What Are Bitcoin ETFs?

Last Updated October 22nd 2021
6 Min Read

The third week of October 2021 was historical for the crypto community because the US Securities and Exchange Commission (SEC) approved the first Bitcoin futures exchange-traded fund (ETF). The ProShares Bitcoin Strategy ETF debuted earlier this week, and during the first day of trading, its trading volumes surpassed $1 billion, showing that demand was high. 

However, despite this fund creating much excitement among investors, very few people know what ETFs are and how crypto ETFs and other ETFs are different. Now that the SEC has allowed ETFs on a highly unregulated crypto space, it is time for investors to understand what Bitcoin ETFs are. 

What Is A Bitcoin ETF? 

An exchange-traded fund (ETF), in general, is an investment vehicle that monitors the performance of an underlying asset or assets. ETFs, give investors exposure to these assets without the investors having to own them. 

A Bitcoin ETF tracks the price of the largest cryptocurrency by market capitalization. With a Bitcoin ETF, an investor can get exposure to Bitcoin without necessarily owning and trading Bitcoin. 

Investors prefer Bitcoin ETFs because they prevent them from holding and trading Bitcoin itself. Owning and trading Bitcoin can be tricky for investors with minimal knowledge in this area because of the complex security and storage procedures involved. ETFs are mainly preferred by investors who are only concerned about making profits. 

There are many benefits to a Bitcoin ETF, making some investors prefer them to holding the actual Bitcoin. As aforementioned, the process of owning and holding an ETF is easier and less complex compared to the actual Bitcoin. 

With a Bitcoin ETF, an investor does not need to bother with creating accounts on cryptocurrency exchanges, purchasing wallets and memorizing long wallet addresses. An ETF can easily be bought and sold through traditional stock markets. Besides, cryptocurrency exchanges are less safer compared to traditional markets as they are more prone to hacking attacks. 

The other major benefit that comes with investing in a Bitcoin ETF compared to the actual Bitcoin is that with an ETF, an investor can short sell their ETF shares if they speculate that the prices of Bitcoin are going to dip in the future. This is not possible with a traditional exchange, making ETFs more preferable by investors. 

With Bitcoin, new investors can find the market complex, and it could take time before a new investor learns all the trading strategies that can help them reduce the probability of loss. However, ETFs are better understood by many investors because they are found across different investment vehicles. 

Therefore, an investor who does not have the time or interest in learning about Bitcoin trading opts for an ETF if they only want to gain exposure to the digital currency. Looking at these benefits derived from Bitcoin ETFs, they are more ideal for those traders who prefer to stick to the traditional aspects but do not want to miss out on the rapidly growing digital currency sector. 

Crypto asset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.

US SEC Approves a Bitcoin Futures ETF

The US Securities and Exchange Commission (SEC) was hesitant in approving a Bitcoin ETF. At the beginning of October, the exchange stated that it would approve this product, which created a lot of excitement in investors, especially those in the crypto space. 

However, the SEC did not approve a direct Bitcoin ETF, but it approved a Bitcoin futures-based ETF, which, according to the commission, is easier to regulate compared to an actual ETF. 

Bitcoin futures are like a derivative trading instrument that allows two parties to enter into a contract that allows them to buy and sell Bitcoin at a predetermined price at a later date. Bitcoin futures trade on a commodities exchange such as the Chicago Mercantile Exchange (CME). 

In essence, when you invest in a Bitcoin futures ETF, you will agree to buy or sell Bitcoin at a certain price at a specific date regardless of what the prices will be. A date is set between two parties that will fulfil the transaction. These parties enter into a contract that requires them to fulfil their obligations once the set date arrives. 

Once the set date reaches, the party that had agreed to buy Bitcoin will do so at a premium or a discount. The prices of Bitcoin keep changing; hence there is very little chance that one will buy it at the same price it was when they entered into the contract. The investor who had agreed to buy the Bitcoin will pay at the current spot price and pay for the futures contracts' value. 

The ProShares Bitcoin Strategy ETF was the first futures-based ETF to be approved in the US. This ETF has made major gains, with its trading volumes surpassing $1 billion during the first day of trading. During the opening of the trading session, the ETF was going for $40 before making a 4.85% gain to reach $41.94 by the close of markets. 

Other ETFs are also expected to debut in the coming week, among them the Valkyrie Bitcoin futures ETF and the VanEck Bitcoin futures ETF. The chair of the SEC had earlier hinted on the approval of these funds stating that the regulator was more open to approving an ETF backed by futures than an ETF that is physically backed by Bitcoin. 

The crypto sector has been for the longest time waiting for a Bitcoin ETF. Asset management firms started filing for the approval of spot Bitcoin ETFs in 2017. However, these applications have been rejected by the regulator. According to the SEC, none of these Bitcoin ETFs could prove that they would resist market manipulation. 

Canada has made great strides in this sector, unlike the US, where financial market regulators are unwilling to launch Bitcoin ETFs backed by the actual cryptocurrency. Canada has approved not only several Bitcoin ETFs but also Ethereum ETFs. The ETFs were launched earlier this year, and they have been performing well, having attracted a wide range of investors looking for a way to gain exposure to Bitcoin.

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Crypto asset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.

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