The meeting of two of the most popular investment areas seemed inevitable sooner or later. Exchange-traded funds (ETFs) track bitcoin, so for cryptocurrency enthusiasts and investors looking to capitalize on the growing popularity of ETFs, this type of connection makes the most sense.
Although the first bitcoin ETFs have been launched, there have been some growing pains. Unlike other cryptocurrencies, bitcoin retains a relatively unregulated market capitalization due to its unregulated nature.
Additionally, the Securities and Exchange Commission (SEC) is hesitant about allowing a publicly-traded exchange-traded fund to be created for the relatively new cryptocurrency market. So, let’s get to know Bitcoin EFT more in-depth in this article.
What is an ETF?
- As an investment vehicle, ETFs are listed on an exchange, like stocks, but track an index rather than the performance of a single company.
- Investors can use ETFs to gain exposure to the value of their underlying assets, like gold or oil.
- The value of ETFs should increase when the price of an asset rises, and fall when the price decreases because they trade on a traditional stock exchange.
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In 1993, the first ETF was launched, and they were popular among retail investors who wanted an easy way to invest across a variety of assets. Shares in an S&P 500 exchange-traded fund (ETF) would allow you to invest in 500 of the largest companies in America at one time.
What is Bitcoin ETF?
Bitcoin ETFs are similar to other ETFs in how they work. The ETF shares are purchased from whatever brokerage the investor uses to purchase stocks and can be traded the same way they would trade Apple stock or Tesla stock.
In order to keep pace with Bitcoin's price swings, Bitcoin ETFs track the current price of bitcoin.
How Does a Bitcoin ETF Work?
Firstly, let's take a step back and look at what bitcoin ETFs are and how they work before we dive into the potential benefits and risks. An exchange-traded fund tracks the performance of an asset or group of assets. Investors can diversify their investments through ETFs without having to actually own the assets they invest in.
ETFs provide a simpler alternative to buying and selling individual assets for people who want to focus only on gains and losses. Moreover, since traditional ETFs aim to gather a wide range of stocks with a similar characteristics-the sustainability focus, for example, or stocks related to the video game industry and related firms-they help investors diversify their portfolios easily.
Bitcoin ETFs are exchange-traded funds that reflect the price of the most popular digital currency. Investing in these funds allows investors to participate in the bitcoin market without undergoing the complicated process of trading bitcoin. Furthermore, since holders of the ETF will not be directly invested in bitcoin, they will not have to worry about the complicated security and storage procedures that crypto investors must follow.
Why the need for a Bitcoin ETF?
Is there any reason why investors wouldn't just buy Bitcoin?
Bitcoin and cryptocurrency, in general, remain risky investments for most regular retail investors.
In addition to possessing unclear regulations around them, owning a Bitcoin requires shopping on crypto exchanges and maintaining a Bitcoin wallet, which are still uncharted territory for those unfamiliar with the space.
If you hold Bitcoin, you are responsible for protecting your private keys (unless you choose to entrust them to a third party exchange). In order to protect purchased Bitcoin, you may need to purchase a hardware wallet or store private keys securely. Similarly, you would be responsible for filing taxes as a result of Bitcoin sales that resulted in capital gains.
“Investing in a Bitcoin ETF allows investors to forget about storing private keys or worrying about security.”
Shares of the ETF are owned by investors just like their own stock. As a result, they are gaining exposure to the cryptocurrency market without the hassle of actually holding crypto.
To put it simply, that is a fantastic opportunity for many regular investors as well as sophisticated institutions.
The United States Securities and Exchange Commission (SEC) has received applications for Bitcoin ETFs from hedge funds and other investment firms alike-we count at least seven applications from reputable companies as of April 2021, including Fidelity, VanEck, SkyBridge Capital, Bitwise, and others.
The Winklevoss Bitcoin Trust was formed when Tyler and Cameron Winklevoss filed the first application with the SEC in 2013. Despite the Winklevoss brothers receiving a patent last year for "exchange-traded products," the Securities and Exchange Commission has yet to approve them -- or any other ETF.
A Brief History of Bitcoin ETF Progress
- July 2013: A Bitcoin ETF proposal is filed by the Winklevoss Bitcoin Trust.
- June 2018: The SEC has rejected Winklevoss' second Bitcoin ETF application.
- October 2019: ETF proposal by Bitwise is rejected by the SEC.
- February 2020: The SEC rejects the Bitcoin ETF application of Wilshire Phoenix.
- September 2020: The Bermuda Stock Exchange has listed the world's first Bitcoin ETF.
- December 2020: After retracting its previous proposals before formal rejection multiple times, VanEck files its latest proposal for a Bitcoin ETF.
- February 2021: Launch of Purpose Bitcoin ETF (BTCC), Canada's first Bitcoin ETF. CI Galaxy Bitcoin ETF (BTCX) and Evolve Bitcoin ETF (EBIT) will also be approved in the same month.
Do Bitcoin ETFs Exist?
With the growing popularity of cryptocurrencies, Bitcoin ETFs are becoming more popular. For example, on the NYSEArca, the ProShares Bitcoin Strategy ETF tracks bitcoin prices. A number of other proposals for Bitcoin exchange-traded funds (ETFs) have been blocked by the Securities and Exchange Commission (SEC) because the market is unregulated.
The performance of Bitcoin is replicated by using futures in Bitcoin ETFs. Investing in cryptocurrency and blockchain companies, which have exposure to the cryptocurrency market, is another way of getting exposure to Bitcoin without actually purchasing it.
The Road to Bitcoin ETF Approval
Regulation agencies have proven difficult for companies that want to launch bitcoin ETFs. SEC denied Cameron and Tyler Winklevoss' petition to establish a bitcoin ETF called the Winklevoss Bitcoin Trust in 2017. The Winklevoss brothers are well known for their involvement in Facebook (now called Meta), and more recently, their Gemini digital currency exchange.
Initially, bitcoin was rejected because it is traded on mostly unregulated exchanges, making it vulnerable to fraud and manipulation. Despite the rejection, the Winklevoss brothers persevered. The United States Patent and Trademark Office granted them a patent on June 19, 2018, for a firm called Winklevoss IP LLC that trades in exchange-traded products.
It is not only the Winklevosses who are seeking to be the pioneers in launching bitcoin exchange-traded funds. It's expected that the SEC will allow digital currency-related ETFs as well, according to CBOE Global Markets (CBOE). Also purchased by Cboe was Bats Global Markets, which would have offered the Winklevoss ETF.
SolidX, a fintech company undertaking bitcoin projects, and VanEck announced plans for a Bitcoin Trust ETF earlier in 2018. This ETF, according to ETF Trends, targets institutional investors and will open for business with a $210,000 share price. XBTC is a cryptocurrency index that tracks the performance of a group of bitcoin trading desks. The SEC's concerns about funds linked to bitcoin itself might be alleviated by spreading the focus of the ETF somewhat.
The CEO of VanEck, Jan van Eck, told CoinDesk:
"I believe that collectively we will build something that may be better than other constructs currently making their way through the regulatory process. A properly constructed physically-backed bitcoin ETF will be designed to provide exposure to the price of bitcoin, and an insurance component will help protect shareholders against the operational risks of sourcing and holding bitcoin."
What’s so special about a Bitcoin ETF?
Bitcoin ETFs in the U.S. will help bring Bitcoin investments to a new level of mainstream acceptance and trustworthiness. Bitcoin adoption grew in 2020 and 2021 after companies like Square and Tesla bought the cryptocurrency as an investment for their balance sheets, but many conservative investors remain wary of it as a gimmick or risky bet.
Institutional investors could speculate more easily on the price of Bitcoin if the SEC approves a Bitcoin ETF. The latter would essentially bring cryptocurrency to Wall Street, trading on the same exchanges as Tesla stock, bonds, gold, or oil.
As a result, Bitcoin's price would likely increase significantly.
Why hasn't the SEC approved a Bitcoin ETF?
SEC has repeatedly denied proposals to issue Bitcoin ETFs since 2017.
A major complaint of the SEC is that Bitcoin prices are easily manipulated. The price of Bitcoin can be manipulated on less reputable exchanges with looser restrictions even if an ETF drew only prices from scrupulous cryptocurrency exchanges.
Besides a lack of transparency in crypto markets, the SEC also often cites a lack of liquidity as a potential concern. All of this happened during the Jay Clayton era.
Joe Biden, the recently elected president of the United States, announced Gary Gensler, an M.I.T. professor who taught a cryptography class, would be the next SEC chair, creating a new wave of optimism that the SEC would soon approve a Bitcoin ETF.
The Bottom Line
ProShares Bitcoin Strategy ETF is seen as an important milestone by some crypto enthusiasts, but many investors and fund managers hope the SEC approves an ETF directly tied to bitcoin in the near future.
An SEC source explained in one final sentence, "U.S. residents are sending money to a myriad of foreign countries to invest in unregulated [cryptocurrency] instruments with no recourse for losing every penny they have invested...regulation will solve those issues by keeping client assets onshore."