Crypto ETFs Explained: From the First Bitcoin ETF and Beyond

09-11-2023

Crypto ETFs Explained: From the First Bitcoin ETF and Beyond

Embark on a user-friendly exploration of Crypto ETFs with us, starting from square one: understanding what an ETF is and why it matters in the world of investing. We'll guide you through the basics of these convenient investment bundles, through the groundbreaking entry of Bitcoin into the mix, and onto the future possibilities of the crypto market. Whether you're new to finance or simply crypto-curious, our guide will navigate the pros and cons of these investment vehicles with you, demystifying the buzz around Crypto ETFs and helping you make sense of how they fit into the bigger picture of investment opportunities.

What is an Exchange Traded Fund (ETF)?

An ETF, or Exchange-Traded Fund, is a type of investment that can be bought and sold on the stock market, much like shares of a company. Unlike individual stocks that represent ownership in a single company, an ETF can track a diverse range of assets, including a basket of companies, a specific industry sector, commodities like gold, or even cryptocurrencies such as Bitcoin. For example, there are ETFs designed to mirror the performance of the S&P 500 index, which is composed of the 500 largest companies in the U.S. The value of these ETFs fluctuates with the collective performance of the included companies.

ETFs are favored by many investors for the diversification they offer, allowing for a broader exposure across multiple assets with a single purchase. Additionally, they are known for having lower fee structures compared to other types of investment funds.

What is a Bitcoin ETF?

A Bitcoin ETF is a fund that is designed to track the price of Bitcoin, allowing investors to gain exposure to its price movements without the need to own or store the cryptocurrency itself. There are two primary types of Bitcoin ETFs:

  • Bitcoin Futures ETF: This type does not hold actual Bitcoin. Instead, it invests in Bitcoin futures contracts, which are agreements to buy or sell Bitcoin at a future date for a predetermined price. These typically incur additional costs from rolling over futures contracts, and the ETF's price may not always precisely match Bitcoin's due to the futures basis.
  • Spot Bitcoin ETF: This type would directly purchase and hold Bitcoin. The term 'spot' refers to the current market price, meaning this ETF would aim to track the live price of Bitcoin. It offers investors real-time exposure to Bitcoin's price movements without the complexities of direct purchasing, storage, or management.

Pros and Cons of Buying Bitcoin ETFs

Pros:

  1. Ease of Access: Bitcoin ETFs are available through conventional investment platforms, such as a bank's investment section, offering a straightforward alternative to the more complex process of buying actual Bitcoin.
  2. No Need for Wallets: Investors can sidestep the technical challenges and security risks associated with setting up and managing cryptocurrency wallets.
  3. Regulation: As regulated entities, Bitcoin ETFs provide a layer of protection against fraud and mismanagement, facilitating financial transactions like cashing out in a more secure manner.

Cons:

  1. Management Fees: While convenient, Bitcoin ETFs incur management fees that can eat into potential profits, unlike direct ownership of Bitcoin.
  2. Not Actual Ownership: Holding a Bitcoin ETF is not the same as owning the actual cryptocurrency; you can't use it for transactions or engage with the crypto ecosystem directly.
  3. ETF Entity Risks: here are inherent risks if the ETF provider faces issues like bankruptcy, security breaches, or legal complications.

Present and Future of Bitcoin ETFs

Over the years, various asset management firms have tried to get Bitcoin ETFs approved by the SEC, the U.S. government oversight agency responsible for regulating the securities markets and protecting investors. As of November 2023, the SEC has only approved seven Bitcoin futures ETFs. The first, the ProShares Bitcoin Strategy ETF (BITO), was authorized in October 2021 and is listed on the New York Stock Exchange, with over $1 billion in assets.

Spot Bitcoin ETFs face more regulatory hurdles, and as of now, none have received approval. However, numerous proposals are in the review process. For instance, BlackRock, the world's largest asset manager with a successful track record of launching hundreds of ETFs, has submitted an application for a Spot Bitcoin ETF. The approval of such ETFs could potentially lead to a surge in Bitcoin investment from institutional investors, such as mutual or pension funds, because it would simplify their ability to allocate a portion of their portfolios into BTC.

Can Other Cryptocurrencies Have Dedicated ETFs as Well?

While Bitcoin and Ethereum have successfully entered the ETF market, as evidenced by the SEC's approval of the first Ethereum futures ETF on September 28, 2023, the emergence of ETFs tracking a wider array of cryptocurrencies doesn't seem imminent. This is largely due to the predominance of Bitcoin and Ethereum among the volatile cryptocurrencies market.

That being said, the concept of multi-cryptocurrency ETFs, akin to ETFs that represent entire industries such as agriculture, appears to be a natural evolution over time. There are numerous influential tokens in the crypto realm that have not only been pivotal in the ecosystem but have also experienced substantial price increases. An example is Arbitrum (ARB), which speeds up and reduces transactions costs for Ethereum blockchain, boasting a market capitalization exceeding $1 billion as of November 2023.

Despite this potential for innovation in cryptocurrency-based ETFs, the extensive and prolonged regulatory process that comes with the introduction of new financial instruments must be considered. Consequently, the market might not see a diverse crypto ETF materialize in the immediate future.

Givearn – crypto for you

In the interim, those seeking exposure to a broader cryptocurrency market can explore alternatives such as the Givearn app. Givearn presents a well-balanced crypto portfolio, featuring key tokens such as BTC, ETH, AVAX, ARB and others. With a composition that includes half stable cryptocurrencies, Givearn aims to provide a shield against severe market volatility while offering its users an attractive annual crypto reward of 5.2%.



Disclaimer and Risk Warning: This content is presented to you on an “as is” basis for general information and educational purposes only, without representation or warranty of any kind. It should not be construed as financial, legal or other professional advice. You should seek your own advice from appropriate professional advisors. Digital asset prices can be volatile. The value of your investment may go down or up and you may not get back the amount invested. You are solely responsible for your investment decisions and Givearn is not liable for any losses you may incur. For more information, see our Terms of Use.