Since 2018 many companies working in banking and finance have tried to establish a Bitcoin ETF. Among them Van Eck and Bitwise who applied repeatedly in the USA. A few have succeeded with notable examples in Canada and France. Starting October 2021, Bitcoin ETFs are now allowed in the United States as well, surging a new BTC rally. But buying an ETF is not the same as buying and holding Bitcoin.
In today’s article, we are going to take a close look at what a Bitcoin ETF really is. And who these products are designed for, and why they are particularly attractive to this specific group of investors.
What is an ETF?
ETF is an abbreviation and stands for exchange-traded fund which is classified as a type of security that tracks the value of an index, a commodity or any other asset for that matter. An ETF can be traded like a stock. Typically, via a broker who allows to buy, sell and hold securities. Exchange-traded funds became quite popular in the last couple of years.
Unlike a mutual fund, an ETF simply tracks the value of an index or an asset. Therefore, an ETF is not needing complex management and as a result, an ETF is significantly cheaper in most cases. This saves a lot of money for investors. It makes it also possible for retail investors to invest in a variety of assets and get exposure to markets that would be otherwise unavailable to them.
One example is the MSCI World ETF. The MSCI World basically tracks the value of the biggest companies of industrialized nations. An investor could try to buy shares in each of these companies, but that would require a lot more capital and would cost more. Buying a MSCI World ETF simply means that an investor can participate in the market and his investment gets the same performance as the index of the world’s biggest companies combined.
Why did we have to wait for a Bitcoin ETF?
A Bitcoin ETF would basically be the same financial product as described above, but it would track the value of BTC. One of the biggest problems for regulators is the definition of the index price for Bitcoin. Many derivatives exchanges build their own price index for futures trading or perpetual swaps. But the stock market is heavily regulated and it is not that easy to define a reliable index price for Bitcoin.
This was or is perhaps one of the biggest issues for regulators. Especially the SEC had rejected several applications over the last three years because the Bitcoin market is not regulated as any other stock or commodity market.
But not all countries took that long to decide. In February 2021 the Ontario Securities Commission approved the Purpose Bitcoin ETF. Allowing it for the first time to participate in the market without holding Bitcoin and not trading a future or any other derivative.
Who is a Bitcoin ETF for?
As pointed out before, an ETF is a heavily regulated product. This is especially interesting to family offices and institutional investors who would like to get exposure to Bitcoin’s price development without having to invest in the asset itself for mid- and long-term investing.
Depending on the legal situation it might be even more complicated for these players to buy Bitcoin directly. It is easier for them and comes with low cost to invest in Bitcoin this way. But it has also a lot of downside potential depending on the specific terms of the ETF in question.
A synthetic ETF is only tracking the price index of BTC, but it is not holding actual Bitcoins in its wallet. In a worst-case scenario, an investor could not claim “physical” BTC from the fund. But there is also the option to go for physical replicating ETFs, meaning that these funds buy and hold the asset in order to track the price.
Both options come with a downside because they do not offer the same advantages of holding Bitcoin in your own wallet.
What is the advantage of holding BTC in your wallet?
One basic idea of Bitcoin is to replace financial institutions and be your own bank. You can transfer Bitcoin freely and use it for payments or simply hold it and speculate on its performance. You also can rest assured that you control your BTC because it is in your personal wallet.
Having access to the market even with small amounts of money might be something that many retail investors don’t mind because they are doing financially very well. But this is simply another aspect of Bitcoin. It is inclusive to those who have only a small income or even no bank account at all if you think of people living outside the EU and in developing countries.
This leads us to the next advantage. Holding Bitcoin means that you can convert it against any other crypto or Euros within the blink of an eye 24 hours per day, and trading 365 days per year. This is an access to the market that is unmatched by any product offered by stockbrokers who regularly close trading during nighttime or weekends. This offers a lot of opportunities to investors and day traders alike that would never occur in traditional trading in stock markets and particularly trading ETFs.