Bitcoin ETF – advantages and disadvantages
What is a Bitcoin ETF? What are the advantages and disadvantages of a Bitcoin ETF? What kind of Bitcoin ETFs exist?
Bitcoin ETFs are exchange-traded funds that track the value of bitcoin and are traded on traditional market exchanges, not on cryptocurrency exchanges. They allow you to invest in Bitcoin without experiencing the hassle associated with using the exchange of fiat money into cryptocurrency.
See also what brokers exist with cryptocurrency trading.
How does it work?
An ETF is an investment fund that tracks the price of an underlying asset or index. Today, ETFs are available for several assets and industries, from commodities to currencies.
The bitcoin ETF will work in the same way – the price of one share of the fund traded on the exchange will fluctuate depending on the price of bitcoin. If bitcoin is growing in price, the ETF is also growing, and vice versa. But instead of being traded on the cryptocurrency exchange, the Bitcoin ETF will be present on exchanges such as the NYSE or TSX.
Advantages of a Bitcoin ETF
- Convenience. The Bitcoin ETF makes it easier to invest in bitcoin. There is no need to understand how bitcoin works, register on the cryptocurrency exchange and take on the risks of direct ownership of bitcoins. For example, if bitcoins are stored in a wallet, and an investor forgets the password to the wallet, his bitcoins are lost forever.
- Diversification. An ETF can contain more than one asset. For example, a Bitcoin ETF can include bitcoins, Apple shares, Facebook shares and other assets, giving investors the opportunity to reduce risks and diversify their portfolio. Similarly, by trading on a regulated market exchange, the Bitcoin ETF will provide investors with the opportunity to diversify their existing stock portfolios.
- Tax efficiency. Given that bitcoin is unregulated and decentralized, most countries do not allow the purchase of cryptocurrencies. On the other hand, trade Bitcoin ETFs on traditional exchanges are likely to be regulated by the SEC and have the right to increase tax efficiency.
Disadvantages of Bitcoin ETFs
- Management fee. ETFs usually charge a fee for managing the fund. Consequently, owning a significant number of shares in a Bitcoin ETF over time can lead to high management fees.
- The inaccuracy of the ETF. Although ETFs track the price of the underlying asset, they may also have multiple holdings in an application to diversify the portfolio. This suggests that a 50% increase in the price of bitcoin may inaccurately affect the value of an exchange-traded fund due to its other assets.
- Restrictions on cryptocurrency trading. Bitcoin can be exchanged for other cryptocurrencies, such as Ethereum, Litecoin, XRP and others. The Bitcoin ETF will not have the right to trade other cryptocurrencies, since it is not a cryptocurrency, but simply an investment fund that tracks the price of bitcoins.
- Lack of ownership of bitcoins. Bitcoin serves as a hedging tool against central banks, fiat currencies and stocks. Being independent of central banks, bitcoin allows you to reduce the risks associated with the financial system. Bitcoin also protects users and investors by providing privacy through the blockchain. The Bitcoin ETF will be regulated by the state, which will eliminate these advantages.
What are the Bitcoin ETFs in 2024?
At the time of writing, no Bitcoin ETFs have been approved in the United States. This is largely due to the unregulated nature of bitcoins and the cryptocurrency market, which makes it easy to manipulate the price of bitcoin for investors with large assets. The US Securities and Exchange Commission (SEC) has blocked several offers for Bitcoin ETFs on the grounds that the market is not regulated.
However, current SEC Chairman Gary Gensler on August 3, 2024 year said that he sees the future for blockchain technologies, but at the same time, it is first necessary to strengthen regulation in the crypto space to protect the interests of investors. He understands all the advantages of creating a Bitcoin ETF compared to existing cryptocurrency investment products. However, for now, he is waiting for applications for ETFs, which are limited to bitcoin futures traded on the CME. Therefore, we can expect Bitcoin ETFs based on futures products in the near future.
At the same time, the first Bitcoin ETF appeared in the EU – Melanion Capital, a French investment company. Also in 2024, Bitcoin ETFs were registered in Canada and Brazil. All this suggests that in the near future, the Bitcoin ETF will compete with traditional investment in cryptocurrencies. In the meantime, we offer the most reliable cryptocurrency exchange Binance with a large selection of cryptocurrencies and low commissions.
Read also the article "The best cryptocurrencies of 2024".