What is Bitcoin ETF and how does it work
The concept of Bitcoin ETF has been evaluated for many years. The US SEC is set to allow the trading of bitcoin ETF. In this article, I have discussed what is ETF and how does it work?
What is an ETF?
An Exchange-Traded Fund or ETF is a fund that tracks the price of an underlying asset or index. The unit of ETF are listed on the stock exchange, and the NAV of the mutual fund fluctuates as per the market movements. The ETFs can be purchased and sold through a registered broker of a recognized stock exchange. While the ETF is listed on a stock exchange, ETF cannot be traded like an open equity fund. When we buy units of ETF, we are investing in the assets that track the yield.
Following are the key advantages of investing in ETFs:
An investor can diversify their portfolio without actually owning the underlying asset
We can purchase one unit, as there are no minimum investment requirements.
The commission that is paid to the broker when buying or selling ETFs is the same as that paid for regular order.
ETF is comparable to a mutual fund that can be bought and sold at a cost that varies throughout the day.
Difference between ETF and Mutual Fund
ETFs can be traded on the exchanges. However, one can only purchase a unit of a Mutual Fund from a fund house.
ETFs generally do not have any minimum lock-in period. However, a Mutual Fund has minimum lock-in, and early redemption could attract penalties.
Also, MFs are actively managed by fund managers or professionals, while ETFs are passive investment options that track the performance of an index.
Bitcoin ETFs
In order to purchase BTC, one needs to open an account with a crypto exchange, and many people may not be aware of the process of investing in bitcoin through crypto exchanges. BTC ETF would make investing in bitcoin easier as it will be traded like shares and can be combined with other stocks listed on stock exchanges.
In order to create Bitcoin ETF, an asset management company needs to buy bitcoins coins from the market. The asset management company sets up a fund that represents the value of the crypto assets it holds and list the fund on the stock exchange for trading. If the value funds of coins increases, your value of the investment would also increase.
Considering that there are many advantages of BTC ETF, various attempts have been made to get an approval of BTC ETF. It is a complex process to get an approval of BTC ETF from SEC in USA as bitcoin is a highly volatile and decentralized currency.
Advantage of Bitcoin ETF
Following are the key advantages of BTC ETF:
The investor can easily invest in bitcoin without the complexity of buying these assets via a “traditional” crypto exchange.
BTC ETF will bring more liquidity as many risk-averse investors now enter into BTC ETF
BTC ETFs provide s level of diversification as the ETF be built to include both the crypto and traditional asset market.
ETFs are tax efficient as compared to norma bitcoin holding as the ETF revenue can be paid directly into various types of low-tax investment accounts.
ETFs are highly regulated; regulators can monitor and analyze their performance and protect against price manipulation within the ETF markets.
Crypto ETFs diversify crypto assets — one can invest in various crypto assets through a single investment. ETF fees are also generally lower than those of traditional managed funds.
The Disadvantages
BTC ETFs have disadvantages due to the inherent characteristics of ETFs, cryptocurrencies.
Cryptocurrencies are volatile, and it would have an impact on ETF pricing.
Most ETFs charge management fees. A fee of 1% fee can reduce the profitability of a fund. Due to this, it could be a possibility that a BTC ETF can diverge from the true value of BTC over time.
If the fund becomes insolvent, this will impact EFT investor, and they need to fight a legal battle.
Future Ahead
While there are short-term advantages or disadvantages of BTC ETF, approval of BTC ETF could be revolutionary for the crypto world. This will bring more transparency, visibility, and adoption of cryptocurrencies. Crypto ETF would result in easier access to crypto. Every milestone we’ve reached from now to mass adoption. While the future is promising but it is not free of problems or challenges.
Disclaimer: The content you are reading is for informational purposes only. Nothing contained in this article constitutes a solicitation or recommendation to buy or sell crypto-assets in this or in any other jurisdiction in which such solicitation could be unlawful under the laws of the country. Before using the services, please educate yourself to make informed decisions. Crypto assets are volatile. Carefully evaluate your goals and the financial risk you are willing to take. Please be aware that FutureFin does not provide financial, tax, or legal advice. Decisions to perform operations involving crypto-assets should be taken on your own or rely on the opinions of reliable and qualified experts.