Have you ever thought about investing in Bitcoin but do not know where to start? Don’t worry because you are certainly not alone. In 2023, you can buy Bitcoin stocks, Bitcoin ETFs, Bitcoin futures, Bitcoin options, and of course, just buy Bitcoin itself.
Bitcoin is becoming a significant part of the mainstream financial industry and there is a push for traditional financial institutions to get involved. Over the past few years, major banks like Goldman Sachs and JPMorgan have started to offer cryptos to their clients. Other neobanks like SoFi, Ally, and Revolut all offer Bitcoin and crypto trading as well.
With so many options for investing in Bitcoin, why are people still so hesitant? For the vast majority of people, it is a lack of understanding of what Bitcoin is. Bitcoin gets lumped in with the thousands of other cryptocurrencies, many of which are viewed as scams or unregulated ponzis.
In this article, we will discuss the emergence of Bitcoin ETFs, what they are, and if you should consider them for your investment portfolio.
What are Bitcoin ETFs?
Bitcoin ETFs are funds that hold specific assets, like stocks or futures contracts, that trade on regulated exchanges. In terms of the everyday investor, these ETFs are one of the easiest ways to invest in Bitcoin. There is no need to sign up for an account with a centralized crypto exchange like Kraken or Coinbase. Instead, Bitcoin ETFs allow you to invest in Bitcoin from your online brokerage account.
Investing in Bitcoin can be daunting but with ETFs the process is simplified and streamlined. Not only is it easy to access, but it does not require the complicated storage of Bitcoin or concerns over security with centralized crypto exchanges. The first Bitcoin ETF in Canada was the Purpose Bitcoin ETF (BTCC.TO), which was listed on the TSX on February 28, 2021. Since then there have been dozens of others in Canada and the United States for investors to buy.
What are Bitcoin Futures ETFs?
One of the more popular ways to invest in Bitcoin is with futures contracts. These are derivative securities that allow investors to speculate on Bitcoin’s future price. Bitcoin futures ETFs allow investors to be invested in Bitcoin without ever owning the underlying asset.
As their name suggests, futures contracts are forward-looking assets that might not reflect the current price of Bitcoin. These are a great way for investors to be bullish or bearish on Bitcoin despite the current price action.
Bitcoin Futures ETFs are more accepted by regulators than Spot Bitcoin ETFs. The ETF provider does not need to own any spot Bitcoin to offer a Bitcoin Futures ETF. For regulating bodies like the SEC, the preference is to not need to own any Bitcoin because it opens up the asset to market manipulation.
When the futures contracts in the ETF expire, the ETF provider rolls them to a future date. Whether the future strike price is higher or lower, dictates the price action of the price of the ETF’s shares. This will often lead to the price of the ETF not accurately reflecting the spot price of Bitcoin. Thus, Bitcoin Futures ETFs aren’t a perfect way for people to invest in Bitcoin.
What are Spot Bitcoin ETFs?
Spot Bitcoin ETFs are funds that aim to track the price of BTC by holding the actual asset. Investors that buy shares of a Spot Bitcoin ETF are buying small shares of the Bitcoin that are held by the ETF provider. In this way, it more accurately tracks the supply and demand of Bitcoin and its impact on the price.
The benefit of Spot BTC ETFs is direct exposure to BTC without owning the asset. For Bitcoin enthusiasts, this might seem like blasphemy but for the everyday investor, it removes the complexities of storage and security. The more demand for the Spot Bitcoin ETF, the more likely the provider will need to purchase more Bitcoin. All of this demand will weigh on the fixed supply of 21 million BTC.
Will Spot Bitcoin ETFs be Approved?
This is the million-dollar question right now and the crypto world is waiting with bated breath. Earlier this year, major institutions like Blackrock, Fidelity, and WisdomTree all applied to offer these funds to investors. These funds will trade directly on US stock exchanges and be accessible to all investors if approved. One bullish catalyst will be the amount of BTC all of these institutions will buy to fund these ETFs. This will bring trillions of dollars to the Bitcoin market all at once and you can see why the price could soar.
Right now the ball is in the court of the SEC which is the regulating body of securities in the United States. The SEC has rejected these applications in the past and has already called for more surveillance details. This refers to what these institutions will do to prevent market manipulation which could harm investors. In response, several of these institutions have listed Coinbase as their surveillance-sharing partner.
Is this finally going to bring Spot Bitcoin ETFs to the US markets? Analysts are already saying that the SEC is running out of reasons to reject these applications. If Blackrock or Fidelity are approved, it will be a watershed moment for the crypto industry and will forever change the world of finance and investing.
The Bottom Line: The Future of Bitcoin ETFs
It is only a matter of time before Spot Bitcoin ETFs are approved in the US by regulators. This means that we are on the cusp of a new Bitcoin bull market and one that will take us into the next halving event in early 2024. Bitcoin ETFs are going to be the bridge that connects casual investors to the world of digital currencies. It will allow access to millions of new investors and take us one step closer to adopting Bitcoin as a world currency and store of value.
As always, do not use this article as investment advice. It is only an introduction to Bitcoin ETFs and an explanation of how they work. Do your own research and determine if Bitcoin ETFs are a good fit for your portfolio.