What is a Bitcoin ETF and How it works?

Posted by John Kammy on January 12th, 2021

What is a Bitcoin ETF and How it works?

ETF is commonly known as an ‘exchange-traded fund’. It is a type of investment fund that tracks the performance of a particular asset, such as gold, oil, an index or stocks. 

One important thing about ETF is investors can trade holdings in an ETF to other market members over the stock exchange. 

A Bitcoin ETF will have the digital currency bitcoin as an asset or which tracks the performance of Bitcoin. It means the investor holding a bitcoin ETF is like indirectly purchasing Bitcoin but not the actual Bitcoin itself. This helps the investor to be free from the process of complex storage and security procedures. 

Moreover, the ETF will be closely following the price of bitcoin, as for the investor it should make little difference whether they are holding a bitcoin ETF or the actual digital currency.

The difference of buying a Bitcoin ETF v/s Bitcoin would be like investors purchasing a regulated investment channel that they can buy and sell on exchanges, instead of having to buy and securely store the actual bitcoin.

Why Invest in a Bitcoin ETF

Ok, you will be wondering now, bitcoin ETF follows and reflects the price of the actual cryptocurrency itself, then why to have an intermediate?  we can invest directly in bitcoin and trade. 

Let me explain to you, there are many reasons why you should use Bitcoin ETF. One of the main reason is already mentioned above, where investors don’t have to think about the security procedures regarding storing bitcoin and other cryptocurrencies. Also, there is no need to just depend on cryptocurrency exchanges; investors can buy and sell the ETF through other mediums like traditional exchanges and markets. 

Still, there are no investable bitcoin ETF on U.S. exchanges, but there are exchange-traded in which investors can invest like bitcoin financial products available on ‘European exchanges’ and an over-the-counter ‘Bitcoin Trust’.

XBT Provider -ETN

Investors can buy and sell XBT Provider Bitcoin ETNs (exchange-traded notes) on the Nasdaq Stockholm stock exchange in Euros or Swedish krona. 

They offer both retail and institutional investors to gain regulated exposure to bitcoin and Ether.

Investors need to pay a 2.5 percent annual fee for holding the Bitcoin One Trackers.

The Bitcoin Investment Trust

Grayscale Investments’ Bitcoin Investment Trust offers Investors to purchase shares in the OTC traded investment fund, that will hold bitcoin as an underlying asset on behalf of its investors.

Investors need to pay two percent annual fee for holding shares in the Bitcoin Investment Trust.

Blockchain ETFs

There are a number of blockchain ETFs that invest in blockchain stocks on behalf of their investors. Some of the blockchain ETFs in the market are the Amplify Transformational Data Sharing ETF (NYSEARCA: BLOK),  Reality Shares Nasdaq NexGen Economy ETF (NASDAQ: BLCN) and the Innovation Shares NextGen Protocol ETF (NYSEARCA: KOIN).

The Benefits of an ETF 

Bitcoin ETF will help several new types of investors with moneybags who were not able to invest in bitcoin in the past.

Moreover, the approval of Bitcoin ETF would boost the price of bitcoin to new highs as the institutional investors and the private investors who are not very familiar with the technology, would now be able to freely invest in the Bitcoin through the ETF.

Bitcoin ETFs Future

The CFTC regulated to list bitcoin futures contracts on the CME and CBOE, there is a possibility for bitcoin ETFs in the future. 

The SEC Commission did not approve the listing of the Winklevoss Bitcoin Trust in 2018, but SEC Commissioner ’Hester Peirce’,  believes the market is ready for a Bitcoin ETF and also she does not agree with other team members on the disapproval of the Bitcoin ETF.

The cryptocurrency community has hope that there will be a Bitcoin ETF on US exchanges in the near future. But, the SEC’s concern ‘that bitcoin is traded on exchanges which are mostly unregulated, leaving it vulnerable to fraud and manipulation’ is the main reason Bitcoin ETF not to be approved yet.

As the bitcoin market is growing and the transparency surrounding its trading activities is increasing and it is not very far to think that a Bitcoin ETF will be listed on a major U.S. stock exchange.