BITCOIN ETFs: WHAT ARE THEY? AND WHAT ARE THEIR IMPLICATIONS?
After almost a decade of futile attempts at getting a Bitcoin ETF online, ProShares — the groundbreaking financial firm — achieved the seemingly impossible. It launched the first ever Bitcoin ETF on October 19, 2021, after scaling the arduous task of getting it approved by the Securities Exchange Commission. Well, it did not exactly get the permission to launch an outright Bitcoin ETF for public trading. Rather, its ETF has Bitcoin futures contracts as its underlying asset, rather than Bitcoin itself. Nevertheless, this is a milestone event in the history of cryptocurrencies as the first ever crypto-related ETF launch; with the expectations of many more to come in the not so distant future. But ‘nuff said. What exactly are they in the first place, and what are their consequences to the crypto market? I’ll tell you, no kidding. But an even better idea is to have you know what ETFs are, before any other adjoining dimensions to the subject.
An ETF (Exchange Traded Fund) is a security class that is not a real stock, but is tradeable on a stock exchange like a stock is. It is designed to track the movements of pretty much anything, ranging from a commodity, index, stocks, to specific investment strategies, or even a combination of diverse assets. It is assigned a marketable price, which reacts according to the state of the fund’s underlying asset, almost like a futures contract. It is a bit similar to mutual funds, but they differ a bit in structuring, and widely in management and trading times.
Relating the explanation of an ETF to the context of Bitcoin, it does not prove to be a complex task to decipher what a Bitcoin ETF is. It simply turns out to be an ETF that has Bitcoin as its underlying asset. It mimics the price of Bitcoin itself as a tradeable asset on not a cryptocurrency exchange, but rather, as an asset on the stock exchange. As stated in the introductory paragraph of this article, there have been several assets in the past to launch a Bitcoin-pegged ETF in one way or another. One of such attempts is the famous petition Winklevoss Bitcoin Trust, owned by Cameron and Tyler Winklevoss, which was turned down by the SEC in 2017. Another recent attempt was the plan devised by VanEck and SolidX to launch the VanEck SolidX Bitcoin Trust ETF — an ETF designed to track an index related to a group of bitcoin trading desks — in 2018, but did not scale through the SEC either.
“Collectively we will build something that may be better than other constructs currently making their way through the regulatory process. A properly constructed physically-backed bitcoin ETF will be designed to provide exposure to the price of bitcoin, and an insurance component will help protect shareholders against the operational risks of sourcing and holding bitcoin.” — Jan van Eck (VanEck CEO) to CoinDesk on the VanEck SolidX Bitcoin Trust ETF.
The idea was for the fund to cover a broader scope, and thus allay the SEC’s fears of an exchange traded fund existing for a largely unregulated and highly volatile asset. However, the magic touch did come all the way down in 2021 in the form of the Bitcoin Strategy Fund by ProShare, the forerunner for potentially tens of other Bitcoin and crypto-related ETFs in the next decade or so.
So what does this mean for Bitcoin, and the cryptocurrency space at large? First, the major connotation of a Bitcoin or cryptocurrency exchange traded fund would be that the cryptocurrency in question is basically available to be traded on the STOCK market. Imagine all that extra liquidity in the crypto space. Of course it’s not the crypto itself that is being traded, but a fund pegged to it would have the effect — if not more — of futures contracts on the trajectories of these crypto assets. Everyday investors would be able to diversify their portfolios to include Bitcoin and other crypto assets without actually having to go through the hassle of learning the technicalities of crypto trading.
Furthermore, a crypto or Bitcoin ETF would basically provide a means for investors to delve into the cryptocurrency space, while bypassing crypto exchanges and the hassle of wallet security et al. Furthermore, such ETFs opens up a whole new option for traders. It would be possible for traders to short-sell shares of the Bitcoin or crypto-ETF and profit off of it if they sense a downward movement in price coming.
Bitcoin ETFs remain largely uncharted territory, and will remain so if the SEC crackdown on the phenomenon. However, with trailblazing institutions like ProShare making headway, the proactive investor should brace himself; the future is about to assume a new dimension.
