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Bitcoin ETFs (Exchange-traded funds) allow investors to gain exposure to the most popular cryptocurrency without actually owning it. The possibility of a bitcoin ETF is the best opportunity for cryptocurrency enthusiasts and investors looking to capitalize on the growing popularity of exchange-traded funds (ETFs). However, there have been growing pains and difficulties in launching the first bitcoin ETFs.
This is because bitcoin, the world’s largest cryptocurrency by market capitalization, is still unregulated. Additionally, the Securities and Exchange Commission (SEC) is hesitant to allow the general public to purchase an ETF focused on the new and largely untested cryptocurrency market.
NOTABLE POINTS
- A bitcoin ETF replicates the digital currency’s price, allowing investors to invest in the ETF without trading bitcoin itself.
- Investing in a bitcoin ETF eliminates the need for cryptocurrency investors to deal with complex storage and security procedures.
- The Securities and Exchange Commission have finally approved a digital currency ETF.
What is ETF and How Does Bitcoin ETF Work?
Before delving into the potential benefits and risks of a bitcoin ETF, let’s first define what a bitcoin ETF. Then how it works. An ETF (Exchange-traded funds) is a type of investment fund that tracks the performance of a specific asset or group of assets. Thus, ETFs enable investors to diversify their holdings without actually owning the assets.
ETFs are a simpler alternative to buying and selling individual assets for individuals who focus solely on gains and losses. On the other hand, many traditional ETFs allow investors to easily diversify their holdings because they target larger baskets of names with something in common.
For example, a focus on sustainability or stocks representing the video game industry and related businesses.
A bitcoin ETF simulates the price of the world’s largest digital currency. This enables investors to invest in the ETF without going through the complicated process of trading bitcoin. Furthermore, because ETF holders will not be directly investing in bitcoin, they will not be subject to cryptocurrency investors’ complex storage and security procedures.
Why Not Simply Invest in Bitcoin?
One may be wondering, why bother with the middleman if bitcoin ETF simply mirrors the price of the cryptocurrency itself? Why not simply invest in bitcoin? This is due to several factors. For starters, investors do not need to worry about the security procedures associated with holding bitcoin and other cryptocurrencies. Furthermore, there’s no need for investors to deal with cryptocurrency exchanges in the process. They can simply buy and sell the ETF through traditional exchanges and markets.
Another significant advantage of focusing on a bitcoin ETF rather than on bitcoin itself is that it allows you to diversify your investment portfolio. Because the ETF (Exchange-traded funds) is an investment vehicle, investors who believe the price of bitcoin will fall in the future can short sell shares of the ETF. This is not possible in the traditional cryptocurrency market.
You can short sell bitcoin ETF shares if you believe the underlying asset’s price will fall, which is an advantage you won’t get if you invest in bitcoin directly.
Importantly, even as digital coins and tokens gain popularity, ETFs are far more widely understood in the investment_world than cryptocurrencies. So, rather than trying to learn the ins and outs of something seemingly complicated, an investor interested in digital currency could focus on trading a vehicle they already understand.
The Road to Approval for a Bitcoin ETF
Firms attempting to launch bitcoin ETFs (exchange-traded funds) have encountered problems with regulatory authorities. Cameron and Tyler Winklevoss, best known for their involvement in Facebook (FB) and, more recently, for their Gemini digital currency exchange, had their petition to launch the Winklevoss Bitcoin Trust, a bitcoin ETF, rejected by the SEC in 2017.
The denial was based on that bitcoin is traded on exchanges that are largely unregulated, making it vulnerable to fraud_and_manipulation.
The Winklevoss brothers didn’t give up. On June 19, 2018, the United States Patent and Trademark Office granted them a patent for exchange-traded products through a company called Winklevoss IP LLP.
The Winklevosses aren’t the only cryptocurrency enthusiasts hoping to be the first to launch a bitcoin ETF (Exchange-traded funds). Cboe Global Markets (CBOE), the exchange responsible for creating bitcoin futures, hoped that the SEC would also allow digital_currency-related ETFs. Cboe also purchased Bats Global Markets, the exchange where the Winklevoss ETF would have been available.
VanEck and SolidX, a fintech company with bitcoin-related projects, announced plans for the VanEck SolidX Bitcoin Trust ETF this year. According to ETF Trends, this ETF would target institutional investors and begin with a share price of $200,000. XBTC is intended to track an index linked to a collection of bitcoin trading desks. The idea is that by broadening the ETF’s focus, XBTC may be able to alleviate the SEC’s concerns about funds linked to bitcoin itself.
VanEck CEO Jan van Eck told CoinDesk that he “believes[s] that collectively we will build something that may be better than other constructs currently navigating the regulatory process.” For example, a properly constructed physically-backed bitcoin ETF will be designed to expose bitcoin’s price. In addition, an insurance component will help protect shareholders from the operational risks of sourcing and holding bitcoin.
There is much speculation in 2021 that VanEck and ProShares have recently begun withdrawing proposals for Ethereum futures ETFs. Many believe that this is a sign of potential Bitcoin futures ETFs on the horizon, fueled by the SEC appearing to allow filings to remain active.
SEC Finally Approves a Bitcoin ETF.
Investing in cryptocurrencies has finally become more accessible to the general public after years_of_trial and error by potential fund sponsors. Thanks to the tacit approval of a bitcoin ETF in the United States.
The Securities and Exchange Commission (SEC) approved bitcoin futures ETFs. A first for the industry, following a regulator’s five commissioners meeting on the subject. As a result, ProShares, which filed for its Bitcoin ETF earlier this summer, could be the first to launch.
Proponents of a bitcoin ETF believe that providing investors with a regulated alternative to the underlying digital asset will make the product more widely accessible for individuals interested in bitcoin than the actual cryptocurrency. The first product, however, will track bitcoin futures rather than the price of bitcoin directly. SEC Chair Gary Gensler stated that he believes futures-based products may offer better investor protections because of the laws that govern their operation.
The SEC has explicitly rejected bitcoin ETF applications in the past, but will no longer do so now. In accordance with federal law, SEC may simply allow an application to become effective rather than making a formal announcement.
Intriguing sign
“It’s an encouraging and intriguing sign for the future of crypto to see SEC Chairman Gensler become comfortable with making it easier for mainstream investors to gain exposure to bitcoin,” he wrote in an email. “The availability of a bitcoin ETF will now bring in more investors and facilitate greater education across the space.”
Bloomberg Intelligence analyst James Seyffart confirmed that the filing signifies that the fund is about to launch. He also expects the futures-based ETF launch to bridge the eventual launch of a spot market-based ETF.
According to Seyffart, ProShares’ amended filing removed language about the fund potentially investing in Canadian bitcoin ETFs as a hedge.
According to a ProShares spokesperson, “it appears the SEC did not like that language for whatever reason.”
“However, they are following standard procedures and allowing the first to file to launch first.”
As a result, we’ll be keeping a close eye on how much of a first-mover advantage exists here.”
It’s been a long time coming.
Industry participants have long sought a bitcoin ETF, with Gemini founders Tyler and Cameron Winklevoss first seeking one in 2013. To date, SEC has rejected every previous application and has yet to rule on more than 30 other current applications.
However, it is very likely that the SEC will only allow futures ETFs to be launched this year. Moreover, Gensler’s comments favouring a futures ETF suggest that he will not allow a spot market ETF to launch in the near future.
Conclusion
When the first bitcoin ETFs are launched, they will likely be a big hit for both cryptocurrency_enthusiasts and traditional investors.
As a result, the rise of bitcoin ETFs may help fuel gains in bitcoin because many other digital currencies are closely linked to bitcoin’s performance and gains across the cryptocurrency market.
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