image post

What to Know before getting into Bitcoin ETFs

author image

Contributor

Last updated October 1, 2021

Bitcoin may have started as a digital currency, but it is now commonly used as an investment vehicle. As the price has climbed, we have not only seen more individuals entering the crypto markets as investors, but it is also gaining a lot of interest from large financial institutions.

Beyond investing in cryptocurrencies directly, there are efforts to create securities based on these digital coins. One idea that has gathered a lot of steam in recent years is that of a Bitcoin exchange-traded fund (ETF). 

Along with Bitcoin, the ETF might also track things like the Dogecoin price or other assets like Ether and Dash. 

Many believe that cryptocurrency ETFs would be a great way for investors to gain exposure to the benefits of Bitcoin without some of the issues that have kept them away from the markets. 

While it has been a struggle to this point, the first Bitcoin ETF was launched in Canada at the beginning of 2021. And now, many investors hope this is a sign that it is only a matter of time before the SEC starts approving crypto exchange-traded funds for US markets.

How does an ETF work?

How does an ETF work

Before you can understand how this type of investment product would work with Bitcoin, you should learn about conventional exchange-traded funds. These types of securities track a market index, commodity, or some other kind of asset. 

They can be structured to track the price of a single asset or follow a group of assets. Also, they can be bought and sold on stock markets.

With conventional exchange-traded funds, a management team creates the security. They buy assets to hold in the fund and then sell shares that represent partial ownership of the assets. 

If you were to apply this same practice to Bitcoin, it would be a security that tracks the digital currency’s price. Investors would also be able to buy and sell the security on a conventional stock exchange, offering a way to benefit from the price of Bitcoin without having to get involved with the crypto markets directly.

In many cases, ETFs will follow a group of related assets. As an example, you might find an automotive fund that covers a range of assets like auto manufacturers and parts suppliers. This principle could also apply to securities that track crypto. 

Bitcoin ETF advantages

Creating a new security based on the price of Bitcoin could be a way to attract more capital into crypto. Much of this would be due to some of the advantages that would come with putting Bitcoin into an ETF.

One of the first advantages is that it could offer a way to benefit from the value of Bitcoin without having to deal with some of the issues that come with buying and holding cryptocurrencies. The investor would not have to open a crypto wallet, find an exchange for trading or hold and manage the coins. The fund managers would handle most of this for the investors.

Diversification is another reason. As was mentioned earlier, these funds can hold several assets at once. If you are looking to gain exposure to a group of assets, an ETF is an easy solution. You can just buy shares in the fund and balance the growth of your portfolio over several assets instead of just one. 

Security could be another issue that will attract people to this type of investment. When you own Bitcoin, you have to be responsible for securing your assets. If your account is compromised, you could lose your investment. With an investment fund, it would not be so simple for a criminal to steal your shares. 

Paying taxes on Bitcoin can also be complicated. While some of the tax issues have been sorted out in recent years, it can still be quite problematic for some investors. Yet, ETFs have been around for a while, and the tax laws are settled and straightforward. 

Bitcoin ETF Disadvantages

This type of investment vehicle does come with its advantages, but you do have to give some things up to gain these advantages. If you were to invest in Bitcoin, it could be an excellent introduction to the cryptocurrency markets. You could start with Bitcoin and then learn about and invest in other coins. It could potentially open up a range of new investment opportunities.

Another issue is that the fund might hold more assets than Bitcoin. This can be a positive aspect when you consider things like diversification and stability, but it might mean that the fund does not track as close to the price of Bitcoin as some would like. With other assets under management, that might indicate that you will see times when the Bitcoin price takes a sharp increase, but the fund’s share price only goes up a little.

Investors also need to consider management fees. With this type of investment vehicle, the fees do tend to be reasonable, but they could eat into your profits. While you would have to do more work to invest in Bitcoin directly, you would not have to pay any management fees for the investment.

Why are there no Bitcoin ETFs in the US yet?

no Bitcoin ETFs in the US

Crypto exchange-traded funds have been a hot topic among investors for a few years now. This is especially true as it concerns backing these funds with Bitcoin. With that said, it has been a long and challenging road to make them a reality. 

Investors have made several attempts to get approval for funds. Purpose Investments was able to win approval to trade their fund on the Toronto Stock Exchange. And since then, there has been some success with funds getting approved in other parts of the world. 

As for the US, there are still no crypto ETFs that have been approved by the SEC.

But this situation does not result from a lack of trying. There have been several attempts by investors to win approval. However, the SEC has been reluctant to approve any of these funds for several reasons. 

The agency explained some of its reasoning in a letter released in 2018. Among other issues, the SEC expressed concern that the underlying assets (Bitcoin) are traded in unregulated markets, which could leave the funds open to price manipulation. There were also concerns over the limited liquidity in the crypto markets of the time. 

The good news is that the crypto markets have changed a lot in the time since that letter was written. The SEC is currently reviewing several fund applications for approval. It is the hope of many that growth in the market and new regulations will be enough to change the minds of regulators. Many investors do believe that it is only a matter of time before these investment products are available in the US as well.

Conclusion

Bitcoin ETFs could be an attractive investment option. It offers a way to benefit from Bitcoin investment without having to hold the tokens. It could also be a great way to attract more capital to crypto markets since they offer exposure to digital currencies in a more conventional investment vehicle. 

Looking at the success of the first fund in Canada, we can see it as an indicator that a Bitcoin ETF could do well in the US as well. In fact, the SEC might be watching some of the movement of the funds popping up in other markets as an additional factor that might guide their decision on the current round of applications they have in review.

2
Copy link
Powered by Social Snap