What are Bitcoin ETFs and what are they for?

Written by Evgenia Sidorova
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What are Bitcoin ETFs and what are they for?

Cryptocurrency is gaining popularity every year, but at the same time the legislation of many countries does not have time to regulate the crypto industry to protect investors. Not everyone can invest in bitcoin directly. That’s why new investment products called Bitcoin ETFs were invented.

How bitcoin ETFs work and their purpose

The principle is very similar to conventional ETFs funds. Let’s take any ETF for the S&P 500 index as an example. Investment companies create portfolios of 500 American companies and combine them into a single balanced fund. For this fund, they issue individual stocks whose price is linked to the price of the 500 U.S. companies. If the U.S. stock market falls, so will ETF stocks

But what are Bitcoin ETFs and how do they differ from conventional funds? Technically, they do not differ much. The principle is similar. The only difference is that Bitcoin ETFs are focused on the price of Bitcoin itself?

At its core, Bitcoin ETFs contain futures on the first cryptocurrency and then investment companies issue shares of bitcoin ETFs on the stock exchange and there they are already freely traded without liquidity problems.

On this basis, anyone can make investments in blockchain technology without registering on cryptocurrency exchanges.

What are the advantages of bitcoin ETFs?

As mentioned in the beginning of this article, not everyone can afford to invest in cryptocurrencies. Some legal entities are not allowed by law to invest directly in crypto assets, and bitcoin ETFs largely remove this restriction.

Plus, it also brings a number of advantages for the retail investor. For example, it is not always possible to fully learn how safe cryptocurrency exchanges are, how to store cryptocurrency in wallets and so on. If such a person uses an ETF, he or she will simply not face such challenges, but will be able to participate in investing in crypto assets.

In addition, many people start out as crypto traders, but trading is a high-risk occupation unlike the usual.

investing. Again, it is worth adding about fraud schemes in the crypto industry. Many people think that regulators pay too much attention to the problem of fraud and make it too big on purpose, but in reality this problem exists and many investors have to deal with it.

To reduce risks from off-market factors – it is more logical to use proven tools, which are regulated by the SEC and other regulators. In the case of fraud by a company, investors can count on compensation, but in the case of bankruptcy of a crypto-exchange – there is little to protect investors. And owners often maintain their anonymity.

The main attention to them began to turn relatively recently. Such products are just beginning their development, but many supporters of the crypto industry are heavily promoting them.

The possibility of issuing not only futures ETF funds, but also spot ETFs is also on the agenda. Most bitcoin ETFs are backed not by Bitcoin itself, but by Bitcoin futures. There is no fundamental difference for an investor here, but investment companies want to offer their clients ETFs that are backed by Bitcoin itself. The SEC, on the other hand, doesn’t want to rush into this issue.

It is also worth noting that the technology sector has shown active growth since 2020. Ark Invest, run by Katie Wood, can be considered a striking indicator. Cryptocurrencies also served as one of her areas of investment. In her opinion, cryptocurrencies are a revolutionary technology capable of changing the world, which is why she focuses on them along with biotechnology.

Kathy Wood is not the only investment company manager who follows new trends. And that’s why they need tools to attract new investment in the blockchain direction.

But the question of the popularity of Bitcoin ETFs will depend entirely on the decision of regulators, and especially the SEC. If Wall Street representatives manage to convince regulators of the safety of spot ETF listings, it will help to offer new products related to crypto-assets in the future.

To put it bluntly, when they give the green light to spot ETFs – there will be opportunities to consider ETF funds not only for bitcoin, but also other popular cryptocurrency destinations such as DeFi, Metaverse, GameFi and others. Will this be of interest to investors? Yes, because the cryptocurrency industry offers many opportunities to raise capital in a short period of time. The risk appetite is growing, so investors will be interested in instruments that can make it happen.

To summarize:

So, the Bitcoin ETF is the same as any other ETF for other investment assets. Their working principle is similar, but unlike usual funds – bitcoin ETF’s are mainly secured by bitcoin futures.

This may change over time, as the popularity of such funds grows, as does investor demand for crypto assets.

Also, people who have little experience in investing in cryptocurrencies so far, as well as those who have tried working with cryptocurrency markets as crypto traders might consider this tool.

The crypto industry continues to evolve at full speed, and therefore we may witness new trends. New ideas will also require the formation of new ETFs, under already different targets.

But that’s another story. You’ve learned the answer to the question – “What are bitcoin ETFs?” and now you can put that knowledge to good use.

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