The Mystery Behind Bitcoin ETFs

Bitcoin ETFs are all the craze these days. So, what do we know about them?

Before we learn about bitcoin ETFs, you can read our detailed article on ETFs to get an idea about how they work. If you are already a pro on the subject, then read on! Now coming to Bitcoin ETFs, they are exchange-traded funds that track the value of Bitcoin and trade on traditional market exchanges rather than cryptocurrency exchanges.

The price of a share of one would roughly track the price of Bitcoin, which provides the exposure to Bitcoin without having to buy cryptocurrency directly, understand how it works, or work out how to store it. Apart from that, you can trade it on publicly traded stock markets, alongside shares in the companies that run companies such as Facebook or Pizza Hut.

Investing in a bitcoin ETF offers leverage to the price of bitcoin without having to learn about how bitcoin works, having to sign up for a cryptocurrency exchange and taking on the risks of owning bitcoin directly.

Another thing is that a Bitcoin ETF wouldn’t consist only of Bitcoin. For e.g.) A bitcoin ETF would consist of bitcoin, Apple shares, Facebook shares and more. This offers an opportunity to investors to reduce risk and diversify their portfolio.

There are a couple of problems that come with Bitcoin ETFs, including the charging of management fees. Apart from that, there will also be an inaccuracy in the reflection of the bitcoin prices to that of the ETF. For e.g.) Just because the price of bitcoin rallies 30%, it may not accurately reflect in the value of the ETF because of its other holdings. Also, in a Bitcoin ETF, you would not be eligible to trade for other cryptos like how you can do it in a cryptocurrency exchange.

So, Bitcoin ETFs have their own pros and cons. But here is the big question — We know for a fact that cryptocurrencies are not regulated by any authorities, so what about Bitcoin ETFs? The US Securities and Exchange Commission has blocked several proposals for Bitcoin ETF as the Bitcoin market is easily manipulated and its cryptocurrency exchanges are unregulated.

Where the U.S is worried, Canada is not as the latter has approved two bitcoin ETFs in February. Just one month after the launch, the first ever Bitcoin ETF called the Purpose Bitcoin ETF has touched the $1 billion mark in assets under management. That’s a huge amount!

If you think Canada is the frontrunner on the whole Bitcoin ETF episode, then you should know about Europe. In Europe, several ETPs exist that behave in almost exactly the same way, the biggest of which has been trading for more than five years. An FT article writes, “…Europe has already approved 23 cryptocurrency ETFs, which had combined assets of $6.3bn at the end of February, according to ETFGI, a consultancy.”

Even though Bitcoin ETFs sound like a great product, it has its own risks. The highly unregulated crypto market causes worries to investors and regulators alike, but bitcoin ETFs have a huge potential. Although it might be a good thing for them to be legalized, regulators also have to be very cautious about how these ETFs will be designed and draw a detailed framework for their trading.

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