Understanding Bitcoin ETF: Bitcoin-based Exchange-Traded Fund

Over the past few weeks, there has been an increase in the demand when it comes to Bitcoin-based Exchange-Traded Funds, popularly known as Bitcoin ETFs. Not only are corporate heavyweights trying to introduce Bitcoin ETFs in the markets, but even the investors have been voicing their demands for it quite actively. In the recent SEC Bitcoin ETF proposal, Hester Peirce was the only commissioner to vote in approval. However, before one chooses a side in this debate about ETFs, it is critical to know what an Exchange-Traded Fund is – and how a Bitcoin ETF is different from a regular ETF.

Understanding Exchange-Traded Funds

Exchange-Traded Funds (ETF) is not a new concept when it comes to the world of investments and trading. An ETF basically tracks the price of an asset or a collection of assets. These assets that an ETF tracks could be anything which carries a value and is tradable – this includes the likes of oil, stocks, and gold, etc.

In an ETF, the fund owns the underlying asset class from the money invested by the investors. The value of the owned asset is distributed among the investors in the form of shares. ETFs are different from other traditional forms of funds such as mutual funds as they are more liquid as well as available directly via stock exchanges.

Exchange-Traded Funds are becoming quite popular over the past few years – especially considering the fact that ETFs have low fees as well as a simple structure, they make it easier for investors to invest in certain asset classes without having to buy large quantities of the said asset class. Compared to mutual funds, which are also a popular investment method, ETFs offer the users with a higher liquidity as well as offer other benefits such as no lock-in period and no time restrictions.

Cryptocurrency-based ETFs are the flavor of the season. Over the past few months, there has been quite a debate going on when it comes to the legality of cryptocurrency-based Exchange-Traded Funds – more specifically, Bitcoin ETFs. Let us now take a closer look at Bitcoin ETFs and understand what makes them unique, as well as different from blockchain ETFs.

What is a Bitcoin ETF?

Understanding Bitcoin ETFs at this moment is a little complex. This is because of the fact that at the moment there are no Bitcoin ETFs which are legally approved by the Securities and Exchanges Commission of the US (SEC). The SEC is the legal watchdog body which monitors and approves all cryptocurrency and securities-related issues in the US markets. The SEC was recently requested by the Winklevoss twins to approve their upcoming Bitcoin ETFs. However, the SEC refused the Winklevoss twins, twice. There has been other ETF proposals and submissions as well.

A Bitcoin ETF, in concept, basically involves tracking Bitcoin Futures contracts. The fund owns these futures contracts – and tracks these prices. Based on the increase or decrease in the price of these contracts, the shareholders of the fund would benefit or lose out money. For using and tracking futures contracts, the funds require the permission of the Commodity Futures Trading Commission (CFTC) – which they have obtained – but the SEC continues to say no.

It is worth noting that Bitcoin ETFs are expected to invest in and track the price of Bitcoin Futures contracts and not the price of Bitcoin on various cryptocurrency exchanges. Moreover, it must also be known that Bitcoin ETFs actually own the cryptocurrencies (in the form of which they track.

Considering that there is an active demand from it and big names in the crypto-industry are pushing for the approval of Bitcoin ETFs – they may become a reality soon. For now, however, the only crypto-related Exchange-Traded Funds that are available are those of blockchain-based companies, known as ‘Blockchain ETFs’. In blockchain ETFs, the fund invests in shares of blockchain-based companies – and the profits and the losses made by the investors depend upon the performance of these companies.

In Conclusion

While Blockchain ETFs have been approved by the SEC and all other regulatory bodies, Bitcoin ETFs still have a long way to go. It is expected that with time, more pressure will be mounted on the SEC to ensure that they approve these cryptocurrency based Exchange-Traded Funds and it is only a matter of time before it becomes legal and official.

Editor’s Note: This article is a guest post by Khushboo Shah. For more information, you can contact her via email or follow her on LinkedIn.