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April 7, 2019

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Bitcoin ETFs: The Full Guide

Cryptocurrencies are considered highly unstable. Whereas you may wake up with a fortune one day, you never know what happens the next day. For this reason, wary investors may hesitate in venturing into cryptocurrency trading. Exchange-Traded Funds (ETFs) are a perfect solution. They allow investors to try out trading cryptocurrencies without buying them directly.

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How do Exchange-Traded Funds (ETF) work?

Generally, ETFs work much like stocks on an exchange. Anyone qualified as a trader can carry out transactions in an ETF to other market participants over a stock exchange.

They are considered passive financial instruments tied to a particular index. Therefore, their performance is based on how the underlying asset performs in the market.

An ETF is tied to the price of an index rather than a commodity. In the case of a Bitcoin ETF, the digital token Bitcoin is the underlying asset.

What is a Bitcoin ETF?

It can be defined as a special type of financial instruments backed by the price of Bitcoin, which can be sold like stocks. A Bitcoin ETF could either consist of a portfolio of different cryptocurrencies or solely be tied to the Bitcoin price.

This simply means that a trader is able to hold Bitcoin ETF in a portfolio instead of actual coins. Therefore, the main distinction between owning a Bitcoin and Bitcoin ETFs would be that with the latter you don’t need to worry about security or storage of Bitcoins. The ETF is only tied to the Bitcoin price, not the asset itself. You get to own some money in the market whose value is dictated by the price of Bitcoin at a particular time.

Normally to deal with the issue of instability, traders who own cryptocurrencies have to set up a digital wallet to store and safely keep their investment. With ETFs, you don’t need to do that as they are highly-regulated and secure. They are especially useful to traders who are only interested in the profits and losses Bitcoins make or those who do not have a clear idea of how it works and are afraid of their volatility. ETFs enable such traders to engage in cryptocurrency trading more confidently.

Benefits of Bitcoin ETFs

In comparison to cryptocurrencies, ETFs are:

Highly-Regulated

ETFs are put under greater scrutiny both by regulators and investors. Investors can only put their money into Bitcoin through regulated brokers. This ensures that ETFs are insured against thieves and hackers who tend to take advantage of gullible traders.

Low Costs

ETFs are more tax-efficient than cryptocurrencies. In addition, the costs incurred when purchasing and utilizing them are quite pocket-friendly. They are lower since they are meant to be passive index-tracking funds.

No Minimum Investment

Most exchanges set a given number of Bitcoins which you have to own in order to transact using the cryptocurrency. With Bitcoin ETFs, you are allowed to hold any amount you wish, no matter how little. This factor has made it attractive and affordable even to common investors.

Simple Process

ETFs are easier to manage. Traders do not have to go through the hassles of acquiring and managing digital wallets so as to prevent a Bitcoin theft.

It is also a great opportunity for traders who intend to invest long-term in a less complicated venture. ETF allows them to speculate on the price of Bitcoin and enjoy its benefits without having to master the complexities involved in using the technology.

Secure

The responsibility of keeping the Bitcoin investment secure lies with the entity offering the ETFs, hence, traders do not have to worry about hackers trying to steal their Bitcoin holdings. If one is afraid to put all their money in an unstable cryptocurrency coin, they can instead opt to hold it in the form of Bitcoin ETFs. These allow standard trading of Bitcoin in known exchanges.

Short-Sell Option

If traders speculate a future drop in the price of Bitcoin, ETF allows them to short-sell their investment and hedge themselves from risk. This feature is especially beneficial to experienced traders who are well-versed with cryptocurrency market trends. It helps them not only protect their investment but also earn profits if they manage to sell their Bitcoin ETF at a price higher than they bought them for.

Hurdles for Bitcoin ETFs

The main stumbling block to ETFs is the Securities and Exchange Commission (SEC). This is a regulatory commission set in place to dictate the operations of financial instruments which commonly involve investing money and their expected profitability relies on what others do. Since ETFs meet all these requirements, they are under the jurisdiction of SEC.

Reportedly, the commission has prohibited quite a number of ETFs from getting into the market. It has especially been stricter within the United States where, in a 2018 court ruling, it prevented two Bitcoin ETFs from trading on the New York Stock exchange.

The issue of whether to engage in fund innovation and cryptocurrency-related holdings has been on debate for quite some time so far. According to the commission, allowing the operation of the barred ETFs would encourage fraud and manipulation within the larger Bitcoin market. This makes sense considering that though Bitcoin remains the largest cryptocurrency worldwide by market cap, the cryptocurrency lacks clear regulation. Thus, the commission is hesitant in allowing an ETF based on the cryptocurrency penetrate the market.

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Despite the rulings, there is still some hope for ETFs as the commission later announced a stay for further review of its decision.

In addition, though investors do not have to worry about securing Bitcoins in a digital wallet, the value of their investment is still determined by how Bitcoins perform in the market. In view of that, on its own, Bitcoin is characterized by the following:

  • Highly-speculative and volatile in nature.
  • Not regulated by any central authority.
  • A venture whose transactions are irrevocable, even if proof of theft is provided.
  • Has no specific clearinghouse or depository where Bitcoins are safely stored.
  • Exposed to the general market and liquidity risk.
  • Investing in any type of Bitcoin is considered a risky venture. Such negatives will also be felt by a Bitcoin ETF eventually.

Interested in Investing in Bitcoin ETFs?

Based in the US? Sorry, Bitcoin ETFs are currently unavailable on exchanges within the region. A recent application (February 19, 2019) was filed by Bitwise seeking to have SEC change its act and lift its ban on listing Bitcoin exchange-traded funds. The SEC delayed its resolution and is now expected to deliver its final decision by May 16, 2019.

In the meantime, traders within the US and other parts of the world can acquire ETFs through some European exchanges or over-the-counter Trust. Below are some exchanges which approve Bitcoin ETF.

1. XBT Provider

The XBT exchange provides Bitcoin ETNs which are available for sale on the

Nasdaq Stockholm stock exchange
. You can either buy or sell them in the euro or Swedish krona. Traders incur a 2.5 percentage fee annual management fee charged for holding one Tracker.

2. The Bitcoin Investment Trust

The exchange provides traders with the opportunity to buy shares in over-the-counter investment traded funds which are tied to Bitcoin as their underlying asset. Traders get to the part with a 2-percent annual management fee for holding shares in the Trust.

3. Blockchain ETFs

There are some Blockchain ETFs which purchase and sell block stocks on behalf of the traders who invest in them. Such blockchains use their expert judgment to gauge which stocks are profitable and more stable before engaging them. Examples of such Blockchain ETFs include Reality Shares Nasdaq NextGEn Economy ETF and Amplify Transformational Data Sharing ETF.

Conclusion

Since ETFs were launched, investments placed on them have impressively grown with time. This is mainly attributed to its tradeable instruments placed within the reach of common investors thus ensuring popularity.

Though the market is still yet to mature and fully embrace the use of Bitcoin ETFs, there is a silver lining as more features are continually being developed. In the long run, ETFs are predicted to get more recognized and accepted.

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