Abstract

Nowadays, Bitcoin is working hard to develop into a legal asset that can be invested by the public. However, because the investment activities of some institutions and retail investors are strictly regulated. Therefore, from a technical perspective, Bitcoin is not accessible to everyone. To combat this, many people recommend Bitcoin exchange-traded funds (ETFs).

Bitcoin ETF is a pool of assets related to Bitcoin, which is sold by brokers on traditional exchanges and traded in the form of ETFs . Traditional investors can invest in Bitcoin without actually holding it.

Bitcoin exchange-traded open-end index funds (ETFs) have been launched in Canada and the United States, increasing the popularity of cryptocurrencies among mainstream investors application rate. Let’s understand what an ETF is and what it means for Bitcoin.

Introduction

Bitcoin (BTC) and the entire cryptocurrency market experience a long development process. Less than a decade ago, only a small group of enthusiasts used this technology, and 10,000 Bitcoins could only buy two pizzas.

A few years later, we have witnessed the great success of many companies in this industry, digital currency projects have sprung up, and decentralization Emerging technologies such as automated finance continue to enter the public eye. MicroStrategy has converted more than $2 billion of its balance sheet into Bitcoin, and consumers may soon be able to use Bitcoin to buy the latest Tesla cars.

However, what are the lack of basic elements that prevent Bitcoin from becoming a major asset in the global macroeconomic environment? One of the challenges may be how to get more institutional and mainstream investors exposed to Bitcoin while being subject to regulation. Some may think that Bitcoin ETFs are the key to solving the problem.

What is a Bitcoin ETF?

First let us have a general understanding of this concept. An ETF is an exchange-traded fund, an investment fund that tracks the price of an underlying asset. ETFs are active in many different industries and asset classes. For example, gold ETFs that track the price of gold have been around for decades.

In short, a Bitcoin ETF is an exchange-traded fund consisting of Bitcoin or assets linked to it. ETFs are regulated financial products. As a result, Bitcoin and other cryptocurrency ETFs trade on traditional markets such as Nasdaq or the New York Stock Exchange (NYSE) rather than on digital currency trading platforms. However, this may change in the future as the lines between the traditional finance and digital currency industries become increasingly blurred.

The goal of the Bitcoin ETF is to allow mainstream investors unfamiliar with cryptocurrency trading to invest in Bitcoin through familiar tools.

Why are Bitcoin ETFs important?

Bitcoin is not the easiest asset to deal with. Safeguarding Bitcoin, for example, can be a huge headache for large institutions. After all, Goldman Sachs isn't plugging a hardware wallet directly into a laptop and transferring $2 billion worth of Bitcoin without any fuss. Large financial institutions operate differently from retail investors, and complex regulatory and financial channels are unavoidable issues before they participate in investments.

Because of this, ETFs can help increase public acceptance and expand the potential investor base. It provides price exposure to traditional market participants without the hassle of actually holding a digital currency.

In addition to Bitcoin itself, Bitcoin ETFs can be a range of assets such as Bitcoin, Ethereum, Tesla stock, and gold. combination to help investors build a diversified investment portfolio.

Introduction to Bitcoin ETF

Generally speaking, the public talks about Bitcoin Coin ETFs usually refer to ETFs in the US market. However, ETFs exist in many different markets. For example, the first Bitcoin ETF was launched on the Canadian stock market. This index fund named "Purpose Bitcoin ETF" is listed on the Toronto Stock Exchange under the code "BTCC".

Even so, the public has long turned its attention to U.S. regulators to see whether they will accept a U.S. Bitcoin ETF. Finally, the U.S. Securities and Exchange Commission (SEC) accepted the listing application of the ProShares Bitcoin Strategy ETF (BITO) in October 2021, and the fund officially landed on the New York Stock Exchange (NYSE).

Based on historical experience, the reasons for rejection of applications are usually excessive price fluctuations in the Bitcoin market, lack of supervision, and extreme vulnerability. to manipulation etc. Although these conclusions are indeed reasonable, other financial markets that have launched ETFs may also have such problems.

Furthermore, most of the financial channels needed for Bitcoin to become a legitimate macro asset class were already in place during the last bear market. A few years ago, MicroStrategy's plan to buy billions of Bitcoins would have been difficult to realize. Today, after considerable development, the infrastructure and market liquidity are sufficient to support such a huge investment.

As the Bitcoin market matures, regulators are likely to change their attitude and finally agree to launch a Bitcoin ETF in the US market.

What is Bitcoin Contract ETF?

Not all Bitcoin ETFs are backed by Bitcoin in wallets (called "Bitcoin Spot ETFs"). Many Bitcoin ETFs (such as BITO) use Bitcoin contracts as the underlying asset.

So far, the SEC has favored contract ETFs tied to the Chicago Mercantile Exchange’s (CME) Bitcoin contract. It is a regulated financial security. The Bitcoin Contract ETF uses CME’s Bitcoin Reference Rate (BRR) price rather than the spot price. This means that the only difference between a Bitcoin spot ETF and a Bitcoin futures ETF is the price source.

Should I invest in a Bitcoin ETF?

Are Bitcoin ETFs the ideal financial instrument for investing in Bitcoin? If you just want your personal savings to be protected from the depreciation of fiat currencies, then you're just fine buying Bitcoin.

After all, the development of Bitcoin is to democratize finance. The value contained in Bitcoin varies from person to person. The value generated by simply saving Bitcoin is already very considerable. Not to mention, there are countless ways to earn money from Bitcoin mining or lending.

Having said that, there are many advantages to investing in Bitcoin ETFs. If you think the returns are good, then ETFs are certainly an ideal choice.

Summary

Bitcoin ETF can allow investors in traditional markets to Regulated exposure to Bitcoin also opens a new door for more institutions to apply the digital currency asset class. With the US laying the groundwork, we'll just have to wait and see how many investors will build their Bitcoin portfolios.