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A Bitcoin ETF gives a straightforward, legally acceptable way for investors to trade the price of Bitcoin on platforms they are already familiar with.
Three years after the infamous “crypto winter” of early 2018, Bitcoin has nearly tripled its previous $20,000 high water mark, and has surpassed a $1 trillion market cap—making it by far the largest cryptocurrency in a $2 trillion total crypto market.
Many new people are interested in obtaining some Bitcoin now that it is more popular than before. However, many crypto-curious people still regard purchasing Bitcoin through a cryptocurrency exchange as a scary and confusing transaction. The technical features of Bitcoin ownership, such as crypto wallets, Bitcoin addresses, and private keys, are perplexing to newbies and scare away some investors.
All of this has increased the attractiveness of a Bitcoin ETF, or exchange-traded fund. While Canada already has three Bitcoin ETFs on the market, the United States has yet to authorise any for trading.
What is an ETF?
- An ETF is an investment vehicle that is publicly traded, like a stock, but tracks the performance of an underlying asset or index, rather than one company.
- An ETF is a way for investors to get exposure to the value of its underlying asset, like gold or oil.
- ETFs trade on a traditional stock exchange, and their value should rise when the asset increases in price, and fall when it decreases.
The first ETF was introduced in 1993, and they quickly gained popularity as a tool for individual investors to invest in a variety of assets all at once. If you wanted to invest in 500 of America’s largest corporations all at once, you could buy shares in an S&P 500 ETF.
A Bitcoin ETF operates in the same manner as any other ETF. Shares in the ETF can be purchased through any brokerage where equities can be purchased, and they can be traded in the same manner that shares in Apple or Tesla can be traded.
Bitcoin ETFs track Bitcoin’s current price and should react in lockstep with price movements.
Why the need for a Bitcoin ETF?
So, why wouldn’t investors simply purchase Bitcoin?
Bitcoin and cryptocurrencies in general continue to appear dangerous to the majority of normal retail investors.
Aside from the ambiguity of the legislation, owning Bitcoin necessitates the use of a Bitcoin wallet and the confidence of crypto exchanges, both of which are unknown ground for anyone unfamiliar with the area and necessitate a certain level of self-education.
Having Bitcoin places the responsibility of security squarely on your shoulders, making you accountable for the protection of your own private keys (unless you want to entrust them to the exchange). This could include purchasing a hardware wallet to protect newly obtained Bitcoin or securely storing private keys. You’d also have to figure out how to submit taxes for Bitcoin sales that resulted in capital gains.
Investors that use a Bitcoin ETF do not have to worry about private keys, storage, or security. They own shares in the ETF in the same way that they own stock, and they may obtain exposure to the cryptocurrency market without having to go through the hoops of purchasing and holding cryptocurrency.
And to put it plainly, that is an extremely appealing proposition for many regular folks—as well as sophisticated institutional investors.
That’s why so many hedge funds and other investing organisations have submitted applications with the U.S. Securities and Exchange Commission (SEC) for Bitcoin ETFs—as of April 2021, we count at least seven high-profile Bitcoin ETF filings from Fidelity, VanEck, SkyBridge Capital, Bitwise, and others.
Cameron and Tyler Winklevoss, creators of Gemini, were the first to file an application for the Winklevoss Bitcoin Trust in 2013. The Winklevoss brothers were granted a patent for “exchange-traded products” by the United States Patent and Trademark Office in 2018. However, the SEC has yet to approve their ETF—or any others.
How does a Bitcoin ETF work?
A Bitcoin ETF is managed by a firm that buys and holds the actual Bitcoin; the price is pegged to the Bitcoin held in the fund. The firm lists the ETF on a traditional stock exchange, and you, the investor, trade the ETF just as you would any other stock. Bitcoin ETFs also offer new types of trading opportunities, including short-selling, where investors can bet against Bitcoin.
But there are also some key differences between a Bitcoin ETF and other ETFs.
First, some ETFs, like those that track the S&P 500, represent equity shares, so you get a cut of the dividends that any company in the ETF pay to their shareholders. When Tesla pays a dividend and you have shares in an ETF that includes Tesla, you get a (smaller) dividend. Bitcoin is decentralized, so that won’t happen with a Bitcoin ETF.
Second, just like with other ETFs, you have to pay fees to the company offering the ETF. But with a Bitcoin ETF, some portion of your fees would go to paying the custody and management fees for the purchase and storage of the Bitcoin that underlies the ETF.
A brief history of Bitcoin ETF progress
- July 2013: The Winklevoss Bitcoin Trust files the first Bitcoin ETF proposal.
- June 2018: The SEC rejects the Winklevoss’ second Bitcoin ETF proposal.
- October 2019: The SEC rejects Bitwise’s Bitcoin ETF proposal.
- February 2020: Wilshire Phoenix becomes the latest project to have its Bitcoin ETF project rejected by the SEC.
- September 2020: The world’s first Bitcoin ETF is listed on the Bermuda Stock Exchange.
- December 2020: VanEck files its latest proposal for a Bitcoin ETF, after pulling its previous proposals before formal rejection multiple times.
- February 2021: Canada’s first Bitcoin ETF launches, the Purpose Bitcoin ETF (BTCC). Two more would be approved in the same month: the Evolve Bitcoin ETF (EBIT) and the CI Galaxy Bitcoin ETF (BTCX).
What’s so special about a Bitcoin ETF?
A Bitcoin ETF in the United States is intended to raise Bitcoin investing to a new level of mainstream dependability and acceptance. In 2020 and 2021, large publicly traded firms such as Square and Tesla purchased Bitcoin as an investment for their balance sheets, spurring fresh adoption—but the cryptocurrency is still viewed as a hazardous venture, if not a gimmick, by many conservative investors.
The SEC’s approval of a Bitcoin ETF would allow institutional investors to more readily speculate on Bitcoin’s price. It would effectively bring Bitcoin to Wall Street, with the Bitcoin ETF trading in the same venues as Tesla stock, bonds, gold, oil, or any other traditional asset.
And it would likely be a huge boost to the price of Bitcoin.
Did you know?
Cannabis ETFs have become popular for many of the same reasons that Bitcoin ETFs have. Just like crypto, the marijuana industry is viewed as risky and uncertain by traditional investors who still want the opportunity to profit from it.
Why hasn’t the SEC approved a Bitcoin ETF?
Since 2017, the SEC has routinely rejected Bitcoin ETF proposals.
The SEC’s major point is that the price of Bitcoin is susceptible to market manipulation. Even if a Bitcoin ETF solely took prices from the most renowned cryptocurrency exchanges, the price of Bitcoin may be influenced on less reputable exchanges with less regulations.
Other prominent concerns raised by the SEC include a lack of transparency in cryptocurrency exchanges and a potential lack of liquidity.
But that was all during the Jay Clayton era.
In January 2021, newly elected U.S. President Joe Biden announced Gary Gensler as his candidate for the next SEC chair, whose previous expertise teaching a cryptocurrency course at M.I.T. triggered a new wave of confidence that the SEC will approve a Bitcoin ETF soon.
The Future of Bitcoin ETFs in the U.S.
Of course, just because Gensler is knowledgeable about cryptocurrency does not guarantee that he will support it as SEC Chair. But it isn’t stopping investors with skin in the game from betting on Gensler opening the floodgates for Bitcoin ETFs.
“I’m hoping that with the introduction of Gary Gensler now into the regulatory rubric, and my understanding of where he’s coming from, although I don’t know it personally, that we can possibly get an ETF in place by the end of the year,” Anthony Scaramucci, whose SkyBridge Capital has applied for a Bitcoin ETF, said in March.
SkyBridge is one of the firms that has a Bitcoin fund for its own clients, which isn’t quite an ETF, but it aims to convert that fund into an ETF if and when the SEC approves a Bitcoin ETF.
Grayscale Investments, the largest crypto asset provider in the United States, offers publicly listed investment products tied to various cryptocurrencies, such as the Grayscale Bitcoin Trust (GBTC). Grayscale confirmed in April that it aims to convert its Bitcoin Trust to a Bitcoin ETF if and when the SEC permits it.
Morgan Creek Capital Management CEO Mark Yusko is similarly convinced that a Bitcoin ETF would be approved in the United States soon; Morgan Creek has invested in Bitwise, which has applied for an ETF.
The SEC’s approval would be a significant step towards Bitcoin being recognised as a legitimate investment by the same traditional investors who have been dismissive of it for years.
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