What is a Bitcoin ETF?

Emirex Group | Jul 27, 2021 12:33:10 PM

A Bitcoin ETF is a way to trade BTC on the stock market. Bitcoin ETFs allow investors to gain exposure to the leading cryptocurrency without having to actually own it.

What Are Bitcoin ETFs?

Bitcoin ETFs are exchange-traded funds that follow Bitcoin's value and trade on regular market exchanges rather than cryptocurrency exchanges. They let investors invest in bitcoin without the bother of utilizing a cryptocurrency exchange, while also offering price leverage.

How it Works

An exchange-traded fund (ETF) is a type of investment vehicle that tracks the price of an underlying asset or index. ETFs are now accessible for a variety of assets and sectors, ranging from commodities to currencies.

A Bitcoin ETF would function similarly in that the price of one share of the exchange-traded fund would vary in tandem with the price of bitcoin. If the value of bitcoin rises, so will the ETF, and vice versa. However, rather than trading on a cryptocurrency exchange, the ETF would trade on a market exchange such as the NYSE or TSX.

Advantages of Bitcoin ETFs

1. Convenience

Investing in a bitcoin ETF gives you access to the price of bitcoin without having to learn how it works, join up for a cryptocurrency exchange, or take on the dangers of actually holding bitcoin. Bitcoins, for example, are stored in a wallet, and if an investor forgets the password to the wallet, their bitcoin is gone forever. A bitcoin ETF makes it easier to invest in bitcoin.

2. Diversification

An ETF can hold many assets at the same time. A Bitcoin ETF, for example, might include bitcoin, Apple stocks, Facebook stocks, and other assets, allowing investors to reduce risk and diversify their portfolios. A bitcoin ETF, similarly, would allow investors to diversify their current stock portfolios by trading on a regulated market exchange.

3. Tax efficiency

Since bitcoin is unregulated and decentralized, the bulk of the world's tax havens and pension funds do not permit bitcoin purchases. A bitcoin ETF trading on regular exchanges, on the other hand, would almost certainly be regulated by the SEC and qualify for tax breaks. 

Disadvantages of Bitcoin ETFs

1. Management fees

ETFs often impose management fees in exchange for the convenience they provide. As a result, buying a substantial number of shares in a bitcoin ETF may result in hefty management costs over time.

2. ETF inaccuracy

While ETFs track the price of one underlying asset, they can potentially hold numerous assets to diversify the portfolio. However, because of its other assets, a 50% increase in the price of bitcoin may not be fully represented in the value of the exchange-traded fund. As a result, while an ETF offers leverage to the price of bitcoin, it may or may not be an accurate tracker of its price.

3. Limits to cryptocurrency trading

Bitcoin may be exchanged for other cryptocurrencies such as Ethereum, Litecoin, and XRP, among others. Because it is not a cryptocurrency, but rather an investment fund that tracks the price of bitcoin, a bitcoin ETF would not be eligible to trade for other cryptocurrencies.

4. Lack of Bitcoin ownership

Bitcoin acts as a hedge against central banks, fiat currencies, and stocks. Bitcoin, by virtue of its independence from central banks, offers a means of mitigating financial system vulnerabilities. Bitcoin also protects users and investors by enabling them to maintain their anonymity via the bitcoin blockchain. These advantages would be lost if a bitcoin ETF was regulated by the government. 

Do Bitcoin ETFs Exist?

The only Bitcoin ETFs that exist are listed on the Toronto Stock Exchange and nowhere else. It is primarily due to bitcoin's and the cryptocurrency market's unregulated character, which makes the bitcoin market simple to manipulate by investors with huge holdings. Since the market is unregulated, the Securities and Exchange Commission (SEC) of the United States has denied many proposals for bitcoin ETFs.

While no bitcoin ETFs exist, there are publicly listed funds that invest in bitcoin. Shares in the funds reflect a pool of money invested in the cryptocurrency, as opposed to bitcoin ETFs, which directly purchase bitcoin. Investing in cryptocurrency and blockchain firms, which give leverage to the crypto market, is another method to acquire exposure to bitcoin without actually owning it. However, it’s so easy to hold bitcoin with the Emirex CEX and even easier to trade it. You have to look no further than emirex.com for all your crypto ventures.

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