Bitcoin ETF Explained

TL;DR

Bitcoin is solidifying itself as a legitimate investment asset that anyone can invest in. Well, technically not anyone, as some institutions and individuals can only participate in a highly regulated manner. Many think a Bitcoin ETF could fulfill this purpose.

While Bitcoin ETFs already exist in Canada, US regulators have yet to approve a Bitcoin ETF for the US markets. Let’s see what an ETF is and what it could mean for Bitcoin.

Introduction
Bitcoin and the cryptocurrency markets have come a long way. Not more than a decade ago, this technology was only used by a small community of enthusiasts, while the price was around 10,000 BTC for two pizzas.

Fast forward a few years, and we’ve seen many successful businesses built on this industry, countless cryptocurrency projects, the birth of DeFi, and much more. Institutional adoption is also booming. MicroStrategy has converted more than 2 billion dollars of their balance sheet into Bitcoin, and you may soon be able to buy the latest Tesla with your BTC.

But what building blocks are still missing before Bitcoin can become a major asset in the global macroeconomic environment? One of these could be a regulated way for institutions and more traditional players to get exposure to it. According to some, the best way to do that could be through an ETF.

What is a Bitcoin ETF?
First, a bit of an overview. An ETF is an exchange-traded fund, meaning an investment fund that tracks the price of an underlying asset. ETFs exist across many different industries and asset classes. For example, gold ETFs have existed for decades, and they track the price of gold.

A Bitcoin ETF would work the same way – the price of the ETF would follow the price of Bitcoin.

ETFs are regulated financial products – as such, they trade on traditional markets like the NASDAQ or NYSE and not on a cryptocurrency exchange. This, however, might change in the future as the borders between traditional finance and the cryptocurrency industry continue to blur.

Why is a Bitcoin ETF important?
Well, Bitcoin isn’t the easiest asset to deal with. Custody, for example, can cause some serious headaches for a large institution. After all, Goldman Sachs won’t just plug a hardware wallet into a laptop and YOLO (transfer) $2B of Bitcoin on it. Large financial institutions don’t operate in the same way as individual investors, and they need a complex regulatory framework and financial plumbing to be able to participate in this space.

This is why an ETF can go a long way to bring adoption and expand the potential investor base. It can give price exposure for participants in the traditional markets without them having to worry about all the nitty-gritty of physically owning the coins.

A Bitcoin ETF could also hold assets other than Bitcoin. For example, a Bitcoin ETF could hold a basket of assets, like Bitcoin, Ethereum, Tesla stock, gold, and so on. This could provide some diversification benefits to investors.

A brief overview of Bitcoin ETFs
Generally, when people talk about Bitcoin ETFs, they’re usually talking about ETFs on the US markets. However, ETFs exist in many different markets. For example, the first Bitcoin ETF was launched on the Canadian stock market. It’s called the Purpose Bitcoin ETF and trades on the Toronto Stock Exchange with the ticker BTCC.

Even so, most of the eyes are on the US regulators, as it’s the largest financial market in the world. A US Bitcoin ETF could solidify Bitcoin as an investment asset.

There have been several attempts to launch a Bitcoin ETF in the US. As of March 2021, all of them have been rejected by the US Securities and Exchange Commission (SEC).

Why does the SEC keep rejecting the applications? They usually cite volatility, the unregulated nature of the Bitcoin markets, and their apparent liability to market manipulation as the reason for denying the ETF applications. While these may be true to some extent, it’s probably also true for many other financial markets that already have ETFs.

In addition, much of the financial plumbing required for Bitcoin to be a legitimate macro asset class has been built in the last bear market. If MicroStrategy wanted to buy billions worth of Bitcoin just a few years ago, it probably would have been exceedingly difficult to do so. Now, however, both the infrastructure and the liquidity are there and ready to fulfill even such sizable investments.

This ongoing maturation of the Bitcoin markets will likely turn the tides for the regulators and eventually give way to a US Bitcoin ETF. As to when that will happen, it’s hard to tell – but it may be sooner rather than later.

Should I invest in a Bitcoin ETF?
Is a Bitcoin ETF the right financial instrument for you to invest in Bitcoin? Well, if you’re an individual who wants to protect their savings against the melting value of fiat, you may be better off just buying Bitcoin.

After all, Bitcoin is about democratizing finance. Well, actually, Bitcoin is many things for different people. But having direct custody of your savings can be powerful. Not to mention the countless ways you can earn yield or borrow against your Bitcoin.

With that said, there are advantages to investing in a Bitcoin ETF, so if those seem attractive to you, then an ETF can also be a good choice.

Closing thoughts

Bitcoin ETFs let investors in the traditional markets get exposure to Bitcoin in a regulated way. It can be a good way to bring more institutional adoption to cryptocurrency as an asset class.

When will US regulators accept a Bitcoin ETF application in the US? Hard to tell, but the required building blocks seem to be falling in place.

Do you still have questions about Bitcoin ETFs? Check out our Q&A platform, Ask Academy, where the Binance community will answer your questions.