A fully regulated Bitcoin ETF tradeable on US stock exchanges is widely considered to be one of the major stepping stones toward the broader recognition and adoption of Bitcoin and other cryptocurrencies.
Despite this, the launch of a regulated Bitcoin ETF has been less than straightforward, but progress has recently been made — reigniting expectations for a new wave of institutional adoption. Here, we take a look at exactly what Bitcoin ETFs are and why they’re often regarded as a magnet for large-scale investment into the cryptocurrency.
What are Bitcoin ETFs and How Do They Work?
An exchange traded fund, or ETF, is a type of security used to track an underlying asset, which can include single stocks, currencies, bonds, and more; or a package of multiple different items. They can even track entire sectors — allowing holders to easily gain exposure to an array of assets through a single investment product.
Similar to traditional stocks, ETFs are traded on stock exchanges, making them easily available to traditional investors and brokers. As a result, they are only available to buy and sell during trading hours, which varies from stock exchange to stock exchange. For example, the London stock exchange is open for trading for exactly 8 hours and 28 minutes each day — i.e. from 8 AM until 4:30 PM (with a 2-minute break at midday).
Like most speculative instruments, the price of an ETF will vary throughout the day as the value of the underlying asset/s changes.
In the case of a standard Bitcoin ETF, the fund owner would hold a certain amount of Bitcoin and use this as the underlying for the ETF. Users can then invest in a share of this ETF which would then increase or decrease in value as the value of the BTC backing it changes. As a result, if the ETF is backed by 100 BTC, then its Net Asset Value (NAV) is equivalent to the market value of 100 BTC.
That said, there are a number of reasons why the ETF might deviate from its NAV — trading at a premium or discount for a certain period of time.
Traders can speculate on the price action of Bitcoin by buying and selling these ETFs as a proxy for native Bitcoin. These can be used to speculate on the long or short side by buying or short-selling ETF units — the latter of which is difficult to achieve on current cryptocurrency markets.
Why It’s Important For Adoption
As we briefly touched on, Bitcoin ETFs represent a simple way to gain exposure to the market action of Bitcoin without needing to understand the technicalities of using and securely storing it.
These challenges have been some of the biggest roadblocks to Bitcoin adoption, as institutional investors, including family offices, VC funds, hedge funds, pension funds etc., often opt to steer clear of cryptocurrencies due to the perceived challenges associated with keeping them secure.
By eliminating the issues that surround the custody of Bitcoin, ETFs open BTC investments to more risk-averse traders.
Bitcoin ETFs are often regarded as one of the crucial stepping stones towards legitimizing Bitcoin and cryptocurrencies as a whole and making them more attractive to institutional investors who had, until now, been sitting on the fence due to a lack of regulatory clarity.
Since exchange traded funds are regulated products that are protected by the relevant financial authorities of the jurisdictions in which they trade, investors can be confident that they are investing and trading in something lawful and legitimate.
Beyond this, Bitcoin ETFs can also be a more tax-efficient way to earn a yield. Since many tax havens only offer tax breaks and low tax rates on regulated products, the institutions that are incorporated in these regions are generally restricted when it comes to speculating native digital assets. Likewise, it could also potentially catalyze a spike in adoption among retail investors, who will be able to include exposure to Bitcoin as part of their Roth IRAs and 401(k) retirement accounts.
Many speculators believe that the pent-up demand among institutional investors could be set to help fuel the further growth and adoption of digital assets — providing a vote of confidence and weight behind their utility and long-term potential.
Why Has Approval Taken So Long
Since plans for the first Bitcoin ETFs were proposed back in 2013 by the likes of Cameron and Tyler Winklevoss and later several other parties, the United States Securities and Exchange Commission (SEC) has been notoriously slow and defensive in its response to Bitcoin ETF submissions.
Largely over the last four years, the SEC has repeatedly extended the approval deadline for well over a dozen Bitcoin ETFs, and outright rejected most of these after months and sometimes years of deliberation.
Oftentimes, the SEC has cited the immaturity of the Bitcoin market as the reason for its rejections — arguing that because Bitcoin is largely traded on unregulated exchanges and has (had) relatively low trading volume — at least compared to many traditional markets — which the SEC argues leaves it vulnerable to market manipulation.
More recently, there have been a number of Bitcoin ETF proposals made by the likes of VanEck, Fidelity, One River Digital Asset Management, and more. These are all in various states of review and vary in the exact nature of the ETF — with some being pure-play ETFs backed by physical Bitcoin, others a mixture of BTC-related products, while some are Bitcoin futures ETFs.
Now, close to eight years since the proposal of the first Bitcoin ETF, the first has just been approved for trading in the US, and it’s a Bitcoin futures ETF. Though this isn’t quite the ETF Bitcoin purists were hoping for — given that it doesn’t actually track a fund holding real Bitcoin — it’s a step in the right direction and allows traditional investors to more easily speculate on Bitcoin through a regulated exchange-traded product.
The first Bitcoin ETF to successfully list on the New York Stock Exchange (NYSE) is ProShares’ BTC futures ETF, known as the ‘Bitcoin Strategy ETF’. As its name suggests, this is a futures ETF that allows traders to speculate on the direction of BTC’s price movements via CME’s Bitcoin Futures products, rather than on the value of BTC itself.
ProShares’ ETF represents a major step towards legitimizing Bitcoin and cryptocurrency as an asset class, and will act as the proving grounds for potentially more ambitious ETFs in the future, including a pure BTC-backed ETF like Greyscales rumored Bitcoin spot ETF — which would be backed by its 620,000 BTC Bitcoin trust.
About Master Ventures
Master Ventures is a blockchain-focused venture studio helping to build the next generation of blockchain-based Web 3.0 system innovations within the crypto industry. Launched in 2018 by Founder and CEO Kyle Chassé, the company’s ethos can best be summarized in the acronym #BeBOLD: Benevolent, Open, Love, Decentralized.
Master Ventures co-creates with entrepreneurs and businesses worldwide to turn the best ideas into innovative and disruptive products. They do this by investing as strategic partners through offering advisory services to the projects they believe in. To date, Master Ventures has invested in over 40 crypto projects, including the likes of Kraken, Coinbase, Bitfinex, Reef, DAO Maker, Mantra DAO, Thorchain, and Elrond.
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