Bitcoin ETF are designed to track the price of Bitcoin. That means when the price of Bitcoin in U.S. dollars goes up, a Bitcoin ETF trading on the stock exchange should also go up, and vice versa.
Bitcoin ETFs have a much narrower focus than most other exchange-traded funds, which started out with the aim of giving investors broad exposure to the stock market.
In this article, we’ll discuss the benefits and risks of investing in a Bitcoin ETF and the future of Bitcoin ETFs. But first, let’s break down the basics of Bitcoin and ETFs.
What Is Bitcoin?
Bitcoin was the very first cryptocurrency. It aims to be a decentralized financial network, meaning it isn’t backed by a central authority like a country or government in the way fiat currencies are. Cryptocurrencies are instead created through a network of computers that “mine” for Bitcoin.
Bitcoin is sometimes referred to as “digital gold.” That’s partly because it has a fixed supply limit of 21 million and requires physical resources (electricity and computing power) to create additional supply. Like gold, Bitcoin also functions among investors — particularly younger ones — as a store of value.
What Exactly Are ETFs?
An exchange-traded fund, or ETF for short, is a type of security that can be made up of many other assets, like stocks or bonds. ETFs often track an underlying index, but there are many ways ETFs can be structured to invest in any kind of asset.
It’s common for ETFs to focus on a group of stocks that have a common theme that binds them together, such as renewable energy, legal cannabis companies, or video-game and e-sports businesses. A cryptocurrency-focused ETF would be another example of a thematic ETF.
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Creation of Bitcoin ETFs
The invention of Bitcoin created a new asset class, and many different types of cryptocurrencies have sprung up in the years since. Investors and ETF providers have been eager to introduce this new asset class to the stock market through ETFs.
But while many have tried, the vast majority have failed. Cameron and Tyler Winklevoss–famed for their dispute with Mark Zuckerberg over Facebook–tried in 2013 with a proposal that was eventually rejected by regulators four years later.
ETFs of any kind must be approved by the Securities and Exchange Commission (SEC) before being listed on a U.S. stock exchange. And so far, the SEC has been very hesitant to grant most proposed Bitcoin ETFs the right to become tradable securities.
In May 2021, SEC Chair Gary Gensler further disappointed investors hopeful for a Bitcoin ETF approval by saying “there are many challenges and gaps for investor protection in [crypto] markets.”
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Existing Bitcoin Funds
An application by the crypto investment firm Grayscale was also rejected, and the company eventually went on to launch a fund in the over-the-counter market, meaning it’s not listed on a stock exchange. While there currently may not be any additional approved Bitcoin ETFs on the U.S. market, there are other ETFs out there that provide exposure to bitcoin-related securities such as stocks related to blockchain, the technology that underlies the bitcoin network. Bitcoin ETFs do exist on stock markets of other countries.
Benefits of Bitcoin ETFs
Here are some reasons why an investor might choose to invest in a Bitcoin ETF rather than the cryptocurrency itself.
Convenience & Ease
Buying a Bitcoin ETF requires little tech know-how beyond knowing how to use a computer, open a brokerage account, and place a buy order.
ETFs provide a seemingly easy way to profit from rising asset prices without having to actually own those assets. On the other hand, holding actual Bitcoin requires a somewhat advanced level of technical expertise.
Bitcoin can be confusing for less-than tech-savvy users. The process often involves setting up an account on a cryptocurrency exchange, most of which are largely unregulated. Buying an ETF negates the need for this step.
An option for owning Bitcoin directly would be holding coins on an exchange. Some cryptocurrency exchanges might be trustworthy, but some have also had a controversial history of being hacked, stolen from, or defrauded. Even reliable exchanges open investors up to risk.
Securely storing cryptocurrencies—for example, storing the private keys to a Bitcoin wallet—is most often done by using either a paper wallet that has the keys written in the form of a QR code and a long string of random characters, or by using an external piece of hardware called a hardware wallet.
Social media and cryptocurrency forums are rife with horror stories about users who sent coins to the wrong address, misplaced their backup passphrase, forgot their PIN number, or experienced other sad scenarios that created a world of hurt for investors.
Less Counterparty Risk
Counterparty risk arises whenever a third party holds onto something for someone else. In certain situations, the third party’s interests might run contrary to that of the investor’s assets that they hold.
Over the years, some service providers have sprung up promising to securely hold coins for users. This may or may not be a desirable or promising solution, but even if it were suitable in all cases, there would still be risk.
At best, an unforeseen event like a bankruptcy or market disruption could cause a business to withhold customer funds for a period of time, making them inaccessible when people might need those assets most.
Risks of Bitcoin ETFs
The risks of a Bitcoin ETF come from both the traditional investment world and the world of cryptocurrency markets. There are two considerations many investigators look at.
The volatility comes from the occasional wild swings experienced in the price of bitcoin against most other currencies. A Bitcoin ETF, which is intended to mimic the price action of bitcoin, should also experience similar price swings. This could scare investors that have a lower risk tolerance, enticing them to panic sell.
One risk that comes from holding an ETF of any kind involves its expense ratio. This number refers to the amount of money a fund’s management charges in exchange for providing the opportunity for investors to invest in their fund.
If a fund comes with an expense ratio of 2%, for example, the fund management would take $2 out of a $100 investment each year. This figure is usually calculated after profits have been factored in, cutting into investors’ gains. In other words, Bitcoin ETFs may be expensive for investors to hold.
Fraud or Manipulation
Regulators like Gensler have cited fraud and market manipulation as reasons for why they’re cautious about approving a Bitcoin ETF. A Bitcoin ETF would give investors exposure to the digital coin, but they would not actually hold the asset, exposing the risk of fraud.
For investors curious about the cryptocurrency market but not yet ready to take the plunge, a Bitcoin ETF may represent a more convenient, comfortable option. However, U.S. regulators haven’t approved a Bitcoin ETF because of concerns about the cryptocurrency’s volatility as well as the risk of fraud and manipulation.
If an investor is still eager to try their hand at buying cryptocurrencies, they can use SoFi Invest®, which offers Bitcoin and other digital currency exchanges on a secure platform. Investors can also trade 24/7 and monitor their cryptocurrency holdings alongside investments in stocks, ETFs, and fractional shares.
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