Do you wish to know What is Bitcoin ETF? How it works? What are the advantages of Bitcoin Exchange Traded Funds? Let’s take a sneak peek into the answers to all these queries.
What is a Bitcoin ETF?
Apart from the Price of Bitcoin being at an all-time high the investor’s enthusiasm is equally high related to the recent Bitcoin ETFs (Exchange Traded Funds). As you might already know, Bitcoin is the most popular and the largest cryptocurrency by market cap. Currently, the total market cap of Bitcoin is upwards of $1.15 trillion, making it the largest player in the cryptocurrency universe.
Earlier in order to invest in Bitcoin, investors only had the option to directly invest through an exchange. It also meant you had to hold the coins in an online or physical wallet. But now there is an additional investment instrument through which you can buy and hold Bitcoin without going through the trouble of storing it in an online wallet. The latest Bitcoin ETF enables you to purchase Bitcoins through a stockbroker and provides a more convenient way of storing them safely.
How does Bitcoin ETF work?
Before looking at how it worlds, let’s understand how an ETF Functions. An ETF or Exchange Traded Fund is a portfolio of assets that are managed by an experienced fund manager or professional.
In a Bitcoin ETF, an experienced professional shall buy and sell the equivalent quantity of Bitcoins as you place an order. An ETF mirrors the return of the underlying asset and provides similar returns in the short and long term. This means a Bitcoin ETF will provide the same returns as buying Bitcoin from any crypto exchange, minus the minimal expense fees.
If you want to invest in Bitcoin, you can directly purchase the equivalent amount of a Bitcoin ETF from the respective stock exchange. As soon as you buy the ETF, the asset manager purchases the equivalent amount of Bitcoin for you and reserves them. This makes the process very simple can convenient for an average investor.
This is also because investors don’t have to undergo the lengthy and complex process of adding funds to the wallet and purchasing cryptos through a crypto exchange.
How is Bitcoin ETF different from owning Bitcoins?
Currently, the question arises if a Bitcoin ETF mirrors the price and performance of Bitcoin, why not just purchase the asset directly?
To acknowledge the question in short, the primary benefit of purchasing a Bitcoin ETF is its simplicity. Investors who have a broking account can easily head to their terminal and place an order to buy the ETF. On the other hand, when you buy an ETF, you don’t actually own the cryptocurrencies directly. This means you don’t have to bother about its storage and safety.
Advantages of Bitcoin ETF
With the introduction of Bitcoin ETFs, let’s learn some of the prime advantages of investing in an ETF.
1. Convenience and Simplicity
Any investor possessing a Demat or brokerage account can invest in a Bitcoin ETF with a few clicks. As ETFs are listed on stock exchanges, buying and selling them is as simple as buying stocks or bonds. Purchasing Bitcoin ETFs is also convenient as you don’t need to have a separate account with a cryptocurrency exchange. Another added advantage of a Bitcoin ETF is that you can short sell Bitcoin which is not possible otherwise. You can benefit from this if you anticipate the price of Bitcoin can go down.
2. Provides Security
Owning a Bitcoin ETF is more secured when compared to managing the asset by yourself. If you own Bitcoin, you will have to manually transfer it to a physical wallet to store it offline. This is an additional hassle to ensure the safety of your coins. On top of this, the private key in a crypto wallet is an essential part which if misplaced can lead to permanent loss of the cryptocurrencies. Whereas in an ETF, you don’t have to bother about storing or the risks of online hacking, because you don’t own them directly. The fund manager bears the responsibility for the transactions and security of the cryptocurrencies.
3. Benefits of Regulations
Cryptocurrencies still lie in an unregulated area which makes them too risky for some investors. Whereas a Bitcoin ETF is regulated by the stock market regulator. All the complaints related to fraud and manipulation could be addressed to the regulator who would provide resolutions to the distressed investors. These benefits cannot be availed if you buy Bitcoin from a crypto exchange.
4. Ease of Taxation
As a Bitcoin ETF would be listed on stock exchanges all the transactions will be regulated by the market regulator. This makes the filing of taxes more transparent and easy. ETF transactions can be easily recorded, and the gain or loss can be calculated more easily. This will lead to better regulation of the asset, and the investors can also benefit from the taxation benefits such as ‘Tax-loss harvesting’, etc.
These were some of the advantages of investing in Bitcoin ETFs.
On the flip side to this, there are some disadvantages associated with investing in Bitcoin ETFs.
The primary drawback of investing in a Bitcoin ETF is that you will have to bear additional charges like management fees and expense ratio. ETFs also are not completely accurate, therefore, there would be slight tracking errors associated with the price.
In addition, there is a lack of diversification in cryptocurrencies. This means that you will be only limited to Bitcoin. You cannot purchase any other alt-coins like Ethereum, Cardano, Ripple, etc through ETFs.
Now considering all the major factors of a Bitcoin ETF, it can be stated that it is a good proposition for all investors who are willing to diversify in cryptocurrencies. ETFs provide better security as you don’t have to worry about online threats, scams, hacking, etc. ETFs are also regulated by a separate body which makes it easy to get your problems addressed.
As of now only a couple of Bitcoin Future ETFs have been introduced in the U.S. This means if you reside in any other country, you cannot buy Bitcoin ETFs as of this moment. But looking at the investor’s enthusiasm it is eminent that other countries will adapt to cryptocurrency ETF in the near future.
The adoption of Bitcoin ETFs will attract more investors who will be able to buy crypto-assets seamlessly which will also increase the overall volume and reduce the downside risks.
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