Since its inception in 2009, Bitcoin (BTC) has captured the imagination of traders and enthusiasts alike. Bitcoin has experienced a meteoric rise in value achieving a total return of 18,912% from 2010 to 2022. In addition to its increasing acceptance as a legitimate asset class, which has been reinforced by the adoption of Bitcoin by institutions like MicroStrategy, a range of financial products has been designed to make Bitcoin more accessible to traditional traders.
One such product that has garnered significant attention is the Bitcoin Exchange-Traded Fund (ETF). According to a report, Bitcoin ETFs may account for 10% of the market value of Bitcoin, or roughly $50 billion as of Bitcoin’s price in September 2023. In this article, we delve into Bitcoin ETF and everything you need to know about it.
What Is Bitcoin ETF
A Bitcoin ETF is an exchange-traded fund that allows traders to gain exposure to Bitcoin without buying the cryptocurrency directly. Bitcoin ETFs are traded on traditional stock exchanges and they track the price of Bitcoin and performance of Bitcoin-related assets.
ETFs are structured as investment funds and are typically managed by financial institutions or asset management companies. These companies, holding the underlying assets, create and manage the ETFs.
Unlike traditional ETFs which own and hold the asset that it represents, Bitcoin ETFs do not directly hold Bitcoin. This is because of regulatory reasons thus Bitcoin ETFs are based on financial products, such as Bitcoin futures contracts, or other assets that correlate to the price of the crypto instead of the price of Bitcoin itself.
How Does Bitcoin ETF Work
These are some key elements of a Bitcoin ETF:
Underlying Asset: In a stock ETF, stocks are purchased by the investment fund owned by an institution. Similarly, in a Bitcoin ETF, the fund buys and holds a certain amount of Bitcoin.
Shares: The institution creates shares that represent ownership in the fund with the value of the shares directly tied to the price movements of Bitcoin. Owning shares of the ETF allows traders to gain exposure to the cryptocurrency’s price fluctuations without having to buy and hold Bitcoin directly.
These shares can be bought and sold on traditional financial exchanges, just like stocks. Each share of the ETF represents a fraction of the total Bitcoin holdings of the fund.
Market Tracking: The aim of Bitcoin ETFs is to track the performance of Bitcoin, so if the price of Bitcoin goes up, the value of the ETFs’ shares should go up as well, and vice versa.
Net Asset Value (NAV): Many ETFs provide transparency into their holdings and NAV. Traders can see what assets the ETF holds and monitor its performance.
Benefits Of Bitcoin ETF
Accessibility: Bitcoin ETFs provide a straightforward and convenient way for traditional traders to gain exposure to Bitcoin without managing private keys and wallets. Traders can buy and sell these Bitcoin ETFs directly through their stock brokerage account. This accessibility can help bridge the gap between the traditional financial system and the crypto markets.
Regulation: ETFs are subject to regulatory oversight and must adhere to securities laws. Regulatory approval is a crucial step in launching a Bitcoin ETF. This regulatory framework can provide a level of investor protection and oversight.
Convenience: Traders can trade ETFs through their brokerage accounts, just like they would with traditional stocks, without needing to set up a cryptocurrency wallet or an account with a crypto trading platform.
Challenges & Considerations Of Bitcoin ETF
Regulatory hurdles: As of August 2023, the Securities and Exchange Commission (SEC) has not approved any Bitcoin ETF that directly represents Bitcoin. There are several Bitcoin ETFs such as the ProShares Bitcoin Strategy (BITO), Valkyrie’s Bitcoin Strategy (BTF), and Van Eck’s Bitcoin Strategy (XBTF) ETFs but these ETFs track Bitcoin Futures Contracts instead of the price of Bitcoin itself.
Tracking error: The performance of a Bitcoin ETF may not precisely mirror that of Bitcoin itself due to factors such as tracking error and management fees.
Management fees: Like other funds, Bitcoin ETFs charge management fees, which can eat into returns over time. Traders should be aware of these fees and its impact on their overall returns.
What Is The Importance Of A Bitcoin ETF
A Bitcoin ETF that receives regulatory approval in the United States is expected to increase the mainstream acceptance and trustworthiness of Bitcoin. Institutional traders, such as mutual funds, pension funds, and hedge funds, often have strict compliance requirements and mandates that limit their ability to trade directly in cryptocurrencies.
Bitcoin ETFs allow these institutions to gain exposure to Bitcoin within their regulatory boundaries, potentially driving significant demand and capital into the market. This acceptance can, in turn, encourage further innovation and investment in the cryptocurrency space.
Bitcoin ETF Progress Timeline
- 2013-2017: Initial Bitcoin ETF Proposals
The first Bitcoin ETF proposal was filed by the Winklevoss twins, Cameron and Tyler Winklevoss, in 2013 with the U.S. SEC. This proposal was initially rejected in 2017.
- 2017-2018: SEC Rejections
The SEC rejected multiple Bitcoin ETF proposals, citing concerns about market manipulation, lack of regulation in the cryptocurrency market, and investor protection.
- 2018: CBOE’s Bitcoin ETF Proposal
In 2018, the Chicago Board Options Exchange (CBOE) filed a proposal for a Bitcoin ETF in collaboration with VanEck and SolidX. This proposal generated significant interest but faced multiple delays and was ultimately withdrawn in January 2019.
- 2019: SEC Review of VanEck/SolidX ETF
The SEC initiated a review of the VanEck/SolidX Bitcoin ETF proposal, rekindling hope for a regulated Bitcoin ETF. However, this proposal was eventually withdrawn by the applicants in September 2019.
- 2019-2021: Resubmissions and New Proposals
Various companies continued to submit new Bitcoin ETF proposals to the SEC in the hope of gaining regulatory approval. Several proposals were either withdrawn or faced delays due to regulatory concerns.
- 2021: Canadian Bitcoin ETFs
In February 2021, Canada approved its first Bitcoin ETFs, allowing investors in Canada to gain exposure to Bitcoin through regulated funds. These ETFs were well-received and marked a significant milestone in Bitcoin ETF history.
- 2021: U.S.-listed Bitcoin ETF
Launch of ProShares Bitcoin Strategy (BITO), the first U.S.-listed Bitcoin ETF.
- 2023: Europe’s Bitcoin ETF
Europe’s first Bitcoin ETF was launched by London-based Jacobi Asset Management
Disclaimer: This material is for information purposes only and does not constitute financial advice. Flipster makes no recommendations or guarantees in respect of any digital asset, product, or service.
Trading digital assets and digital asset derivatives comes with significant risk of loss due to its high price volatility, and is not suitable for all investors.