Introduction

It has been over a decade since the introduction of Bitcoin (BTC), the first cryptocurrency. In the interim, many cryptocurrencies have come onto the market. Also, various blockchain-related projects that use cryptocurrencies, such as DeFi and Metaverse, came onboard. Although these have increased the demand for cryptocurrencies and other digital assets, their adoption has remained very low. The market has come up with crypto-based ETFs to increase the adoption of cryptocurrencies.

What is a Bitcoin Exchange Traded Fund (BTC ETF)?

Although crypto-related exchange-traded funds will increase in the future, the BTC ETF is the most well-known at the moment. Let’s first explain what an exchange-traded fund is. An exchange-traded fund (ETF) is a security whose value tracks that of another asset. In other words, the price of an ETF correlates with that of an underlying asset. ETFs are investment assets that exist only in traditional financial markets. As such, crypto markets do not trade ETFs.

Therefore, a BTC ETF is an investment asset that tracks the value of Bitcoin or related securities but exists in traditional financial markets. For this reason, BTC ETFs allow investors to get exposure to Bitcoin without holding it. It is also essential to understand that ETFs existed well before cryptocurrencies such as BTC. They have been there for decades, tracking the values of essential commodities such as gold and silver.

Eleven spot Bitcoin ETFs, including those from Grayscale, 21Shares & ARK, BlackRock, Bitwise, and Valkyrie, were approved by the U.S. Securities and Exchange Commission (SEC) on the morning of January 11, 2024. Chairman Gary Gensler issued a statement explaining this action.

Over the past six years, the SEC has rejected more than 20 spot Bitcoin ETP applications, yet the situation has evolved recently. Gensler noted that a court ruling requiring the SEC to reconsider converting Grayscale’s GBTC fund into a spot Bitcoin ETF signals a shift in the SEC’s stance. However, Gensler emphasized that the SEC has approved only one ETF that holds a single non-security commodity, Bitcoin, and this does not imply that the SEC will agree to list crypto asset securities. He also highlighted that spot Bitcoin ETFs might offer better investor protection than the various existing tools for obtaining Bitcoin.

The SEC will thoroughly investigate any behavior involving fraud or manipulations in the securities market, including market manipulation via social media. Despite approving the spot Bitcoin ETFs, the SEC still stresses that Bitcoin is an asset of speculation and volatility and is used to carry out illegal activities such as money laundering and sanction evasion. While the SEC’s position on Bitcoin ETFs has evolved, it remains cautious and will continue to monitor risks and illegal activities in the cryptocurrency market.

Impact of Bitcoin ETFs Approval

1. Increased Liquidity: Similar to the approval of gold ETFs, which saw a significant inflow of liquidity, Bitcoin might witness the same growth in liquidity. This would increase the market’s depth and breadth, increasing Bitcoin liquidity, and potentially enhancing its value.
2. Growth Potential in Market Cap: Bitcoin’s total market cap currently stands at about $840 billion. Historical experience shows that introducing gold ETFs increased gold’s market cap from $2 trillion to $16 trillion. If Bitcoin’s market cap reaches half of gold, around $8 trillion, its price could soar to $500,000, signifying a possible growth of over 10-fold from its present price.
3. Market Comparison: Bitcoin’s growth prospects are commonly compared to those of gold ETFs, as both serve as hedge assets. While gold’s supply is ever-expanding due to constant mining, Bitcoin’s fixed supply could potentially result in greater long-term value.
4. Other Asset Markets: Bitcoin’s market capitalization growth might tap into the gold market and the stock market. With global stock market capitalization at $109 trillion, the bond market at $133 trillion, and the gold market at $13.79 trillion, Bitcoin’s market potential appears very significant.

The approval of spot Bitcoin ETFs is a significant milestone for the market. Expanding its market cap is expected to be a long-term process rather than an immediate change. Investors should remain patient, avoid panic selling due to short-term volatility, and stay confident in cryptocurrency by conducting research. Holding on to investments will help achieve long-term wealth appreciation. Institutional investors’ entry into the market is anticipated to make the cryptocurrency sector more stable and mature, as their participation will bring in additional funds and propel Bitcoin’s price higher.

Source: @Ashcryptoreal

According to data Glassnode disclosed on the X platform, U.S. spot Bitcoin ETFs have now accumulated over 887,000 BTC, second only to the 3 million BTC held by CEX. Other holdings include approximately 705,000 BTC by miners (Patoshi included), about 207,000 BTC by government entities, and approximately 139,000 BTC held by the Mt. Gox trustee.

Source: glassnode

How Does a BTC ETF Work?

The underlying aspect is that the value of a BTC ETF fluctuates in relation to the price of the BTC. What this means is that if the price of BTC increases, so does that of the BTC ETF. On the contrary, if the price of the BTC decreases, it also follows that the value of the BTC ETF will fall.

In terms of investments, the main difference between the BTC ETF and Bitcoin is that the BTC ETF is traded on the regulated traditional financial market such as NASDAQ, New York Stock Exchange (NYSE) and TSX whereas people buy and sell BTC on crypto exchanges and wallets.

The ETF works by holding a certain amount of Bitcoin as an underlying asset, and then issuing shares in the ETF that can be bought and sold on a stock exchange. The issuer must first buy a predetermined amount of Bitcoin and store it in safe, offline storage before issuing the ETF. The issuer will issue shares in the ETF that can be purchased and sold on a stock exchange. An investor effectively purchases a small portion of the underlying Bitcoin when they purchase shares in the ETF.

When an investor wants to sell their shares in the ETF, they can do so on the stock exchange just like with any other publicly traded security. The ETF issuer will then redeem the shares and give the investor cash, which is based on the current market price of Bitcoin.

Types of Crypto ETF

There are two types of crypto ETFs. The first type is ETFs directly backed by cryptocurrency such as Bitcoin. In this scenario, the investment platforms purchase and hold the cryptocurrency, and issue the ETFs in return. It is important to note that two or more cryptocurrencies back some ETFs. An example is Bitwise 10 Crypto Index Fund which is backed by 10 cryptocurrencies. These include Bitcoin, Ethereum, Litecoin (LTC), and Cardano (ADA).

Some ETFs are backed by crypto synthetics, such as Bitcoin futures. With these ETFs, the investment platforms do not hold the related securities. Instead, they purchase premiums, thus acquiring the right to buy the related cryptocurrency at a given date. Other examples of BTC ETFs are the ProShares Bitcoin Strategy ETF, Valkyrie Bitcoin Strategy ETF (BTF), and VanEck Bitcoin Strategy ETF (XBTF).

Acquiring Crypto ETFs

You may want to know how to purchase a crypto ETF such as BTC ETF. It is very simple. Many online brokers of traditional instruments such as shares and bonds also sell BTC ETFs. However, not every broker sells them. You have to search diligently to find genuine brokers offering BTC ETFs.

The Need to Invest in a BTC ETF

After discussing the various aspects of BTC ETF it is time to find out the need for investing in them. It is more convenient for some people to invest in BTC ETFs than BTC itself. This is because, at times, it is very difficult to use BTC if you do not have the right knowledge. You may need to know how to use digital wallets and transfer BTC to exchanges or other DeFi investment platforms. However, with BTC ETFs, the situation is different. The approach to handling BTC ETF is similar to how we deal with other investment assets such as bonds and shares. With BTC some investors may fail to access it because they have lost their private keys or passwords. This is not the case with ETFs.

The BTC ETF also exists on investment platforms where many investors already have accounts. Therefore, they know how to explore the platforms’ interfaces and carry out certain procedures. Such people can find investing in a BTC ETF easier than in BTC. There are also several advantages to investing in a BTC ETF.

Advantages of Investing in a BTC ETF

Less Security Risk

As already pointed out above, when dealing with BTC ETFs, there is no need to store them in digital wallets where you use private keys. Moreover, attackers cannot hack and steal BTC ETFs, but they can hack digital wallets and crypto exchanges and steal your BTC.

Lower Entry Barrier

Many investors already know a lot about ETFs and can easily relate their knowledge to BTC ETF investments. Apparently, there is no need for them to learn about complicated blockchain concepts such as digital wallets, public keys, and private keys.

Diversify your Portfolio, More Flexible

Some crypto ETFs comprise various cryptocurrencies, helping to diversify your investment portfolio. A crypto ETF backed by several crypto securities, such as futures and options, has less volatility than cryptocurrencies.

It is very possible to short sell the BTC ETF, something you hardly do with cryptocurrencies. However, it is very possible to short sell and profit from an ETF when the market is in a downtrend.

Disadvantages of Bitcoin ETFs

Government Regulation

Bitcoin and its derivatives, such as ETFs, are highly speculative, which makes their prices highly volatile. These sharp price fluctuations scare investors away from investing in BTC and its derivatives. Worse, the absence of government regulations in the crypto sector contributes to this volatility.

Price Delay in ETFs

There is also a problem of inaccurate pricing. Basically, when the price of BTC changes, this does not result in the price of the BTC ETF changing at the same time. For instance, if the price of BTC increases, it may take some minutes or hours for this change to reflect in the value of BTC ETFs.

The fees for crypto ETFs are usually higher than those of other ETFs. Depending on the circumstances, this can reduce the profitability of the BTC ETF or increase the loss.

ETFS can not be Transferred as Easily as the Crypto you Hold

Last, you can trade Bitcoin for other cryptocurrencies such as ETH, XRP and TRX. Nevertheless, you cannot exchange BTC ETFs with cryptocurrencies. The reason is that the BTC ETF is an investment asset, not a token.

Bitcoin Spot ETF vs. Bitcoin Futures ETF vs. Bitcoin-Related Stock ETF

In the investment market for Bitcoin, there are three main types of ETFs: Bitcoin Spot ETF, Bitcoin Futures ETF, and Bitcoin-Related Stock ETF. Each of these ETFs has its own characteristics and investment methods, catering to different investor needs. Below is a detailed comparison of these ETFs:

Conclusion

The BTC ETF is a BTC-backed investment instrument tradeable in the traditional financial market. The good thing is that some investors who are not interested in cryptocurrencies can invest in crypto ETFs. Also, trading BTC ETFs exposes investors to cryptocurrencies and opens up new investment opportunities. The main investment platforms where investors can trade BTC ETFs are stock exchanges. They can purchase them from brokers selling traditional financial instruments such as bonds and stocks. Still, the value of BTC ETFs remains volatile since they track the price of BTC. Apart from BTC ETFs, other crypto ETFs cater to different investment preferences and risk tolerance.

Spot ETFs are ideal for investors seeking to follow Bitcoin’s price directly but must comply with stringent regulatory standards. On the other hand, Futures ETFs are designed for those who want indirect exposure to the Bitcoin market through futures contracts despite the potential for price discrepancies. Meanwhile, related stock ETFs provide a diversified avenue for those interested in the Bitcoin and blockchain sectors via traditional stock exchanges.