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Bitcoin ETF: Everything You Need To Know - Binaryx
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Bitcoin ETF: Everything You Need To Know

You’ve maybe heard about Bitcoin ETFs. This subject was discussed hundreds of times in the last couple of years. ETFs can give investors more versatility, stability, and protection than regular investments. Moreover, exchange-traded funds continuously track the performance of specific assets or groups of them. Therefore, they can be an excellent possibility to raise profits and decrease risks. Let’s figure out what is bitcoin ETF and why it is so unique.

What is an ETF?

For starters, an ETF is a kind of financial instrument, which is based on a basket of securities. Exchange-traded funds are a fundamental tool for plenty of investment strategies. They include income generation, speculation, price rises, and compensation of risks in an investor’s portfolio.

Notably, an ETF can include many kinds of investments. It has become customary to see exchange-traded funds that hold a collection of stocks, commodities, or bonds. Thereby an ETF will contain equity from various companies related to a particular sector, such as trading or the heavy industry.

Besides, we can say that some ETFs are more wide-ranging. These instruments can hold a wide variety of securities. They can include not only European or American corporations but also worldwide ones. That’s why exchange-traded funds are top-rated around the world.

In contrast to equity funds, ETFs are traded every day; hence their name is “Exchange Traded Funds.” Therefore, this kind of investment is exposed to price changes depending on their structure and market activity. These fluctuations can be more inconspicuous because the fund is an average of all the assets it contains.

One of the main benefits of an ETF is time and cost reductions, attracting many investors’ attention. Your average exchange-traded fund is also far more liquid than investment trusts or other mechanisms in the market. This added liquidity relates to more options for depositors in these funds.

Types of ETFs

There are five types of exchange-traded funds. Let’s learn more about each of them.

  • Bond ETF. The diversification of the portfolio is vital for every investor. It’s good to spread your investment risk. Many experts advise investing in fixed-income and bond ETF. These instruments can provide a steady return at possibly lower risk than equity ETFs.
  • Industry ETF. Industry sector ETFs are a dynamic and growing market. Virtually every major industry group has multiple indexes that track industry performance. The apparent benefit of sector ETFs is they provide a means of investing in an entire industry; however, they can be used for other purposes.
  • Commodity ETF. Often harder to access than stocks, ETFs are a great way to get into commodities like gold, silver, or oil. These are an attractive alternative to stocks to diversify your portfolio and risk further. However, commodity ETFs can be less transparent than index or stock ETFs. They often don’t directly own the underlying asset, like gold, but use derivatives instead. Derivatives track the commodity’s underlying price but can carry more risk, such as counterparty risk, than an ETF that directly owns the underlying asset.
  • Currency ETF. Currency ETFs will invest in either a single currency, like the U.S. dollar, or a basket of currencies. The ETF will either invest in the specific currency directly, use derivatives, or mix the two. Using derivatives can potentially add more risk to the ETF, so you need to be sure of what you’re buying. You’d buy a currency ETF if you thought the underlying currency is likely to strengthen or if you wanted to protect or hedge your investment portfolio. Some ETFs that invest in overseas markets may already ‘hedge’ against currency risk.
  • Inverse ETF. Inverse ETFs are designed to make money when the stocks or underlying indexes they target go down in price. These funds make use of financial derivatives, such as index swaps, to make bets that stock prices will decline. Unlike shorting a stock, though, investors in inverse ETFs can make money when markets fall without selling anything short.

However, in this article, we will talk about BTC ETFs. So, let’s move on to this question.

Who Invented the Bitcoin ETF?

We figured out the main types of exchange-traded funds a while ago. And now, let’s examine what is a Bitcoin ETF. It’s merely a regular ETF based on BTC as the asset for tracking. Honestly, no one invented the concept.

The first description of the Bitcoin ETF was registered with the U.S. Securities and Exchange Commission by Tyler and Cameron Winklevoss in 2013. So, they got a patent for “exchange-traded funds” from the U.S. Patent and Trademark Office (USPTO).

How would a Bitcoin ETF work?

A Bitcoin ETF would be managed by a firm that buys and holds the actual Bitcoin. What is going to happen to the Bitcoin price ETF is that it would be backed by the Bitcoin stored in the fund. The firm would list this ETF on a traditional stock exchange (for instance, the New York Stock Exchange). You could trade this ETF just as you would any other stock. 

A couple of things to note: First, some ETFs, like an S&P 500, represent equity shares, so you’d get a cut of the dividend that, say, Tesla pays its shareholders, as well as any dividends paid out by the other 499 firms. Bitcoin’s decentralized, so that wouldn’t happen.

Second, just like other ETFs, you’d also have to pay fees to the company that handles the Bitcoin ETF. It would go to its operators, but some would also pay the custody and management fees for the Bitcoin purchase and storage under the ETF.

So, we just sort it out and know what is going to be inside the bitcoin ETF XBT. Now it’s time to analyze the primary purposes of BTC exchange-traded funds. 

Why would you use a Bitcoin ETF?

There are a few reasons why ETFs are better than buying Bitcoin directly. 

Holding Bitcoin places the burden of security squarely on you. It means that you would be responsible for keeping your private key safe. It may comprise buying a hardware wallet to protect purchased Bitcoin or securely storing private keys.

Buying Bitcoin yourself also exposes you to the risk of exchanges, many of which were subjected to cyberattacks. You’d also have to work out how to file taxes for each purchase and sale of Bitcoin. And if you don’t know how to do all of these things, you’d have to research the crypto rabbit hole to work everything out. ETFs can solve these problems by offloading the burden of security and storage to someone else.

Bitcoin ETFs would also offer new types of trading opportunities. One is “short-selling.” It’s, in effect, a bet against Bitcoin. It works by obtaining the ETF and selling it at the current market price. The position is then closed by re-buying the ETF at a (feasibly) lower price.

What’s so special about a Bitcoin ETF?

ETF is a more or less familiar tool for traditional financiers. The popularity of such products is growing every year.

Investments in Bitcoin ETFs are straightforward. Market participants don’t need to open a wallet, create an account on a cryptocurrency exchange platform, worry about the safe storage of funds, etc. Investors are also not exposed to the hacking risks, fraud by dishonest exchange owners, or phishing attacks. That’s why these tools may be of interest to traditional investors who don’t want to go deep into technical aspects.

It’s believed that Bitcoin ETFs will undoubtedly attract massive investments to the cryptocurrency market, contributing to the growth of its capitalization and the massive adoption of new assets.

For example, Ari Paul, co-founder of the BlockTower cryptocurrency hedge fund, is satisfied that institutional investors’ entrance will be the primary driver of the next medium-term rally in the Bitcoin price. According to Paul, the main obstacle that prevents large investors from entering the industry is the lack of reliable solutions for storing digital assets focused on the “whales” of the market.

IronWood CEO Michael Stratton is confident that if the SEC approves a Bitcoin ETF, then large investment companies and funds, including Fidelity and Ameriprise Financial, will certainly enter this market.

SEC Opposition to Bitcoin ETFs

Considering all the advantages gained from introducing a Bitcoin ETF into the marketplace, it is no surprise that multiple firms have attempted such an action. The first attempt to bring this new age financial product to the market came from two giants in the industry – Winklevoss twins.

They are no stranger to innovation. These Harvard graduates are best known for their action against Facebook founder Mark Zuckerberg in which they alleged he stole the Facebook concept from them. Most recently, the pair is known for their pro-Bitcoin position. The brothers were one of the first Bitcoin billionaires globally, and they currently operate the hugely popular Gemini cryptocurrency exchange.

In 2017, the Winklevoss twins submitted a filing to the SEC for the Winklevoss Bitcoin Trust. However, the SEC quickly denied the application. The SEC cited concerns over the unregulated status of Bitcoin. However, many in the industry pointed out that there are multiple ETFs for sectors that don’t fall under regulations. That’s why no one knows what time is the deadline for ETF bitcoin SEC approval.

SEC Commissioner on Board with Bitcoin ETF

The brothers made another filing earlier this year. Again the SEC rebuked their application. However, this time, some SEC members are on board with the concept, especially SEC Commissioner Hester Peirce. She filed a dissent against the board’s decision citing numerous instances in which the Bitcoin ETF was put under unfair pressure versus other financial instruments.

In 2018, another firm made a notable attempt to secure a Bitcoin ETF. This time, the blockchain startup VanEck SolidX submitted a Bitcoin Trust ETF application. The firm believed it had a better chance of approval because it was geared only towards professional investors. For example, the fund costs $200,000. Despite their new approach, the SEC denied their efforts.

After multiple application denials, the SEC opened applications up to public comments. Notably, regulators sought insight from the public on their decisions. Notably, most comments on the applications were positive for the approval of these instruments.

How a Bitcoin ETF Could Affect Bitcoin

Many experts strongly believe that the massive adoption of Bitcoin ETFs would skyrocket the coin price. This belief is evident when we look at the BTC graph and see that the market value raised around the times of possible ETF approvals. Indeed, regulators will take a more open and fair approach to the crypto market shortly. For now, the entire blockchain community patiently awaits what happens if Bitcoin ETF is approved.