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TL;DR
Bitcoin is solidifying itself as a legitimate investment asset that anyone can invest in. Well, technically not anyone, as some institutions and individuals can only participate in a highly regulated manner. Many think a Bitcoin ETF could fulfill this purpose.
Bitcoin ETFs already exist in Canada and the US, helping cryptocurrencies increase their mainstream adoption with investors. Let’s see what an ETF is and what it could mean for Bitcoin.
But what building blocks are still missing before Bitcoin can become a major asset in the global macroeconomic environment? One of these could be a regulated way for institutions and more traditional players to get exposure to it. According to some, the best way to do that could be through an ETF.
First, a bit of an overview. An ETF is an exchange-traded fund, meaning an investment fund that tracks the price of an underlying asset. ETFs exist across many different industries and asset classes. For example, gold ETFs have existed for decades, and they track the price of gold.
A Bitcoin ETF would work the same way – the price of the ETF would follow the price of Bitcoin.
ETFs are regulated financial products – as such, they trade on traditional markets like the NASDAQ or NYSE and not on a cryptocurrency exchange. This, however, might change in the future as the borders between traditional finance and the cryptocurrency industry continue to blur.
Well, Bitcoin isn’t the easiest asset to deal with. Custody, for example, can cause some serious headaches for a large institution. After all, Goldman Sachs won’t just plug a hardware wallet into a laptop and YOLO (transfer) $2B of Bitcoin on it. Large financial institutions don’t operate in the same way as individual investors, and they need a complex regulatory framework and financial plumbing to be able to participate in this space.
This is why an ETF can go a long way to bring adoption and expand the potential investor base. It can give price exposure for participants in the traditional markets without them having to worry about all the nitty-gritty of physically owning the coins.
Generally, when people talk about Bitcoin ETFs, they’re usually talking about ETFs on the US markets. However, ETFs exist in many different markets. For example, the first Bitcoin ETF was launched on the Canadian stock market. It’s called the Purpose Bitcoin ETF and trades on the Toronto Stock Exchange with the ticker BTCC.
Even so, most eyes were on US regulators and whether they would allow for a US Bitcoin ETF. Finally, in October 2021, the SEC accepted an application to list the ProShares Bitcoin Strategy ETF (BITO) on the New York Stock Exchange (NYSE).
Historically, most applications had been rejected due to volatility, the unregulated nature of the Bitcoin markets, and their apparent liability to market manipulation. While these issues may be true to some extent, it’s probably also true for many other financial markets that already have ETFs.
Much of the financial plumbing required for Bitcoin to be a legitimate macro asset class has been built in the last bear market. If MicroStrategy wanted to buy billions worth of Bitcoin just a few years ago, it probably would have been exceedingly difficult to do so. Now, however, both the infrastructure and the liquidity are there and ready to fulfill even such sizable investments.
This ongoing maturation of the Bitcoin markets likely turned the tides for the regulators and eventually gave way to the US Bitcoin ETF we see today.
Not all Bitcoin ETFs are actually backed up by BTC held in wallets, known as Bitcoin Physical ETFs. Many Bitcoin ETFs, like the BITO, use BTC futures contracts as their underlying asset.
The SEC has so far favored futures ETFs tied to the Chicago Mercantile Exchange’s (CME) Bitcoin futures, an already regulated financial security. A Bitcoin futures ETF uses the price of the CME’s Bitcoin Reference Rate (BRR), rather than the spot price. This means the only difference between a Bitcoin Physical ETF and a Bitcoin futures ETF is where their prices come from.
Is a Bitcoin ETF the right financial instrument for you to invest in Bitcoin? Well, if you’re an individual who wants to protect their savings against the melting value of fiat, you may be better off just buying Bitcoin.
With that said, there are advantages to investing in a Bitcoin ETF, so if those seem attractive to you, then an ETF can also be a good choice.
Bitcoin ETFs let investors in the traditional markets get exposure to Bitcoin in a regulated way. It can be a good way to bring more institutional adoption to cryptocurrency as an asset class. With the building blocks now having fallen into place in the US, we can only wait to see how much investors will expose their portfolios to BTC.
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