What is Bitcoin ETF? Classification & Pros and Cons of Bitcoin ETF
Description of What is Bitcoin ETF? Classification & Pros and Cons of Bitcoin ETF
What is Bitcoin ETF?Why is there a need for a Bitcoin ETF? Is a Bitcoin ETF the way to bring a simpler approach to those who want to invest in BTC? Let's learn about Bitcoin ETF in today's article.
Previously, the news that the United States Securities and Exchange Commission (SEC) approved a Bitcoin Futures ETF was one of the hot news of the market. At the time of being launched, Bitcoin ETFs have received great attention from the market with the advantages they bring. Let's learn more about Bitcoin ETF, advantages and disadvantages as well as distinguish different types of Bitcoin ETF on the market today!
Before learning about Bitcoin ETFs, we will learn about the types of ETFs, a concept that has been around for a long time in the traditional financial markets. So, what is an ETF?
What is an ETF?
An exchange-traded fund (ETF), also known as an exchange-traded fund, is an investment fund designed to mimic the movements of a certain set of indexes. An ETF can be understood as a basket containing different types of assets such as commodities, bonds, and stocks. Instead of investing in a certain asset class, you invest in a set of indices that include many similar asset classes.
ETFs are traded like a stock and are listed on stock exchanges. Most ETFs are considered a passive investment strategy, which is also a transparent and flexible method that helps investors save time, costs, minimize risks, and diversify portfolios.
Suppose an investor realizes that the tourism industry can thrive in the post-covid period, instead of investing in a travel agency A, that investor can invest in an ETF of some kind. including company A and a few other companies in the tourism industry. At that time, investors will expand their portfolio and take less risk.
The world's first ETF is the SPDR S&P 500 ETF (SPY), which mimics the S&P 500 index, which is still traded on the US stock exchange. Today, more and more types of ETFs are born, giving investors easy access to many different types of assets without having to directly own them.
Next, we will learn about the Bitcoin ETF.
What is Bitcoin ETF?
A Bitcoin ETF (or Bitcoin exchange-traded funds) is a group of assets related to Bitcoin or the price of Bitcoin offered on traditional stock exchanges by brokerage firms, trading in the form of fund certificates. ETFs).
The purpose behind these ETFs is to provide access to cryptocurrencies for investors who are uncomfortable with the hassle of investing in these assets without actually owning them. .
Bitcoin ETFs use the same structure as traditional ETFs to enable trading. The price of the ETF will closely follow the price of Bitcoin. As the value of Bitcoin increases and decreases, the value of the ETF will increase and decrease respectively.
When it comes to Bitcoin ETFs, many people think that Bitcoin ETFs will be backed by BTC held in a wallet. In fact, there are 2 main types of Bitcoin ETFs: Bitcoin Physical ETF and Bitcoin Futures ETF.
Bitcoin ETF Classification
Bitcoin Physical ETF
Bitcoin Physical ETF, also known as Bitcoin spot ETF, is an ETF that works like ETFs in the traditional market. Fund management companies will make the purchase of BTC, investors can participate in the investment by buying shares in the ETF, these shares represent ownership of BTC, which means investors are indirectly owning BTC without incurring the risks associated with the crypto market. This also means that the value of these types of BTC ETFs will closely follow the actual value of BTC traded on the market.
There have been many Bitcoin-related ETFs approved by the SEC, however, they are mainly Bitcoin Futures ETFs, in fact there are still no Bitcoin Physical ETFs that have been authorized by the SEC to trade on the US stock markets. .
Recently, the SEC has continued to reject Grayscale Investments' application to convert Grayscale Bitcoin Trust (GBTC) into a Bitcoin Spot-based ETF. However, Bitcoin Physical ETFs are more widely accepted in other countries such as Canada, Brazil, etc.
A few examples of Bitcoin ETFs that invest in Bitcoin spot: Evolve Bitcoin ETF (EBIT), Purpose Bitcoin ETF (BTCC), Jacobi Bitcoin Exchange Traded Fund...
Bitcoin Futures ETF
Because the SEC has so far supported ETFs tied to the Chicago Mercantile Exchange (CME) Bitcoin futures contracts, at the present time, the underlying assets in Bitcoin ETFs on the U.S. stock markets are generally traded. linked to Bitcoin futures contracts and traded on exchanges such as New York Stock Exchange ARCA, Nasdaq…
A futures contract is an agreed-upon contract between two parties to exchange a specific asset in standardized quality and quantity, at a price agreed today but delivered at a different time in the future.
As such, a BTC futures contract is an agreement between two parties to exchange one unit of a Bitcoin contract, the fund will create shares at a price based on the current price of one unit of the contract and offer the exchange to buy. sold on the floor. Therefore, the Bitcoin futures ETF is backed by the Bitcoin price in the derivatives markets (CME's Bitcoin BRR reference rate) rather than the Bitcoin spot value.
A few examples of Bitcoin Futures ETFs: ProShares Bitcoin Strategy ETF (BITO), Valkyrie Bitcoin Strategy ETF (BTF), VanEck Bitcoin Strategy ETF (XBTF), Global X Blockchain & Bitcoin Strategy ETF (BITS), ProShares Short Bitcoin ETF (BITI)...
Bitcoin ETF Pros and Cons
Advantages
The introduction of Bitcoin ETFs received the attention of the crypto community due to many outstanding advantages:
- Convenience: Bitcoin ETF was born with the purpose of helping many people easily invest in Bitcoin without having too much knowledge about blockchain technology , or complicated operations to buy real Bitcoin on exchanges. electronic money.
- Diversify portfolio: A Bitcoin ETF can also include many different asset classes such as gold, Apple shares, ... so, Bitcoin ETF also has the outstanding feature of an ETF that helps investors diversify portfolio , hedging involves investing in one or a small group of assets.
- Increased liquidity: Tradedable Bitcoin ETFs bring in a whole new group of investors, which may include institutional investors indirectly involved in the cryptocurrency market.
- Solve the legal issue: Some institutional investors such as pension funds or wealth management firms may be subject to rules not to invest directly in Bitcoin. However, with a Bitcoin ETF, they have easier access to Bitcoin even if they don't hold Bitcoin directly.
- Security: For inexperienced investors in the crypto market, using Bitcoin wallets or cryptocurrency exchanges may face high risks of loss such as coin/token hacking, forgetting or leaving reveal private key, don't know how to use wallet...
- Tax Optimization: In countries that have enacted crypto laws like the US, investing directly in Bitcoin may be subject to higher taxes than trading an ETF as a stock on the stock market.
- Advantages for Other Crypto ETFs Approved: It is possible that in the future there will be more ETFs related to cryptocurrencies, attracting more investors to the crypto market.
Defect
In addition to the above advantages, Bitcoin ETF is also not without disadvantages:
- Management Fees: ETFs typically charge an annual management fee for the activities they provide. Compared to the one-time fee (even 0%) when trading on some crypto exchanges, owning shares in a Bitcoin ETF can lead to high management fees over time.
- Transaction time: Crypto market operates 24/7, investors can participate at any time. However, the Bitcoin ETF will only trade according to the opening and closing times of the stock market.
- Loss of payment functionality: Bitcoin can be used as a means of payment in a few countries, but a Bitcoin ETF of course cannot be used directly for payments, which results in instant loss of payment.
- ETF price differs from Bitcoin's real value: ETFs track the price of a group of underlying assets under management, so sometimes the ETF price doesn't always match the fund's net asset value.
History & Future of Bitcoin ETF in US
History begin
The US is known to have one of the highest crypto adoption rates in the world, so the approval of Bitcoin ETFs in this country has been expected for years. However, the US Securities and Exchange Commission (SEC) has repeatedly refused to approve ETFs, citing the desire to protect investors.
The first Bitcoin ETF application went to Cameron and Tyler Winklevoss in July 2013 and was officially rejected four years later. In the following years a few other parties continued to apply including SolidX, Grayscale, Direxion and GraniteShares but were either rejected or withdrawn on their own.
As of early August 2021, SEC Chairman Gary Gensler said that Bitcoin futures ETFs will be allowed to trade if they comply with the SEC's rules for funds.
On October 16, 2021, the SEC finally allowed the ProShares Bitcoin Strategy ETF, the first Bitcoin futures ETF to be traded on the market.
Since then, there have been many approved Bitcoin futures ETFs such as Valkyrie Bitcoin Strategy ETF, VanEck Gold & Bitcoin Strategy ETF, AdvisorShares Managed Bitcoin Strategy ETF (CRYP)...
Future of Bitcoin ETF
With the SEC's approval of the first Bitcoin-based ETFs, investors in the crypto market are feeling more optimistic about other types of ETFs the SEC is considering.
Futures ETFs will have a higher priority for approval because the SEC has tighter regulatory oversight over the Chicago Mercantile Exchange, as well as the types of futures contracts traded there.
There have been many parties wishing to be approved for Bitcoin spot ETF in the US such as Grayscale, VanEck, Ark 21Shares, NYDIG and Global X's, Fidelity, First Trust, Kryptoin, WhisdomTree... However, they were all rejected or delayed by the SEC. decision. Explaining this, the SEC believes that Bitcoin spot ETFs can lead to market manipulation and that ETF proposals lack adequate investor protection.
Even if multiple parties continue to submit applications, we may have to wait until the SEC changes its position or feels stable Bitcoin futures ETFs start to allow trading of Bitcoin spot ETFs. Bloomberg Intelligence analysts believe that it will not be until mid-2023, when the SEC has a regulatory change around crypto exchanges, that the Bitcoin spot ETF may be approved.
summary
Bitcoin ETF is one of the big next steps in bringing crypto assets to traditional investors as well as accelerating mainstream crypto adoption. However, Bitcoin ETFs are still in their early stages and still come with their own risks and inconveniences. It is possible that in the future, we will see a further expansion of the Bitcoin ETF market in both quantity and nature.
