What Is a Bitcoin ETF?

It has been over a decade since the introduction of Bitcoin (BTC), the first cryptocurrency. In the interim many cryptocurrencies have come onto the market. Also, various blockchain related projects that use cryptocurrencies such as DeFi and metaverse came onboard. Although these have increased the demand of cryptocurrencies and other digital assets, their adoption has remained very low. In order to increase the adoption of cryptocurrencies, the market has come up with crypto-based ETFs.

What Is a Bitcoin Exchange Traded Fund (BTC ETF)?

Although crypto related exchange traded funds will increase in the future, BTC ETF is the most well-known at the moment. Let’s first explain what an exchange traded fund is. An exchange traded fund (ETF) is a security whose value tracks that of another asset. In other words, the price of an ETF correlates with that of an underlying asset. ETFs are investment assets that exist only in traditional financial markets. As such, crypto markets do not trade ETFs.
Therefore, a BTC ETF is an investment asset that tracks the value of Bitcoin or Bitcoin related securities but exists on traditional financial markets. For this reason, BTC ETFs give investors the opportunity to get exposure to Bitcoin without holding it.
It is also essential to understand that ETFs existed well before cryptocurrencies such as BTC. They have been there for decades, tracking the values of essential commodities such as gold and silver.

How Does a BTC ETF work?

The underlying aspect is that the value of a BTC ETF fluctuates in relation to the price of the BTC. What this means is that if the price of BTC increases, so does that of the BTC ETF. On the contrary, if the price of the BTC decreases, it also follows that the value of the BTC ETF will fall.
In terms of investments, the main difference between the BTC ETF and Bitcoin is that the BTC ETF is traded on the regulated traditional financial market such as NASDAQ, New York Stock Exchange (NYSE) and TSX whereas people buy and sell BTC on crypto exchanges and wallets.

The ETF works by holding a certain amount of Bitcoin as an underlying asset, and then issuing shares in the ETF that can be bought and sold on a stock exchange. The issuer must first buy a predetermined amount of Bitcoin and store it in safe, offline storage before issuing the ETF. Shares in the ETF that can be purchased and sold on a stock exchange will subsequently be issued by the issuer. An investor effectively purchases a little portion of the underlying Bitcoin when they purchase shares in the ETF.
When an investor wants to sell their shares in the ETF, they can do so on the stock exchange just like with any other publicly traded security. The ETF issuer will then redeem the shares and give the investor cash, which is based on the current market price of Bitcoin.

Types of Crypto ETF

There are two types of crypto ETFs. The first type are ETFs which are directly backed by cryptocurrency such as Bitcoin. In this scenario, the investment platforms purchase and hold the cryptocurrency, and issue the ETFs in return. Now, it is important to note that some ETFs are backed by two or more cryptocurrencies. An example is that of Bitwise 10 Crypto Index Fund which is backed by 10 cryptocurrencies. These include Bitcoin, Ethereum, Litecoin (LTC) and Cardano (ADA), among others.
There are also ETFs which are backed by crypto synthetics such as Bitcoin futures. With these ETFs the investment platforms do not hold the related securities. Instead, the platforms purchase premiums, thus acquiring the right to buy the related cryptocurrency at a given date. Other examples of BTC ETFs are ProShares Bitcoin Strategy ETF, Valkyrie Bitcoin Strategy ETF (BTF) and VanEck Bitcoin Strategy ETF (XBTF).

Acquiring Crypto ETFs

You may want to know how to purchase a crypto ETF such as BTC ETF. It is very simple. Many online brokers of traditional instruments such as shares and bonds also sell BTC ETFs. This does not mean that every broker sells them. You have to search diligently to find genuine brokers offering BTC ETFs.

The Need to Invest in a BTC ETF

After discussing the various aspects of BTC ETF it is time to find out the need for investing in them. It is more convenient for some people to invest in BTC ETFs than BTC itself. This is because, at times, it is very difficult to use BTC if you do not have the right knowledge. You may need to know how to use digital wallets and how to transfer BTC to exchanges or other DeFi investment platforms. However with BTC ETFs the situation is different. The approach to handling BTC ETF is similar to the way we deal with other investment assets such as bonds and shares. With BTC some investors may fail to access it because they have lost their private keys or passwords. This is not the case with ETFs.
The BTC ETF also exists on investment platforms where many investors already have accounts. Therefore, they know how to explore the platforms’ interfaces and carry out some certain procedures. Such people can find it easier to invest in a BTC ETF than in BTC. There are also several advantages to investing in a BTC ETF.

Advantages of Investing in a BTC ETF

Less Security Risk

As already pointed above, when dealing with BTC ETFs there is no need to store them in digital wallets where you use private keys. Moreover, attackers cannot hack and steal BTC ETFs. But they can hack digital wallets and crypto exchanges and steal your BTC.

Lower Entry Barrier

Many investors already know much about ETFs and can easily relate their knowledge to BTC ETF investments. Apparently, there is no need for them to learn about complicated blockchain related concepts such as digital wallets, public keys and private keys.

Diversify your Portfolio, More Flexible

Some crypto ETFs comprise various cryptocurrencies. This helps to diversify your investment portfolio. In a case of a crypto ETF backed by several crypto securities such as futures and options, there is less volatility than of the cryptocurrencies.
There is a great possibility to short sell BTC ETF, something which you hardly do with cryptocurrencies. However, it is very possible to short sell and profit from an ETF when the market is in a downtrend.

Disadvantages of Bitcoin ETFs

Government Regulation

Bitcoin and its derivatives such as ETFs are highly speculative. As a result, their prices are highly volatile. These sharp price fluctuations scare investors from investing in BTC and its derivatives. Worse still, the absence of government regulations in the crypto sector contribute to this volatility.

Price Delay in ETFs

There is also a problem of inaccurate pricing. Basically, when the price of BTC changes this does not result in the price of the BTC ETF changing at the same time. For instance, if there is an increase in the price of BTC; it may take some minutes or hours for this change to reflect in the value of BTC ETFs.
The fees for crypto ETFs are usually higher than that of other ETFs. This can reduce the profitability of the BTC ETF or increase the loss, depending on the circumstances.

ETFS Can Not Transfer Easily as Crypto You Are Holding

Last of all, you can trade Bitcoin for other cryptocurrencies such as ETH, XRP and TRX. Nevertheless, you cannot exchange BTC ETF with cryptocurrencies. The reason is that the BTC ETF is an investment asset, not a token.

Conclusion

The BTC ETF is a BTC backed investment instrument which is tradeable in the traditional financial market. The good thing is that some investors who do not have interest in cryptocurrencies can invest in crypto ETFs. Also, trading BTC ETFs give investors exposure to cryptocurrencies as well as opening up new investment opportunities. The main investment platforms where investors can trade BTC ETFs are stock exchanges. They can purchase them from brokers who sell some traditional financial instruments such as bonds and stocks. Still, the value of BTC ETFs remains volatile since they track the price of BTC. Apart from BTC ETFs, there are other crypto ETFs.