched The Bitcoin Fund (QBTC), a fund tied to BTC on the Toronto Stock Exchange making it the first firm to successfully release an offering like this commercially on the Canadian exchange.

What’s the Point?

Given that holding shares of a BTC ETF does not mean you actually own BTC, you may wonder what the point is. Why pay a middleman to buy something you don’t own after the purchase? Well, there are a number of reasons why people would be more interested in buying BTC ETFs rather than BTC directly.

  • Investors might be interested in gaining BTC exposure to make profits on the volatility, but the legal frameworks in their jurisdiction may be prohibitive.
  • Newcomers to Bitcoin would be more comfortable trading on familiar stock exchanges, rather than trading a new asset on a new platform.
  • Those same newcomers would also not have to learn the basics around securing your account, storing private keys, understanding wallets. They just buy and sell BTC ETFs with their existing retail trading app.
  • Due to the unregulated status of Bitcoin, some major financial institutions still can’t participate in the crypto markets, but they would be able to do so through an investment vehicle like an ETF.
  • For some people, buying Bitcoin through an ETF can offer some tax advantages. For example, Canadians can purchase QBTC shares in a Brokerage Tax Free Savings Account, which means they don’t have to pay capital gains tax whereas they would if they bought BTC directly on an exchange.

Crypto Twitter and crypto media have long touted the promise of BTC mooning when we finally have Bitcoin ETFs. So far, that hasn’t happened yet. We have seen price jumps around the times of possible ETF application approvals, but the push never held.

More interesting would be to see how this plays out for Bitcoin adoption. As it becomes more accepted by retail investors, Bitcoin makes its way into the mainstream trading world embedding itself in everyone’s portfolio – even if it is through an ETF.

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