What is a Bitcoin ETF?
ETF (exchange-traded fund) is the conversion of assets into investment vehicles based on certain indices. The ETF is publicly traded and is used to minimize risk. With the popularity of crypto assets, the number of Bitcoin ETFs has increased. So what exactly does an ETF mean and how does it affect crypto assets, especially Bitcoin?
Although ETFs began to develop in the early 90s, the first ETF trials took place on the S&P 500 in 1989. This trial did not go far enough, following the decision of the federal court in Chicago.
The “S&P 500 Trust ETF”, which is still traded today, is the first modern exchange-traded fund and was introduced in the USA in 1993. However, it took more than 15 years to reach the masses and become widespread.
The funds, which started to diversify with the increase in internet usage, increased from 102 in 2002 to 7100 in May 2020.
In the buying and selling of assets via ETF; If the asset appreciates, so will the ETF price, and likewise, if the asset loses value, the ETF price goes down. However, this fluctuation is less than the market value of the asset and therefore the risk is reduced.
What does the Bitcoin ETF provide?
Bitcoin and cryptocurrencies are defined as risky assets by many investors. Aside from the fact that its legal status is not clear, it is necessary to trust crypto money exchanges in order to own Bitcoin. Considering that there are frequent problems with local and global cryptocurrency exchanges, the investor rightly wants to protect himself. Accordingly, an investor who buys a Bitcoin ETF does not care whether the private key of his wallet belongs to him or not. Because the asset he actually bought acts as a kind of stock.
ETFs also offer diversification to investors. For example; An investor who buys a Bitcoin ETF can simultaneously buy the stock of the Amazon firm. This is completely optional and facilitates diversification of investment.
Disadvantages of ETFs
Fund management fees are paid in order to receive these funds. These management fees, which we can compare to the concept of “gas fee” in cryptocurrencies, are quite high when taken in significant amounts.
The Bitcoin ETF has a protective role in price drops. However, when Bitcoin is bullish, the Bitcoin ETF may not increase at the same rate. In short, the investor who buys a Bitcoin ETF earns less than an investor who holds Bitcoin in his cold wallet or on the exchange.
The ETF that the investor buys is not a cryptocurrency. Therefore, the inability to exchange Bitcoin with other cryptocurrencies is also a disadvantage.
Bitcoin ETF development and applications
Bitcoin ETFs, dating back to 2013, were first submitted by the Winklevoss twins to the SEC (Security Exchange Commission) board in the US. However, neither the Winklevoss brothers’ proposal nor the ETFs subsequently filed with the SEC are approved. The first Bitcoin ETF listing in the world takes place in September 2020 in collaboration with the Brazil-based fund management company and NASDAQ. Thus, a Bitcoin ETF is offered to the public for the first time from the Bermuda exchange.
As of April 2021, at least seven Bitcoin ETF applications with high reputation and profile were made in the USA. Some of those; Fidelity, VanEck, SkyBridge Capital are Bitwise companies.
Approval: How does the process work?
There are currently some Bitcoin ETFs that can be traded around the world. It is traded on four different exchanges in Canada. It is also in Brazil. However, what is expected is a Bitcoin ETF approval in the US. In the US, ETFs are subject to approval by the Securities and Exchange Commission (SEC). The SEC can extend the review period up to 240 days from the day of filing before approving or rejecting a Bitcoin ETF application.Share this article