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What are bitcoin ETFs?
Before understanding the bitcoin ETF, we need to understand first what are ETFs. ETFs stand for exchange-traded funds which are traded on the stock exchange and represent a basket of assets or index funds. For example, an SPDR S&P 500 ETF (SPY) is an ETF that follows the performance of the S&P 500 index. The S&P 500 index represents the 500 companies listed in the US. An investor who buys this ETF will experience a similar performance to the S&P 500 index.
Understanding Bitcoin
Bitcoin can be referred to as a digital currency that does not have any physical existence, however, it can be used like a normal currency for any financial transaction (subject to acceptability). The bitcoin is traded on the cryptocurrency exchange and its value fluctuates like any other asset class depending on various factors.
The investment or trading in bitcoin has grown rapidly in recent years and many institutions and investors either are already investing in bitcoin or potentially looking to invest in this asset class.
To cater to the needs of different investors who are not that willing to directly invest in cryptocurrency, the Bitcoin ETF has come into the picture.
Bitcoin ETFs
Like any other ETFs, Bitcoin ETFs are also traded on the normal market exchange instead of cryptocurrency exchanges. It tracks the price of the bitcoin and performs similarly. Investors benefit from the upward movement of bitcoin’s price and losses if the price of the bitcoin goes down. The ETFs are for investors who do not wish to invest in the bitcoin directly and rather want a regulated market to safeguard their interest from the uncertainty of an unregulated market.
Advantages of Bitcoin ETFs
1. Diversification: When a new asset class is introduced, the first benefit it brings to the investor is diversification. Investors may have invested in many asset classes, and a new asset class like Bitcoin ETF will diversify the portfolio.
2. Convenience: Investing in bitcoin ETFs is more convenient than investing in direct bitcoins. If an investor wants to invest directly in Bitcoin, he or she will be able to do it from a cryptocurrency exchange only. However, bitcoin ETFs can be traded through traditional exchange like trading in any other stocks or asset class.
3. Regulated environment: Direct investment in bitcoin is not regulated by any agency as of now. Therefore, there may be several uncertainties in investing in bitcoins. However, bitcoin ETFs remove this uncertainty as it provides a regulated environment. These are regulated like other ETFs on the exchange.
Disadvantage of Bitcoin ETFs
1. Lack of ownership: one of the major disadvantages of ETF trading is that investors do not have ownership of the asset class. Similarly, in the case of bitcoin ETFs, the investors can play the movement of the bitcoin’s price, however, they do not have ownership of bitcoins.
2. Use as a currency: bitcoin is a digital currency and can be used to trade other asset classes. For example, a bitcoin can be used to purchase gold, silver, etc. however, bitcoin ETF cannot be used for such purpose.
3. Management fee: All the ETFs trading are subject to the management fee that the AMC charges for their services. The same applies to the Bitcoin ETF. A certain amount of management fee may be required to be paid by the investors to trade bitcoin ETFs.
BlackRock’s bitcoin
BlackRock, the world’s largest AMC applied for the spot bitcoin ETF on 15 June 2023 to SEC. On 10 January 2024, BlackRock got the approval for the same. The symbol of BlackRock’s spot ETF is IBIT (iShare Bitcoin Trust) which is traded on NASDAQ. It started getting traded on 12 January 2024 and in its first week, it reached the $1 billion mark as AUM (Asset Under Management).
How does BlackRock’s spot ETF work?
It is in the news that CME CF Bitcoin reference rates are to be used by BlackRock to follow Bitcoin’s price. CME collects information on cryptocurrency from different cryptocurrency exchanges around the globe. BlackRock’s ETF will work on the spot ETF framework. There are other funds as well that work on the future ETF framework.
Spot ETFs are different from future ETFs in the sense that Future-based ETF invests in future derivatives and their price is affected by the related derivative contracts. On the other hand, the spot bitcoin ETF will derive its price from the actual spot price of bitcoin.
BlackRock’s spot ETFs are traded on the NASDAQ. An investor who wishes to invest in Bitcoin ETF will have to open an account with a broker who can provide the investor access to the NASDAQ exchange. Along with other listed securities on NASDAQ, the investor can also invest in BlackRock’s ETF. However, the investor should do their due diligence and be aware of each type of risk before investing in Bitcoin ETF or other asset classes.
Apart from BlackRock’s bitcoin ETF, there are other ETFs as well which are being traded. Some of the examples of bitcoin ETFs are as follows:
ETF Name Symbol
iShares Bitcoin Trust IBIT
Bitwise Bitcoin ETF BITB
Ark 21Shares Bitcoin ETF ARKB
VanEck Bitcoin Trust HODL
Fidelity Wise Origin Bitcoin Fund FBTC
Franklin Templeton Digital Holdings Trust EZBC
WisdomTree Bitcoin Fund BTCW
Invesco Galaxy Bitcoin ETF BTCO
Valkyrie Bitcoin Fund BRRR
Grayscale Bitcoin Trust GBTC
Valkyrie Bitcoin Miners ETF WGMI
VanEck Bitcoin Strategy ETF XBTF
Disclaimer
The information provided in this article is just for educational purpose. Please do not take it as an advice or recommendation to invest in any of the mentioned security. Please consult your financial advisor and do your own research before investing. The author is not a licensed financial advisor, and readers are encouraged to consult with a qualified professional for advice regarding their individual financial situation. All investment and financial decisions involve risk, and readers are solely responsible for their own actions.
While every effort is made to ensure the accuracy and completeness of the information provided, CapiNomics makes no representations or warranties of any kind, express or implied, about the reliability, suitability, or availability of the information, products, or services contained on this post.
CapiNomics is not responsible for any errors, omissions, or inaccuracies in the content or for any actions taken based on the information provided.
