Bitcoin continues to solidify its place as a legitimate investment asset accessible to all. Bitcoin and other cryptocurrencies are traded largely on cryptocurrency exchanges such as Bitexen. Moreover, with the growing popularity of Bitcoin and other cryptocurrencies, there has been a huge demand for Bitcoin in traditional markets. Thus, some firms and individuals have wanted to invest only in a highly regulated asset, and this need has led to the introduction of Bitcoin ETFs (exchange-traded funds) into the stock markets.
What Is an Exchange-Traded Fund (ETF)?
Exchange-traded funds (ETFs) are investment instruments whose prices vary according to the performance of certain assets or indices, from commodities to currencies. It allows investors to invest in an asset without directly owning the asset and being involved in its operating procedures.
ETFs are regulated financial products. That is why they are not located on cryptocurrency exchanges, but in traditional markets such as the NASDAQ and NYSE. However, this does not mean that there is an uncrossable boundary between traditional finance and cryptocurrencies.
How Does a Bitcoin ETF Work?
The Bitcoin ETF is an investment product that tracks the price of the world’s most popular cryptocurrency. It simplifies the Bitcoin trading process for investors. Additionally, since ETF holders do not invest directly in Bitcoin, they do not have to worry about the complex storage and security procedures required.
As we have just mentioned, the price of a Bitcoin ETF follows the Bitcoin price. This product, which tracks the performance of Bitcoin, is a tradable product like any other fund.
Why Don’t We Just Invest in Bitcoin?
If a Bitcoin ETF only reflects the price of the cryptocurrency, why invest in the ETF? Why don’t we invest in Bitcoin? There are a couple of reasons. Firstly, as we have mentioned above, especially institutional investors may want to invest in a regulated asset. Secondly, if investors do not want to deal with security procedures related to holding Bitcoin and other cryptocurrencies, they may opt to use this investment product. Investors can only buy and sell ETFs through traditional exchanges and markets.
What Is the Significance of a Bitcoin ETF?
Large financial institutions differ from individual investors and need a complex regulatory framework and financial equipment to get involved. Therefore, an EFT is an important step towards adoption and broadening the potential investor base.
With the introduction of the Bitcoin ETFs, it has become possible for investors to include cryptocurrencies in their investment portfolios. Since institutional investors generally prefer trading and holding regulated assets, crypto EFTs may encourage them to invest in digital assets. This may increase the demand for the underlying crypto asset and hence increase its price.
The Advantages of a Bitcoin ETF
Ease of Use and Security: Investing in a Bitcoin ETF allows you to invest in a digital asset without having to learn how Bitcoin works or owning Bitcoin directly, and without certain risks. For example, Bitcoins are held in a wallet, and if an investor loses his wallet’s password, his Bitcoins are lost forever. A Bitcoin ETF simplifies the process of investing in Bitcoin.
Diversification: An ETF can be exchanged for more than one asset. For example, a Bitcoin ETF can be converted to Apple stock, Facebook stock, etc. It provides investors with the opportunity to reduce risks and diversify their portfolios. Similarly, a Bitcoin ETF gives investors the chance to diversify their existing stock portfolios by trading on a regulated market exchange.
An Overview of Bitcoin ETFs
The Bitcoin ETF application of Purpose Investments was approved, making it the first publicly traded Bitcoin ETF, according to a resolution by Ontario Securities Commission (OSC), Canada’s financial regulator, on Thursday, Feb. 11. Just days after the approval, it was announced that Evolve’s Bitcoin EFT was also approved. Subsequently, Bitcoin ETFs of various companies in Canada were approved and started to be traded on the stock market.
Although many countries are involved in the crypto ETF trend led by Canada, the stance of the US has not yet changed. Since 2013, no Bitcoin EFT applications have been approved by the US Securities Exchange Commission (SEC). The table below shows the companies that have applied to the SEC for Bitcoin and Ethereum ETFs and their status, according to May 30 data.
Source: Bloomberg Intelligence
As seen above, although there is no Bitcoin ETF application that has been approved yet, forms 19b-4 of 6 companies are being examined by the SEC. On Monday, March 15, the SEC accepted VanEck’s form 19b-4 for its Bitcoin ETF application, officially starting the 45-day period to make an initial decision on the proposal. Thus, VanEck’s application became the first Bitcoin ETF application to be examined by the SEC.
The ongoing global maturation of Bitcoin and its derivatives will likely change the course of regulators and eventually lead to the approval of a US Bitcoin ETF. Although it is difficult to say when this will happen, a positive outlook can be achieved thanks to the increasing adoption by investors.
