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The Debut of Bitcoin ETF: What it is and Why it Matters

The Bitcoin exchange-traded fund (ETF) is a big deal — many believe that it can unlock the floodgates to large investments by institutional investors. The Winklevoss brothers first filed for a Bitcoin exchange-traded fund around eight years back, which was turned down by the Securities and Exchange Commission (SEC) in 2017, so this has been a long time coming.

It’s been a long road to approval for the Bitcoin ETF, in part due to concerns regarding price volatility and the potential for price manipulation in the unregulated ecosystem of cryptocurrencies. Additionally, the SEC was hesitant to permit an ETF based on the untested cryptocurrency market. However, the anticipation ended on October 19 when the ProShares Bitcoin Strategy ETF hit the New York Stock Exchange (NYSE).

The ProShares Bitcoin Strategy ETF started trading on the NYSE under the ticker BITO. The first futures-based Bitcoin ETF, BITO debuted with the highest-ever first-day natural trading volume of $1 billion with a starting price of $40.88. According to TradingView, BITO closed the day at $41.94, with an increase of 4.8%.

What is a an ETF?

Exchange-traded funds (ETFs) are regulated financial products and can represent different types of assets, from individual commodities or stocks to the S&P 500. ETFs provide an alternative way to extract profits from the price trends of the underlying asset without actually owning it.

ETFs can be purchased or sold just like regular stock or mutual fund, but unlike a mutual fund, they tend to have a lower cost to enter the market. Also unlike mutual funds, their price fluctuates throughout the day, while you can only buy or sell mutual funds at the market close price.

Similarly, the Bitcoin ETF is a regulated financial product that represents the number one cryptocurrency, Bitcoin.

How does a Bitcoin ETF work?

While BITO is the first to market, we could see other crypto ETFs in the future. The Bitcoin ETF allows investors to gain exposure to Bitcoin without actually purchasing the cryptocurrency. It keeps track of Bitcoin’s price changes and can be traded on traditional exchanges like NYSE and TSX instead of cryptocurrency exchanges. Investors can buy and sell the shares of Bitcoin ETF during the trading hours of the day. In the case of ProShares ETF, the price of ETF is based on the futures contracts tied to the cryptocurrency.

Advantages of Bitcoin ETF

  • Convenience: When investors purchase a Bitcoin ETF, they can leverage the price of Bitcoin without having to learn about how the leading cryptocurrency works. They do not need to take the risks of owning Bitcoin directly. A Bitcoin ETF simplifies the process of investing in Bitcoin by eliminating the need for managing public and private keys of Bitcoin wallets. Investors with no technical knowledge can purchase Bitcoin ETFs and gain profits from the price changes.
  • Diversification: Any ETF can hold more than one asset. Investors can diversify their portfolios by minimizing the risks involved. Similarly, Bitcoin ETF allows investors to diversify their existing portfolios.
  • Tax efficiency: Cryptocurrencies along with Bitcoin are unregulated and decentralized. A majority of the tax havens and pension funds in the world do not allow Bitcoin purchases. However, a Bitcoin ETF trading on traditional exchanges would likely be regulated by the SEC and eligible for tax efficiency.

Disadvantages of Bitcoin ETF

  • Lack of Bitcoin ownership: Bitcoin acts as a hedge against central banks, equities, and fiat currencies. It paves the way to mitigate risks associated with the traditional financial system. The other benefits of Bitcoin, such as voting rights, high-level security, peer-to-peer transactions, and key holders’ rights, will be lost when investors use its ETFs.
  • Limited crypto trading: Bitcoin can be traded for other cryptocurrencies such as Ether, Ripple, Litecoin, and more. However, a Bitcoin ETF cannot be traded with other cryptocurrencies because it is just an investment fund that tracks the Bitcoin price.
  • Centralization of Bitcoin: Bitcoin ETFs go against one of the core principles of Bitcoin, decentralization. Bitcoin was designed to provide decentralization, but to purchase, hold, and secure a Bitcoin ETF, investors need to rely on centralized entities.
  • ETF inaccuracy: Though ETF tracks the price of an underlying asset, there might be inaccuracies as it can hold other assets. This means a 50% rise in Bitcoin’s price may not be accurately reflected in the exchange-traded fund’s value due to the other holdings. A Bitcoin ETF may or may not leverage the accurate price changes of Bitcoin.

Impact of Bitcoin ETFs on Bitcoin’s price

The price of Bitcoin has reached an all-time high value of $66,974 two days after the launch of ProShares Bitcoin Strategy ETF on NYSE. The latest increase in its price appears to be fueled by the successful debut of the Bitcoin ETF. The first day of the new fund on NYSE has hauled in more than $570 million of assets with around $1 billion trading volume making it one of the most successful launches of all time.

The leading cryptocurrency has recovered from more than six months of decline. According to CoinMarketCap, the Bitcoin price hovers at around $63,000 as of October. The previous all-time high value of Bitcoin $64,888 was recorded in mid-April, and more than half of its value was lost in the consecutive months. Several more Bitcoin futures-based ETFs may debut in the US in the coming few weeks, increasing the potential to gain exposure to the crypto market for the US crypto investors.

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