Bitcoin ETFs have been all the hype, after the SEC finally approved the first Bitcoin for trading in the United States. But what are Bitcoin ETFs and how do they work? Find answers in the article below.
What are Bitcoin ETFs?
Before answering what a Bitcoin ETF is, you should first understand what an ETF is in general. ETF stands for exchange-traded fund and is an investment fund that consists of a pool of assets traded on a stock exchange. Take foreign exchange rates as an example. You could simply buy euros and speculate on the price of the euro rising against the dollar. However, that comes with some risk. If you wanted to spread your risk, you could buy shares of a forex ETF consisting of several foreign currencies like the euro, the pound and the yen. That way, you diversify your risk, protect your investment against downside, and enjoy better liquidity. Thus, an ETF is a simpler alternative to buying and selling individual assets.
A Bitcoin ETF does the same thing, as it mimics the price of bitcoin. Investors do not have to go through the process of actually buying bitcoin but can simply enjoy price exposure to the cryptocurrency.
Why Bitcoin ETFs?
If you’re an experienced crypto investor, you may be wondering what the big deal about buying bitcoin on an exchange like Coinbase is. However, Bitcoin ETFs have a couple of perceived advantages over buying bitcoin.
First, ETF investors are not your average crypto buyers and not even your average crypto whales. Usually, these are institutions with hundreds of millions or even billions of dollars of assets under management. Investing on an exchange like Coinbase is not an option for them, and only an ETF provides the necessary liquidity for these market participants.
Second, don’t forget that people are lazy and often suspicious of innovation. Bitcoin is still a novel concept, but ETFs have been around for decades. While institutional investors may want to get some crypto exposure, they prefer doing so in a way they know and understand. Furthermore, they don’t have to deal with storing bitcoin, remembering passwords and keys, and worrying about crypto scams in that case.
What do Bitcoin ETFs mean for Bitcoin?
The first Bitcoin ETF application by the Winklevoss twins, founders of the cryptocurrency exchange Gemini, got turned down in 2017. Ever since it’s been an onslaught by exchange-traded funds trying to get the green light from the SEC, before the final approval of the ProShares ETF in October. What does that mean for investors, though?
The short answer is, we don’t know for sure. Bitcoin ETFs mean that institutional investors have come to play and that Bitcoin is slowly becoming a mature asset. While some argue that will be good for Bitcoin because more demand means higher prices and less volatility, others are skeptical of Bitcoin ETFs. Critics point to the first gold ETFs and, while admitting that gold prices have risen since, point out that ETFs present a way to suppress the price of an asset as well. The only sure thing is that Bitcoin will generate more attention in the future.