Demystifying Bitcoin ETFs: A Beginner’s Guide to Investing Without the Hassle

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Streamline your Bitcoin investment by navigating through Bitcoin ETFs with ease and confidence

On January 10, 2024, the SEC approved spot bitcoin ETFs following a remarkably chaotic and confusing approval procedure in the preceding days. The approval was announced by SEC’s chair Gray Gensler in an article published on the same day, stating

We are now faced with a new set of filings similar to those we have disapproved in the past. Circumstances, however, have changed. The U.S. Court of Appeals for the District of Columbia held that the Commission failed to adequately explain its reasoning in disapproving the listing and trading of Grayscale’s proposed ETP (the Grayscale Order). The court therefore vacated the Grayscale Order and remanded the matter to the Commission. Based on these circumstances and those discussed more fully in the approval order, I feel the most sustainable path forward is to approve the listing and trading of these spot bitcoin exchange-traded products (ETP) shares.”  

The first 11 spot bitcoin ETFs were authorized for trade by Bitwise, Hashdex, Grayscale, BlackRock, BZX, Valkyrie, Invesco, Fidelity, VanEck, WisdomTree, and Franklin. Trading in spot bitcoin ETFs kicked off on January 11, 2024. The assets generated $4.6 billion in volume on the first day of trading, with BlackRock’s product alone accounting for $1 billion. After seven days of trading, the newly initiated products generated $20 billion in trading volume. Within the first month of execution, the spot bitcoin ETFs had amassed billions of assets under management (AUM). By the end of January, BlackRock’s IBIT had added $2.7 billion in assets, while Fidelity’s FBTC had gained $2.3 billion.

What are Bitcoin Exchange-Traded Funds (ETFs)

Buying Bitcoin via a cryptocurrency exchange remains an intimidating and confusing procedure for many crypto-curious individuals. The technical components of Bitcoin ownership, such as Bitcoin addresses, crypto wallets, and private keys, confuse newbies and may discourage some investors. Such factors have increased the appeal of Bitcoin ETF, allowing investors to trade Bitcoin without holding it directly. But what are Bitcoin ETFs, and how do they address retail investors’ challenges when considering investing in cryptocurrencies? 

Bitcoin ETFs are exchange-traded funds that track the current price of Bitcoin and trade on standard market exchanges rather than cryptocurrency exchanges. They enable investors to invest in Bitcoin without utilizing a cryptocurrency exchange, while still gaining the advantage of leveraging its price.

Also learn more about Bitcoin ordinals here: What are Bitcoin Ordinals? A Guide to Blockchain Block Heights

How do Bitcoin ETFs work?

We must first understand how ETFs work to understand the advantages of trading Bitcoin ETFs over ordinary cryptocurrency. An exchange-traded fund (ETF) is a type of investment vehicle that tracks the price of a certain asset or index. Currently, ETFs are accessible for various assets and industries, including currencies and commodities.

A Bitcoin ETF would function similarly with the price of one share of the exchange fluctuating in sync with the price of Bitcoin. If Bitcoin’s value rises, so will the ETF, and vice versa. However, instead of trading on a cryptocurrency exchange, the ETF would trade on a stock exchange such as the NYSE or TSX.

Understanding Bitcoin ETF Varieties: What Types Exist?

There are two main types of Bitcoin ETFs;

Spot Bitcoin ETF

A spot Bitcoin ETF is a kind of exchange-traded fund designed to give investors immediate exposure to the current market price of Bitcoin. In this context, the term “spot” refers to the present or immediate price of the asset in question, Bitcoin. A Bitcoin spot ETF often holds actual Bitcoin as its underlying asset and strives to track Bitcoin’s real-time price as closely as possible.

Futures Bitcoin ETFs

Futures Bitcoin ETFs don’t hold actual Bitcoin assets. Instead, they acquire Bitcoin futures contracts to obtain exposure to the cryptocurrency. A futures  Bitcoin contract allows investors to make predictions on the asset’s future price. Futures Bitcoin ETFs function differently from spot Bitcoin ETFs, and additional fees may be associated with settling or rolling over futures contracts. Some futures Bitcoin ETFs are designed to give leveraged or inverse exposure to the price of Bitcoin, allowing investors to maximize both profits and losses.

Regulations and product offerings may change, so it’s critical to remain current on the latest developments in the Bitcoin ETF industry, including any new types of products. Furthermore, the structure and availability of Bitcoin ETFs may differ by country and area due to regulatory concerns and market demand.

Why Is there a need for a Bitcoin ETF?

For most small-scale investors, Bitcoin and cryptocurrencies are risky investments in general. Aside from the ambiguous legislation around crypto, holding Bitcoin requires owning a Bitcoin wallet and having a trusted cryptocurrency exchange. Both of these are still new ground for individuals unfamiliar with cryptocurrency. It necessitates a significant level of self-education.

Investors do not have to worry about private keys, storage, or security while investing in a Bitcoin ETF. They own ETF shares the same way they own stock, and they may obtain exposure to the cryptocurrency market without having to go through the hassle of buying and holding bitcoin. Simply put, that is a very enticing offer for many ordinary people and sophisticated institutional investors.

Why Are Investors Interested in Bitcoin ETFs?

The popularity of bitcoin ETF is largely driven by the need for more convenience, accessibility, and exposure to bitcoin as an asset class. Bitcoin futures ETFs aim to allow more individuals to invest in Bitcoin without incurring the high costs and hassles associated with direct purchases. Bitcoin ETFs minimize the need for security processes and unnecessary expenditures while offering a familiar investment platform. Here are some of the main reasons people are interested in Bitcoin ETFs.

Familiarity

Perhaps most crucially, ETFs are considerably more well-understood in investment than cryptocurrency. Therefore, for investors only interested in digital currency investing, an ETF allows you to trade an asset you already know rather than learning about blockchain, decentralized exchanges, mining, distributed ledgers, key storage, and cryptocurrencies.

Diversification

An ETF can contain more than one asset. For instance, a Bitcoin ETF may include Bitcoin, Facebook stocks, Apple stocks, and other assets. This allows investors to reduce risk and diversify their portfolios. Similarly, by trading on a regulated market exchange, a Bitcoin ETF allows investors to diversify their current equity holdings.

Tax Efficiency

Most of the world’s tax havens and pension funds do not allow Bitcoin purchases since it is uncontrolled and decentralized. On the other hand, a Bitcoin ETF traded on standard exchanges, is likely to be SEC-regulated and tax-efficient.

Exploring Beyond Bitcoin: Are There Other Types of Crypto ETFs?

Outside of the United States, there are several cryptocurrency exchange-traded products (ETPs), including ones that offer exposure to more cryptocurrencies alongside bitcoin. These products provide investors with exposure to a variety of cryptocurrencies and crypto-related assets, diversifying their portfolios within the digital asset industry. In the United States, there are other ETFs connected to cryptocurrencies, such as ether, although they are limited to futures-related products.

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