A Beginner’s Guide to Bitcoin ETFs
With trading and various options available for investments, Bitcoin ETFs have made their way to the trading world and they became available for investment in 2018. Supporters and investors find them a great way to invest and get full crypto access.
It is best to know what an ETF is, an ETF is an Exchange-Traded Fund that hit the trading market in 2018. It is considered an advancement in cryptocurrency and trade owners found it a useful option for bitcoin adoption. An ETF gives the owners a full perspective of the crypto world.
ETFs have an association with bitcoin but are not an innovative technology even though they came over two decades back and over USD 1 trillion ETFs have been produced in hundreds of numbers yearly. Now people have an idea about this ETF, but to know it more clearly and precisely one must know what non-crypto ETFs are and how investors and traders can use them.
As the name suggests Exchange, exchange-traded funds are a fund that is used to project the prices of resources, especially the ones that are underlying. The assets can be conventional ones like oil or gold or other than this, they can be bonds, equities, and or they can also be in the form of cryptocurrencies like bitcoins. If a trader has an ETF then he can have access to the assets that can be tracked and a share is issued that approves the ownership of the trader with the assets.
ETFs can be treated as conventional assets in a way that they both can be traded at normal stock exchange rates. The popularity of ETFs is fully dependent on their buying and selling perspective. A trader or an investor can buy an ETF and can trade it by themselves. This trading can include bitcoins as well as other assets too depending on the investor.
Working of ETF
If you are willing to invest in ETF, first know its management and how it is created, and know more about it so that you can get the true potential of ETF. Firstly you need to know how ETFs are made so here is a prompt explanation. The custodian who can be a management asset company, a bank, or even a cryptocurrency exchange, gathers the funds from the willing investors and then buy the shares which are directly linked to the assets.
The parties who are involved in the purchase of assets linked with ETFs are called the authorized parties. This is the process of ETF but in the case of bitcoins, the custodian purchases the spot in bitcoins by the use of the funds of investors.
These authorized parties then give the assets to the investors that are ETF providers and in exchange, they get a share of the fund. The value of this share is the same as that of the assets that they give to the ETF providers. In this way, the investors get to know the role of custodians and shareholders and they don’t become the actual owners of the assets or the bitcoins.
ETFs need to be approved before they become available for the stock exchanges. This approval is made by the regulatory bodies that are security in charge. ETFs that are based on bitcoins are approved in Europe and US but the regulators have made multiple attempts to approve them, this is because there are many concerns with their prices as sometimes they are on the rise, and sometimes no one can predict their value and the other reason is the core asset of cryptocurrency.
ETFs have been first rejected in 2013 and at that time many people believed that they will be approved in either 2019 or 2020. When the ETFs enter the exchanges they can be either sold or bought and they can bring profit or loss to the investor depending on their values. The ETFs do have management fees and as they are like stocks so their value can sometimes increase or decrease depending on the supply as well as the demand of ETFs.
Potential Advantages of ETFs
Investors and trade owners can use ETFs to use bitcoin in trading. ETF has many advantages as an investment model:
- Bitcoin ETFs are easier to spread awareness among people about blockchain technology and as it is an easy way so it prevents investors to get involved in risky sales and just investing simply in the form of bitcoin.
- The bitcoins are not restricted to professional investors and buyers, the buying and selling of bitcoin ETFs are easy and even an average trader and investor can buy them and sell them later with asset exchanges.
- EFTs are very popular in the market nowadays and they have gained much popularity among retail and professional buyers so their buying and selling have become a lot easier now.
- ETFs have a bright future so they can be used as short-term or long-term investments depending on the investors.
- ETFs are also a way of restoring the value of bitcoins. This is helpful especially if the money is coming from banks or other institutions and they are inoculated in the form of ETFs then they have a chance to become constant and stable in value.
- Bitcoin ETFs can benefit the investors in the pension and the mutual funds as their portfolio can be regulated with the addition of cryptocurrency.
Possible Drawbacks of ETFs
Bitcoin ETFs have gained much responsiveness from investors and trade owners in the past couple of years but they have some weaknesses as well:
- The approval of ETF still lags behind official approval so trading becomes a bit difficult as compared to other traditional assets like gold and oil.
- Certain regulatory bodies still falter to approve the bitcoin ETFs as they want them to be physically covered by the institutions or the parties that issue them. as bitcoin doesn’t exist as a physical entity this point becomes a major obstacle to its approval and then it is up to the financial institutions to decide whether they implement it in their custody solutions or use other ones that are given by other parties in the crypto world.
- Though bitcoins are trusted and governed by third parties it doesn’t matter how trusted they are, investors can have no idea about how they can be used in the future and what value they will have to the investors.
- ETFs are associated with the potential risk of manipulation as well as fraud and a custodian or an investor can do fraud with the other as it is a digital currency and not a genuine one so this is also a reason for its refusal to approval.
- If a large amount of bitcoin is removed from circulation then it can make the cryptocurrency scarce and it can also destabilize it so there is a fear that ETF can spike the price of bitcoin rather than bring it down.