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The first ever Bitcoin ETFs is here
08 December 10:39
- Bitcoin ETF is a new investment vehicle that merges known investment principles from ETF with the excitement of price explosions in the crypto world.
- A Bitcoin ETF mirrors the price of the digital currency, allowing investors to buy into the ETF without trading Bitcoin itself.
- Investing in a Bitcoin ETF cuts out any issues of storage and security procedures required of cryptocurrency investors.
- ProShares Bitcoin Strategy ETF is the first Bitcoin ETF to trade in the U.S.
- For cryptocurrency enthusiasts and normal investors, it finally took shape – the first Bitcoin ETFs are out.
What is an ETF?
An exchange-traded fund (ETF) is a type of investment that tracks an index, sector, product, or any other assets, but which can be purchased or sold on a stock exchange the same way a regular stock can. An ETF is an investment plan that buys a vast variety of assets with one single order. It can also be wrapped in a periodical order which buys the asset recurrent. It could be for example a monthly purchase. This way, the investor buys shares from this asset periodically with a predefined, fixed amount of money. And the investor can also sell this asset without issues. An ETF is a type of investment that holds multiple underlying assets, rather than only one single asset. Some ETFs track an index of stocks creating a broad portfolio while others target specific industries. The variety and numbers of ETFs are immense. An ETF is also considered a middle to long-term investment.
Fig 1 - Rachel Mendelson/Insider “Before investing in ETFs, consider how that particular ETF could impact your portfolio and how it compares to other types of funds, businessinsider , Access Date: 29. Nov.21
What makes an ETF so special?
The benefit of ETFs is that you don’t need to time the market and don’t need to worry about the market itself since it will keep buying shares even if the market is high or low. You keep, buying periodically for example, a vast amount of assets with a single purchase. The main advantage of an ETF is that your portfolio has a lot of diversification and the risk management is considered small since you buy several assets and not a single one. At the same time, ETFs are cost-effective and have some tax benefits as well.
How does a Bitcoin ETF work?
A Bitcoin ETF works similarly to a normal ETF. It buys cryptocurrencies and even regularly with a fixed amount. It mimics the price of the most popular digital currency in the world and buys them automatically for you. It allows investors to buy cryptocurrencies without going through the complicated process of trading these currencies one by one or the creation of digital wallets.
Traditional, mostly stock investors, can stick to their already existing broker and will not have to worry about the complex storage and security procedures required of cryptocurrency investors.
The reason why it is simple for conventional investors to invest in these cryptocurrencies ETFs is that the holders of the ETF won't be directly invested in Bitcoin itself, the ETFs allow investors to diversify their investments without actually owning the assets themselves.
This Bitcoin ETF would open the doors for traditional investors to the crypto world allowing them to take part in the astronomic growth of crypto-tokens. At the same time, tokens would have more monetary support.
Why Not Just Invest in Bitcoin?
So since the Bitcoin ETF simply mirrors the price of the cryptocurrency itself, why not skip the middleman, the ETF, and cut at the same time some costs of the ETF? Why not just invest in Bitcoin directly? There are several reasons for this. First, as indicated above, investors don't have to bother with the security procedures associated with holding Bitcoin and other cryptocurrencies.
Further, there is no need to deal with cryptocurrency exchanges in the process - investors can just buy and sell the ETF through traditional exchanges and markets. Another important benefit is the Bitcoin ETF over the purchase of Bitcoin. The ETF is an investment product where the investors usually believe that the value of the assets inside of the ETF will increase its value offer time.
Another reason, and maybe the most important one, is that ETFs are widely better understood across the “traditional” investment world than cryptocurrencies. Traditional investors that know nothing from cryptocurrencies but heard about their astronomic price increase can take part in their growth via ETFs.
The investors looking to get involved in the digital currency could finally participate via the Bitcoin ETFs, an investment form they already understand. However, there have been setbacks and problems in trying to launch the first Bitcoin ETFs.
Fig 2 – "Trading Bitcoin Futures on Gate.io | Gate.io Futures” , gateio, Access Date: 29. Nov.21
The long Road to Bitcoin ETF Approval
The reason for these Bitcoin ETF seatbacks is that Bitcoin, the largest cryptocurrency in the world by market capitalization, remains largely unregulated. Additionally, the Securities and Exchange Commission (SEC) from the USA is hesitant to allow an ETF focused on the new and largely untested cryptocurrency market to make its way to the public.
Fig 3 – “Seal of the U.S. Securities and Exchange Commission” , wikipedia.org, Access Date: 29. Nov.21
Mostly it is because of the unregulated, decentralized characteristics of cryptocurrencies. These cryptocurrencies use decentralized networks based on blockchain technology that are not controllable by any bank or financial institution. These are some of the reasons that make the SEC very hesitant on allowing cryptocurrencies via Bitcoin ETF to join the traditional and heavily regulated investment world.
The companies trying to launch Bitcoin ETFs have run into problems with regulatory agencies right from the start. Cameron and Tyler Winklevoss, famous for their involvement in Meta (previous Facebook) and the Gemini digital currency exchange, had before the year 2017 launched petitions for a Bitcoin ETF called the Winklevoss Bitcoin Trust. This petition was turned down by the SEC.
On of the SEC statement gives insight into their reasoning and explained in the following statement:
"U.S. residents are sending money to all sorts of exotic locations to invest in unregulated [cryptocurrency] instruments with absolutely zero recourse for losing every cent they've put at risk...regulation will begin to solve those issues and keep client assets 'onshore.'"
The reason for their denial was that Bitcoin is traded on largely unregulated exchanges, leaving it susceptible to fraud and manipulation according to them. But that was not the end of the Bitcoin ETF. Finally, on October 19, 2021, the very first Bitcoin-related ETF ProShares Bitcoin Strategy ETF was officially launched and the trading began. ProShares' ETF is different from other Bitcoin ETFs because the fund tracks the future price of Bitcoin and is not directly tied to the spot price of Bitcoin. The main reason that such ETFs don’t exist is that the SEC still didn’t approve them. At least yet. Although crypto enthusiasts see this ProShares Bitcoin Strategy ETF as a step in the right direction, many investors anticipate the SEC to approve a Bitcoin ETF that is directly tied to the currency. Just recently, the SEC denied VanEck its approval for a Bitcoin exchange-traded fund to trade on Cboe Global Markets Inc., marking the first ruling on the subject since the initial Bitcoin Futures ETFs launched. The regulator restated its concern that basing this ETF product on the spot price of Bitcoin could violate securities rules in their eyes because the market is too susceptible to misuse and has no regulators.
“We are disappointed in today’s update from the SEC declining approval of our physical Bitcoin ETF,” said Jan van Eck, chief executive of VanEck. “We continue to believe that investors should have the ability to gain exposure to Bitcoin through a regulated investment product and that a non-futures ETF structure is a superior approach.”
The physically-backed Bitcoin ETF remains therefore for now out of reach. But Investors still see a spot Bitcoin ETF as a milestone in crypto’s breakthrough to mainstream investing. The ProShares Bitcoin Strategy ETF and related ETFs are the first steps in the right direction. But the SEC ultimately needs to approve a Bitcoin ETF that is directly tied to the cryptocurrency. This step could still take some time to come to the realization.
So, follow up gate.io for more brand-new trends and high-quality articles.
Author: article_bot
*This article only represents the views of observers and does not constitute any investment advice.
*The content of this article is original, and the copyright belongs to Gate.io. If you need to reprint, please indicate the author and source, otherwise, legal responsibility will be pursued.
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