A Comprehensive Guide to Bitcoin ETFs: What are they, How do they Work, And Should You Invest?

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Bitcoin ETFs (Exchange Traded Funds) provide the opportunity for crypto investors to enjoy the best of both worlds – the crypto space and the flavor of traditional investment instruments. Learn about the most commonly asked questions: Is there a Bitcoin ETF, how Bitcoin ETF works, and if it is right for you.

Cryptocurrencies recently touched the $3 trillion mark for their market capitalization. However, retail investors who invest in traditional asset classes such as stocks, bonds, mutual funds, etc., remain skeptical of investing directly into digital currencies. Finally, these investors can breathe easily and shake hands with crypto-related investment vehicles as well. After 12 years of ups and downs, Bitcoin makes its debut on the New York Stock Exchange (NYSE) with Bitcoin ETFs. But, bitcoin ETF what is it? The Bitcoin Strategy ETF (BITO) from ProShares is officially the first ETF linked to a cryptocurrency, which in this case, is Bitcoin. It provides crypto investors with an opportunity to invest in crypto and earn returns legally and transparently. This article examines Bitcoin ETFs, how they work, and whether investing in them is right for you.

(Image source – Pixabay.com)

What is a Bitcoin ETF?

An ETF (Exchange-Traded Fund), as the name suggest, is an investment instrument that is publicly traded in the stock market based on the value of its underlying asset. So, Is there an ETF for Bitcoin? Yes, there is. A Bitcoin ETF is a traditional market exchange-traded fund that tracks the value of Bitcoin. With Bitcoin ETFs, crypto investors don’t need to go through the hassle of opening an account in a crypto exchange, buying a wallet, and safeguarding their cryptocurrencies. It does not involve a direct investment in Bitcoin but can be a futures contract tied to Bitcoin. Still, it is a marked improvement in the crypto space as it also offers a chance for retail investors to enter crypto investments easily.

What is the Difference Between Bitcoin and a Bitcoin ETF?

Bitcoin is a decentralized digital currency built upon peer-to-peer technology, is traded on cryptocurrency exchanges, and operates without a central bank or authority. On the other hand, Bitcoin ETFs are exchange-traded funds (ETFs) that are traded on traditional market exchanges rather than cryptocurrency exchanges and are used to track the market value of Bitcoin.

What Exactly Does a Bitcoin ETF Offer?

Investing in crypto is always seen as a complicated and highly risky process. However, investing in a Bitcoin ETF means even traditional investors can gain easy entry into the crypto world without much hassle. There are several reasons why Bitcoins ETFs are far better than investing in Bitcoin directly, and here is what the best Bitcoin ETF offers:

  • You can use your regular brokerage account to invest in Bitcoin ETFs: Firstly, investing in Bitcoin means you need to open an account in a crypto exchange, buy a wallet, and cautiously safeguard your crypto assets. With Bitcoin ETFs, you don’t need to open a new crypto account or even a traditional account. You can use your existing brokerage account for trading with Bitcoin ETFs.
  • You need not worry about losing your investments in instances such as exchange hacks: There have been several incidents where malicious actors compromised crypto exchanges, and investors lost all their bitcoin and other crypto investments. Traditional stock markets are almost free of such concerns. Several instances have also been reported about investors getting locked out of their crypto wallets for losing their passwords. Such incidents cannot affect Bitcoin ETFs. No more worrying about private key safety, crypto storage, or security, unlike in the case of online crypto-wallets.
  • You get access to an unregulated asset class through a regulated environment: Bitcoin ETFs open a new stream of investment for institutional investors. The success of Bitcoin ETFs has pushed several hedge funds and investment firms to apply for other Bitcoin ETFs like Bitwise, Fidelity, and SkyBridge. Online crypto exchanges are still not regulated, and a single bill or law can shut them down completely. With Bitcoin ETFs, you are trading with regulated investment methods.

Should You Invest in Bitcoin ETFs?

You must realize that Bitcoin ETFs are a derivative ETF and not a spot ETF. Secondly, many people don’t have enough knowledge about how futures contracts work. But if you know about contango and backwardation and how futures work, Bitcoin ETFs are better than spot ETFs. When compared to traditional stocks, Bitcoin is relatively new. Hence, institutional investors might find it hard to use historical data to estimate the asset’s future performance.

When you are only starting with investing in cryptocurrencies, it is recommended not to invest a significant portion of your investment portfolio in highly volatile coins. Instead, you can begin with derivative ETFs like a Bitcoin ETF.

If you are new to the crypto landscape, it would not be easy to understand the nuances concerning the functioning of online crypto exchanges, wallets, private keys, etc. But Bitcoin ETFs make it easy for traditional investors to test the waters with cryptocurrencies. You can buy the Bitcoin ETFs through some research with your existing brokerage account and need not be concerned about the storage or security of cryptocurrencies. According to Bloomberg, Bitcoin ETF is the fastest ETF to reach the $1 billion mark as it reached close to $1.2 billion turnover on its second day of trading. It is also the second heaviest traded debut ETF.

Are Bitcoins a Good Investment? And If Yes, What is the Best Bitcoin ETF?

Bitcoin and cryptocurrencies, in general, are known for is price volatility. When you buy and sell Bitcoins from an online crypto exchange, it means you directly invest in Bitcoin and take a chance with its price volatility. Historically bitcoin has generated exponential returns, and it has reached from $0.08 per coin in July 2010 to almost $60,000 in the year 2021. It is difficult to say what is the best Bitcoin ETF. Still, some of the popular Bitcoin ETFs are ProShares Bitcoin Strategy ETF (BITO),Purpose Bitcoin ETF (BTCC), Valkyrie Bitcoin Strategy ETF (BTF), VanEck Bitcoin Strategy ETF (XBTF), Amplify Transformational Data Sharing ETF (BLOK), etc.

Final Words

Bitcoin ETFs open a new stream of investment to a massive segment of traditional investors. This section of investors has a brokerage account and are pretty comfortable with stocks, commodities, futures, etc. They don’t have to go through the complications of creating a new account with an online crypto exchange, buying cryptocurrencies, and managing it. Thus, ETFs like BITO allow you to enjoy the best of both worlds.

References

  1. Dore, K. (2021, October 18). First bitcoin futures exchange-traded fund starts trading. What to know before adding it to your portfolio. CNBC.

https://www.cnbc.com/2021/10/18/first-bitcoin-futures-etf-starts-trading-tuesday-what-to-know-.html

  • Benson, A. & Rosen, A. (2021, November 4). Bitcoin ETFs: What to Know. NerdWallet.

https://www.nerdwallet.com/article/investing/bitcoin-etfs

  • Haar, R. (2021, October 29). New Bitcoin ETF Grows at Record Speed. Here’s What Investors Should Know. NextAdvisor with TIME.

https://time.com/nextadvisor/investing/cryptocurrency/bitcoin-etf-approved/

  • Royal, J. (2021, October 19). The First Bitcoin-Linked ETF Is Here: What To Know About Crypto Funds Before You Invest. Bankrate.

https://www.bankrate.com/investing/first-bitcoin-linked-futures-etf-begins-trading/

  • Mishra, N. (2021, September 30). Bitcoin ETFs: What Investors Should Know. Zacks.

https://www.zacks.com/stock/news/1803468/bitcoin-etfs-what-investors-should-know


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