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What is a Bitcoin ETF?
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You have probably heard the term Bitcoin ETF discussed multiple times over the last few years. These unique exchange-traded funds (ETF) provide investors with more flexibility, protection, and security than traditional investments. An ETF is a fund that tracks the performance of an asset or group of assets. As such, ETFs can be a great way to increase profits and mitigate risks.
What is an ETF?
An ETF is an investment tool that includes a basket of securities. ETFs are very popular in the market. Currently, they are used for a myriad of different investment strategies. These strategies include income generation, speculation, price increases, and to offset risk in an investor’s portfolio.
Importantly, an ETF can include all types of investments. It’s common to see an ETF that offers a selection of stocks, commodities, or bonds. In this way, ETFs are very similar to mutual funds. In many instances, an ETF will contain stocks from various companies all related to a certain sector, such as banking or the defense industry.
Also, there are ETFs that are far more inclusive. These investments could contain hundreds or thousands of stocks across various industries. Additionally, they can include both US and international companies depending on the ETF specifics. Consequently, ETFs are hugely popular globally.
Unlike mutual funds, ETFs are traded daily. Hence their name “Exchange Traded Funds.” As such, these investments experience price fluctuations depending on their composition and market activity. Their price fluctuations can be more subtle because the fund is an average of all the investments it contains.
One of the main advantages of an ETF is that it allows investors to save big time on broker fees and expense ratios. Additionally, your average ETF is far more liquid than mutual funds or other investment vehicles in the market. This added liquidity equates to more options for investors in these funds.
Types of ETFs
- Bond ETF
- Industry ETF
- Commodity ETF
- Currency ETF
- Inverse ETF
What is a Bitcoin ETF?
The Bitcoin ETF concept is long-awaited in the industry. Notably, multiple firms submitted requests to the SEC over the last year. Unfortunately, none has received approval as of yet. To date, the SEC is hesitant to allow an ETF focused on cryptocurrencies to emerge. Most recently, WisdomTree revealed the latest in a long line of SEC filings
A Bitcoin ETF has long been an interesting prospect in the market and for good reason. A Bitcoin ETF that tethers to the price of Bitcoin would allow investors to make profits on Bitcoins volatility without exposure to the crypto market directly. In this way, major investors could avoid the still-emerging legal framework associated with cryptocurrency investing.
Bitcoin ETF – Security
Paramountly, a Bitcoin ETF allows investors to make purchases and sales from traditional exchanges versus newly emerged crypto trading platforms. This ability is a huge advantage for major financial institutions that are unable to participate in the market in its current unregulated status. Consequently, many believe an SEC approval would catapult the cryptomarkets value moving forward.
Additionally, a Bitcoin ETF would provide investors with more options. Currently, investors are unable to short Bitcoin when they believe the price will drop. The introduction of this new financial instrument provides investors with all the traditional ETF functionalities they are accustomed to
Lastly, ETFs have been around for a while. Whereas Bitcoin is still a relatively new concept for most people. This lack of understanding and transparency makes a direct investment into cryptocurrencies a higher risk for some. Opposingly, ETFs have been around for decades and most investors are familiar with their capabilities and processes.
SEC Opposition to Bitcoin ETFs
Considering all the advantages gained from the introduction of a Bitcoin ETF into the marketplace, its no surprise that multiple firms have attempted such an action. The first attempt to bring this new age financial product to the market came from two giants in the industry – Cameron and Tyler Winklevoss.
The Winklevoss twins are no stranger to innovation. These Harvard graduates are best known for their lawsuit against Facebook founder Mark Zuckerberg in which they alleged he stole the Facebook concept from them. Most recently, the pair is known for their pro-Bitcoin stance. The brothers were one of the first Bitcoin billionaires in the world and they currently operate the hugely popular Gemini exchange.
In 2017, the Winklevoss twins submitted a filing to the SEC for the Winklevoss Bitcoin Trust. However, the SEC quickly denied the application. The SEC cited concerns over the unregulated status of Bitcoin. However, many in the industry pointed out that there are already multiple ETFs for industries that don’t fall under regulations.
SEC Commissioner on Board with Bitcoin ETF
The brothers made another filing earlier this year. Again the SEC rebuked their application. However, this time, there were some members of the SEC on board with the concept. Specifically, SEC Commissioner Hester Peirce. She filed a dissent against the board’s decision citing numerous instances in which the Bitcoin ETF was put under unfair pressure versus other financial instruments.
In 2018, another firm made a notable attempt to secure a Bitcoin ETF. This time, the blockchain startup VanEck SolidX submitted a Bitcoin Trust ETF application. The firm believed it had a better chance of approval because the fund was geared only towards professional investors. For example, the fund costs $200,000. Despite their new approach, the SEC denied their efforts.
After multiple application denials, the SEC opened applications up to public comments. Importantly, regulators sought insight from the public on their decisions. Notably, most comments on the applications were positive for the approval of these instruments.
How a Bitcoin ETF Could Effect Bitcoin
Analysts have long believed that the approval of a Bitcoin ETF would catapult Bitcoin’s market value. This belief is evident when you examine Bitcoin’s price activity around the times of possible ETF application approvals. Hopefully, in the coming months, regulators will take a more open and fair approach to the crypto market. For now, the entire blockchain community patiently awaits a Bitcoin ETF approval.
David Hamilton is a full-time journalist and a long-time bitcoinist. He specializes in writing articles on the blockchain. His articles have been published in multiple bitcoin publications including Bitcoinlightning.com