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What is a Bitcoin ETF?

February 21, 2021

Reading Time: 4 minutes

With Bitcoin breaking through the $45,000 ceiling, the cryptocurrency ecosystem’s total market cap has crossed $1 trillion in value. Today, Bitcoin itself has a whopping $882 million market cap, making it the largest and most popular cryptocurrency.

Bitcoin is quickly gaining fame as conglomerates invest billions of dollars into the asset. Considering how well Bitcoin is doing as an asset, everyone wants in. Typically, centralized exchanges such as Binance are the most conventional way to buy cryptocurrency; however, considering the technical aspects of holding Bitcoin, such as wallets or keeping hold of Bitcoin addresses and private keys, are inherently challenging to newcomers.

The risk of losing their assets and the time it takes to educate oneself about the medium’s technology and mechanisms often scare most investors. But what if there were a much easier choice to make an investment in Bitcoin? What if there was a convenient way to put money in Bitcoin like stocks. Well, there is! And it’s called a Bitcoin ETF, or Exchange Traded Fund.

In this article, we’ll be discussing how newcomers can utilize Bitcoin ETFs to invest in Bitcoin.

What is a Bitcoin ETF?

In simple terms, a Bitcoin ETF or Exchange Traded Fund is nothing other than an investment vehicle that characterizes the value of its underlying assets, in this case, Bitcoin. ETFs can be traded on traditional stock exchanges, and their value corresponds to the asset’s price.

ETFs were introduced in 1993, and they became reasonably popular among retail investors who wanted to invest in a collection of assets. If investors wanted to invest in the S&P 500, they could just do that by investing in its corresponding ETF.

Similarly, if investors want to invest in Bitcoin, they could invest in a Bitcoin ETF and use it to trade on traditional stock exchanges. Interestingly, Bitcoin ETFs monitor the most recent price of Bitcoin; therefore, investors don’t have to buy Bitcoin and go through the hassles of keeping it secure.

Why ETFs?

Bitcoin and cryptocurrency, in general, are still in their nascent stages. Compared to the millennia-old fiat currency market and the age-old gold market, Bitcoin and Cryptocurrencies are just a decade old. The nascency of the asset attributes to unsurmountable volatility, making them very risky for mainstream investors and traders.

Moreover, besides the decentralized and unregulated nature of the asset, owning Bitcoin requires in-depth knowledge of the technology such as storing and handling the Private Keys in hardware wallets, software wallets, or cold storage.

Additionally, buying bitcoin yourself often exposes investors to the potential risk of exchanges, many of which have been frequently hacked. Consequently, investors also have to find a way to file taxes for every purchase and sale of their assets, and if they don’t have knowledge of doing the majority of those things, they’d have to spend some time doing research, make a jump down the crypto rabbit hole and comprehend everything by themselves.

This often leads to newcomers feeling intimidated by the mechanisms and operations connected to Bitcoin hence making ETFs a perfect choice for them. With an ETF, investors can allow trusted parties to handle Bitcoin and not worry about learning or dealing with the asset.

What makes a Bitcoin ETF a significant investment?

Mainstream investors generally understand ETFs; however, they do not understand cryptocurrencies as much. Experts in the cryptosphere generally suggest that Bitcoin ETFs could potentially pump money into the cryptocurrency market. ETFs create a safe bright future for conventional and traditional investors. This makes it easier for them to make bets on the price of Bitcoin rather than investing in Bitcoin.

Bitcoin ETFs make it exceptionally easy to invest in Bitcoins. Since Bitcoin is easily the best performing asset of the decade, many people are likely to invest in Bitcoin ETFs. Bitcoin ETF is expected to deliver newer avenues to cryptocurrency adoption.

 Advantages of Bitcoin ETFs

Accessibility

Investing in a Bitcoin ETF enables investors with leverage to the price of Bitcoin without ever having to go through the hassles of dealing and buying Bitcoin.

Diversification

Investors can opt to hold a diverse set of assets.

Tax Efficiency

Given Bitcoin’s decentralized nature, taxing the asset can be very difficult. However, Bitcoin ETF trading on exchanges is regulated by authorities and eligible for tax efficiency.

Disadvantages of ETF

  1. High management Fees
  2. Inaccuracy
  3. Limits to trading

How to invest in Bitcoin ETF?

It goes without saying that in the United States there are no Bitcoin ETFs available for trade thanks to the ban legislated by the SEC, there are exchanges with Bitcoin ETFs. The Bermuda Stock Exchange has a Bitcoin ETF managed by Hashdex, a Brazilian fund manager partnered with NASDAQ.

Moreover, the Toronto Stock Exchange and Gibraltar Stock Exchange have also listed Bitcoin ETFs. Interestingly, the only way to invest in Bitcoin ETFs in the US is to invest in Grayscale Investment trust, run by Grayscale, a cryptocurrency investment fund. This trust is essentially a large sum of money with customer’s investments.

It is important to note that Grayscale is not a pure Bitcoin ETF since it characterizes shares in the investors’ trust. However, the trust is decadent of Bitcoin’s current price, and investors can buy shares that represent investors’ purchase of Bitcoin and trade them on the stock exchange.

Conclusion

Since its introduction a decade ago, Bitcoin has become the most popular asset among investors. With support from respectable entrepreneurs, conglomerates, and a strong community, Bitcoin has soared in value. Seems like that in near future, the SEC lists Bitcoin ETFs in the United States. ETFs are the most convenient way to go for upcoming investors who are eerie about the asset.

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