The United States Securities Exchange Commission recently approved and regulated Bitcoin ETF as an asset in the crypto market to protect investments in Bitcoin. This recent development has already had an impact on the crypto world, including affecting the progress of Bitcoin itself. With the popularity of Bitcoin, the focus of crypto enthusiasts was on the Bitcoin ETF before it was even approved.
With the speculations in circulation, investors are concerned and interested in information that would help them comprehend if the scheme benefits them. This article will provide information and answers to probable questions that might bother a new or seasoned investor regarding Bitcoin ETF and its prospects.
To understand this topic, you need to know several terms by their definitions. Questions like:
What is Bitcoin
What is an ETF?
What is the meaning of the Bitcoin ETF?
Each of these questions will be answered comprehensively and detailed for every level of investor to understand. Just keep reading along.
What is Bitcoin?
Bitcoin is an innovative payment network developed by Satoshi Nakamoto in 2008 as a new form of money. It is the first form of currency with functionality, control, and information distributed to the general investment community rather than a central body (decentralized). It is the inspiration behind other digital currencies that have been adapted as a means of payment for goods and services.
They are assets that can be kept and exchanged for cash, making them a perfect form of investment. Every transaction is publicly shared to the network and distributed through nodes (a server on the blockchain network). There is a total supply of 21 million Bitcoin tokens, with about 19.5 million tokens in circulation.
What is an ETF?
An ETF, fully known as an Exchange-Traded Fund, is a type of collective investment security that operates like a hedge fund. One of the functions of an ETF is to track a particular index or sector, commodity, and any other asset. However, contrary to mutual funds, ETFs can be purchased and sold on a stock exchange, similarly to regular stocks.
It is a vessel of investment securities that can be traded on an exchange platform like stocks. It can contain every type of investment, including bonds, commodities, or even stocks. The price of ETF is not fixed but somewhat fluctuating, being a tradeable asset. Purchasing ETFs attracts lower expense ratios and fewer broker commissions compared to direct purchases of stocks.
What is a Bitcoin ETF?
As the definition of an ETF states its objective of tracking a particular commodity, a Bitcoin ETF simply means an exchange-traded fund that tracks the value of Bitcoin and trades on local market exchanges instead of trading on cryptocurrency exchanges. It allows crypto investors to invest in Bitcoin without the stress of using a cryptocurrency exchange.
Regular retail investors find investment in Bitcoin and cryptocurrency risky as a whole. Also, the vague regulations, the necessity to own a BTC wallet, and trust in a crypto exchange, which might still be an unexplored region for investors new to the space, might require a certain level of education. However, with the availability of Bitcoin ETFs, all these problems are covered.
How does Bitcoin ETF work?
Generally, the function of an ETF of a commodity is to track the price of that commodity or index. Similar is the case regarding Bitcoin ETFs; an investment organization would develop a subsidiary acting as a commodity pool. This pool then trades bitcoin futures contracts typically to emulate the spot price of bitcoin.
Spot price is a cash price for securities or commodities for immediate delivery. If the spot price is equal to the forward price of the purchase or sale of a currency, such a transaction is known as Par. It is important to note that these future contracts don’t precisely track the spot prices, making the assurance of high returns or sync with spot market prices uncertain.
Has the U.S.S.E.C. approved Bitcoin ETF?
In 2023, Grayscale Investments, a highly rated digital assets supervisor, made several proposals to the United States Security Exchange Commission, all of which were rejected. However, the organization did not relent, taking the case to court, which was then ruled in favor of Grayscale Investments because the S.E.C. had not adequately explained the rejection.
Consequently, the S.E.C. properly reviewed the proposal led by Grayscale, which went on for several months before the 10th of January, when it was finally approved.
What role did the U.S.S.E.C play in the approval of the Bitcoin ETF?
The United States Security Exchange Commission is a regulatory organization responsible for protecting traders’ investments by reviewing and approving an exchange to prevent market manipulation. Under this condition, the Bitcoin ETF proposal was brought to the agency for approval and regulation. Initially, the agency rejected these proposals before the intervention of a court ruling.
This resulted in a thorough review and inspection by the SEC on the benefits and impact of the Bitcoin ETF on traders and the market, which lasted several months. After various speculations by crypto traders, the SEC approved about 11 different applications for the Bitcoin ETF despite the warnings from some officials and investor advocates about the asset and the risks it contains.
What are the Prospects of Bitcoin ETF?
Now, let's go back to the top. Prospects of investments are the future possibilities the investors should expect from their investments, either positively or negatively. Bitcoin and Bitcoin ETF are types of investment. Hence, there are prospects for these assets. After understanding the concept of Bitcoin ETF, it is also essential to know the likely positive and negative outcomes that may be attached to it.
The positive impact of investing in Bitcoin ETF
As an investor, you must understand the possible advantages of investing in Bitcoin ETF. These are the potential benefits you can expect from a regulated ETF on Bitcoin to help contribute to your decision on making a possible investment in the asset. Let's discuss some future benefits Bitcoin ETF crypto enthusiasts could expect.
Comfortable investment: Unlike the usual BTC and other cryptocurrencies, investing in the BTC ETFs provides leverage to the price of the regular currency without the need to learn or comprehend the functionality and operation of Bitcoin, not required to register into a cryptocurrency exchange or even experience the direct risks of possessing a BTC token. In the case of Bitcoin, a crypto exchange wallet with security encryption alongside the password to open the wallet is required to keep the token safe. Thus, in a situation where the investor happens to lose this wallet password, the risk of entirely losing the token is present. However, such risks do not apply to Bitcoin ETF as the investment is not directly on the token but in the trust fund. There are currently about 11 Bitcoin EFTs that are best fit for investors.
Enables diversity: ETFs are multi-holding instruments that allow them to hold multiple assets simultaneously. Equally, Bitcoin ETF could contain multiple assets like Apple stocks, Facebook stocks, and more alongside Bitcoin. It will enable investors to reduce the impacts of the risks and diversify their range of investments. When an investor trades Bitcoin ETF on a regulated market exchange platform, the asset (BTC ETF) would allow these investors to broaden and diversify their previous and existing range of investments under their ownership.
Tax efficiency: Bitcoin is an unregulated asset, like a community controlled by several bodies rather than a central control. This factor leads to most of the world’s jurisdictions that attract foreign investors with relatively low tax burdens or requirements on bank reports (tax havens) and pension funds not allowing the purchase of Bitcoin. Like Bitcoin, Bitcoin ETF is pushed to be regulated by recognized investment protection bodies like the Security Exchange Commission (S.E.C) of the United States, making it eligible for tax efficiency when the token is traded on traditional exchanges.
Negative impacts of Bitcoin ETF
The positive sides do not only justify reasons for investment. Knowing the possible disadvantages you can expect in the future from investing in Bitcoin ETF will help you make the best decisions. These are the potential setbacks you can expect from a regulated ETF on Bitcoin to help contribute to your decision on making a possible investment in the asset. Let's talk about the future downside of Bitcoin ETF crypto enthusiasts could expect.
Inaccurate ETF: An ETF tracks underlying assets and acts as a multi-purpose trust fund that can hold multiple assets with the objective of portfolio diversification. Considering this, it implies that the other assets the ETF holds may prevent the fund's value from appropriately reflecting a 50% increase in the price of Bitcoin. It simply means that even though an ETF provides leverage to Bitcoin’s price, there is a probability it might or might not be an accurate tracker of the price of the Bitcoin token.
Management fees: To enjoy the comfort of a stress-free investment without the need to learn about the investment, register into a cryptocurrency exchange, or even experience a direct risk from investing, you would be required to pay a management fee for the services rendered to ensure your convenience. These management fees are the charges imposed on exchange-traded funds serving as a commission to the body responsible for providing you with a comfortable investment experience. These charges depend on the volume of shares owned, meaning the higher your shares, the more the management fee you would be charged.
What is the current effect of the ETF on Bitcoin?
The approval of the Bitcoin ETF has affected the performance of Bitcoin. In the early stages after the approval of the ETF, the price of bitcoin increased rapidly, rising from the closing value of $46,139.73 on the 9th of January, 2024, to about $49,000 on the second day the ETF was approved. However, this rise did not last as the currency suffered a loss and dropped to $42,800 as of the 14th of January, 2024.
Conclusion
Bitcoin ETF is an exchange-traded fund that helps investors track the value of Bitcoin and trade on local market exchanges instead of trading on cryptocurrency exchanges. The primary objective of this instrument is to reduce the risk of investing in Bitcoin while ensuring investors enjoy the comfort of a stress-free investment.
Bitcoin ETF might be an exchange-traded fund, unlike the normal cryptocurrency. However, it still remains a form of investment, and there are several outcomes an investor can expect from investing in them. These outcomes can be positive expectations, as well as they could be negative.
Before the approval and regulation by the Security Exchange Commission (S.E.C), Bitcoin ETFs were becoming more popular amongst crypto enthusiasts, with an example (the ProShares Bitcoin Strategy ETF) already being traded on NYSEArca. However, it is essential to gather information about the Bitcoin ETF, its prospects, and the regulation of the asset before deciding to invest in it.
FAQs
What are the types of Bitcoin ETFs?
There are two forms of Bitcoin ETFs: Spot Bitcoin ETF and Futures Bitcoin ETF. Spot bitcoin ETFs are responsible for securing bitcoins in a digital safe and mirroring the price of Bitcoin in the market. Futures Bitcoin ETFs are accumulations of bitcoin-related assets provided by native exchanges by brokers to be traded as ETFs.
How many Bitcoin ETF contracts were approved by the S.E.C?
Aside from the application from Grayscale Investments, several other crypto management organizations made their proposals for the approval of Bitcoin ETF by the S.E.C. After a thorough review of these proposals, the S.E.C approved 11 different applications, including Grayscale Bitcoin Trust, Invesco Galaxy Bitcoin ETF, the Hashdex Bitcoin ETF amongst others.
What is the minimum required to invest in a Bitcoin ETF?
Investment pools usually require a significant minimum investment; however, unlike these instruments, investing in Bitcoin ETFs does not necessarily require a large minimum investment. Shares on these Bitcoin ETFs can be bought in a single quantity necessary for retail investors. However, the transaction fees and expense ratio on the ETF often affect smaller investments.