Bitcoin ETFs are exchange-traded funds that track the price of bitcoin, the world’s largest cryptocurrency. They allow investors to buy and sell shares of bitcoin without having to deal with the technical aspects of owning and storing the digital asset. Bitcoin ETFs are seen as a way to bring more mainstream adoption and legitimacy to the crypto industry, as well as to attract institutional investors who are interested in exposure to bitcoin.
Bitcoin ETFs are similar to other types of ETFs that track various assets, such as stocks, bonds, commodities, or indices. An ETF is a fund that holds a basket of securities that represent a certain market or theme. For example, an ETF that tracks the S&P 500 index would hold shares of all the companies in the index.
A bitcoin ETF would hold shares of bitcoin or futures contracts that track the price of bitcoin. A futures contract is an agreement to buy or sell an asset at a specified price and date in the future. For example, a futures contract on bitcoin would oblige the buyer to purchase bitcoin at a certain price on a certain date.
The main difference between buying shares of an ETF and buying shares of an individual stock is that an ETF does not require direct ownership or custody of the underlying asset. Instead, it acts as an intermediary between buyers and sellers on an exchange, where shares can be bought and sold like any other stock.
Why Bitcoin ETFs Matter
Bitcoin ETFs have been long-awaited by many investors who want to gain exposure to bitcoin without having to deal with its volatility, security risks, and regulatory uncertainty. Bitcoin is known for its high price fluctuations, which can make it difficult for individual investors to profit from its movements or hedge against losses.
By investing in a bitcoin ETF, investors can benefit from the performance of bitcoin without having to buy or store it themselves. They can also access more liquidity and lower costs than buying individual bitcoins on platforms like Coinbase or Binance.
Bitcoin ETFs are also seen as a way for institutional investors, such as hedge funds, pension funds, or endowments, to gain exposure to bitcoin without having to deal with its technical complexities or regulatory hurdles. Institutional investors typically have more resources and expertise than retail investors when it comes to investing in cryptocurrencies.
However, not everyone is convinced that bitcoin ETFs are beneficial for investors or for the crypto industry. Some critics argue that bitcoin ETFs do not offer any real value added over buying individual bitcoins directly. They also point out that some existing platforms offer similar services as bitcoin ETFs without requiring direct ownership or custody of bitcoins.
Moreover, some regulators remain skeptical about cryptocurrencies and their suitability for mainstream investment. The US Securities and Exchange Commission (SEC) has been reluctant to approve any bitcoin-related products since 2017, citing concerns about market manipulation, fraud, custody issues, and investor protection.
What Happened This Week
This week was a historic week for the crypto industry as several US-listed exchange-traded funds (ETFs) began trading after being approved by the SEC on Wednesday. The SEC had previously announced its intention to approve 11 spot-based bitcoin ETFs on Tuesday, but later said its account had been hacked and posted an unauthorized tweet announcing the approval. The tweet was quickly deleted after causing confusion among market participants.
The first day of trading saw $4.6 billion worth of shares trade hands, leading to a fierce competition for market share among various fund managers who offer different types of products based on different strategies involving cryptocurrencies. Some examples are:
- Grayscale Bitcoin Trust: This is one of the oldest and largest providers of digital asset trusts in the world. It holds over 1 million bitcoins in cold storage (offline) and issues shares that trade on secondary markets.
- BlackRock’s iShares Bitcoin Trust: This is another popular provider of digital asset trusts that holds over 100 bitcoins in cold storage and issues shares that trade on secondary markets.
- Valkyrie Bitcoin Strategy Fund: This is one of the first providers of spot-based bitcoin futures contracts-based products that aim to replicate daily returns from holding actual bitcoins.
- ARK 21Shares Bitcoin Strategy Fund: This is another provider of spot-based bitcoin futures contracts-based products that aim to capture long-term growth potential from holding actual bitcoins.
- Invesco DB Physical Bitcoin Fund: This is yet another provider of spot-based bitcoin futures contracts-based products that aim to provide exposure to actual bitcoins without requiring direct ownership or custody.
- VanEck Vectors Digital Assets Equity UCITS ETF: This is one of the first providers of exchange-traded products (ETPs) based on digital assets rather than cryptocurrencies themselves