A Quick Glimpse on Bitcoin ETFs

It was inevitable that two of the hottest investment sectors would collide. The idea of an ETF that follows bitcoin is the most acceptable option for this sort of link for cryptocurrency aficionados and investors. But there have been growing pains and issues with the initial bitcoin ETFs. The reason is that bitcoin, the world’s most valuable cryptocurrency, is mainly uncontrolled. The Securities and Exchange Commission (SEC) is also wary of releasing an ETF centered on the nascent and unproven bitcoin industry.

Before going into the pros and hazards of a bitcoin ETF, let’s define what it is and how it works. An ETF follows the performance of a particular asset or group of assets. ETFs enable investors to diversify their portfolios without owning the assets. ETFs are a more straightforward way to track profits and losses than purchasing and selling individual assets.

For example, emphasizing sustainability or equities representing the video game industry and associated firms enables investors to diversify their holdings. A bitcoin ETF tracks the price of the world’s most popular digital currency. This enables investors to acquire the ETF without having to trade bitcoin. Because the ETF isn’t directly invested in bitcoin, investors won’t have to worry about sophisticated storage and security processes.

Why bother employing an intermediary if a bitcoin ETF reflects the price of the cryptocurrency? Isn’t it easier to buy bitcoins? Several factors contribute to this.

When it comes to keeping bitcoins and other cryptocurrencies, investors don’t have to worry about the security processes that go with them. There is no need to deal with cryptocurrency exchanges in the process; investors can purchase and sell the ETF using stock exchanges and marketplaces.

Focusing on an ETF rather than bitcoin itself has another critical advantage. As an investment instrument, the ETF would allow investors to short sell the ETF if they predict the price of bitcoin would decrease in the future. To do this in the regular bitcoin market is not an option. On the other hand, despite their growing popularity, ETFs are much better understood in the investing community than cryptocurrencies.

Instead of studying the ins and outs of something that seems complicated, an investor wishing to become involved in digital currency may concentrate on trading a vehicle they are already familiar with.

Regulators have been slow to approve bitcoin ETFs. The SEC denied Cameron and Tyler Winklevoss’ proposal to form a bitcoin ETF dubbed the Winklevoss Bitcoin Trust in 2017. Bitcoin is traded on mostly uncontrolled exchanges, making it vulnerable to fraud and manipulation. The Winklevoss brothers persevered. On June 19, 2018, the USPTO granted them a patent for Winklevoss IP LLP’s exchange-traded products.

Not only have the Winklevosses wanted to be the first to create a bitcoin ETF successfully. The exchange that introduced bitcoin futures, Cboe Global Markets, anticipated the SEC would also approve digital currency ETFs. Cboe also bought Bats Global Markets, the exchange where the Winklevoss ETF would have been listed. A bitcoin-related ETF from VanEck and SolidX, a fintech business, was unveiled earlier this year. According to ETF Trends, this ETF would target institutional investors with a $200,000 share price. XBTC tracks an index of bitcoin trading desks. The notion is that by diversifying the ETF’s emphasis, XBTC may help ease the SEC’s worries about bitcoin-linked funds. Based on his belief that “together we can produce something better than those now going through the regulatory procedure,” Jan van Eck told CoinDesk. An adequately developed physically-backed bitcoin ETF will include an insurance component to safeguard shareholders from sourcing and keeping bitcoin operational risks.

The ProShares Bitcoin Strategy ETF, the world’s first bitcoin-related ETF, commenced trading on October 19, 2021. Bitcoin (BTCUSD) futures contracts on the Chicago Mercantile Exchange will be used to monitor the fund’s performance (CME).

In contrast to some of the other proposed bitcoin ETFs, ProShares’ ETF follows the future price of bitcoin rather than the current price. Meaning that funds like BITO that invest in bitcoin futures contracts might have quite different returns than bitcoin spot.

Funds that follow the values of volatile assets like bitcoin might lose money if longer-dated futures contracts have higher prices than short-term contracts.

Many investors and fund managers eagerly await the SEC’s approval of a bitcoin ETF directly linked to the currency.

According to a SEC source, regulators will help fix these concerns and keep client funds ‘onshore.’ according to a SEC source.

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