Exchange-traded funds, better known as an ETFs, are similar in many ways to mutual funds. They generally track the price of an asset (like gold) or basket of assets (like the S&P 500) — making it easy for investors to diversify their portfolios by gaining access to an entire asset class. As their name suggests, they trade on exchanges and can be bought and sold like stock via a traditional brokerage account.
There are currently several popular Bitcoin-tracking ETFs in Canada and Latin America — and a number of U.S. firms have applied to the Security and Exchange Commision (SEC) to list and trade BTC ETFs on U.S. exchanges. These funds would enable American investors to gain financial exposure to crypto through their brokerage accounts without directly buying or managing bitcoin themselves.
Why the need for a Bitcoin ETF?
For most regular retail investors, Bitcoin and cryptocurrencies in general still look risky.
Besides having unclear regulations around them, owning Bitcoin requires keeping a Bitcoin wallet and trusting crypto exchanges, which are still uncharted territory for people unfamiliar with the space and require a certain level of self-education.
Holding Bitcoin places the burden of security squarely on you, making you responsible for keeping your own private keys safe (unless you want to entrust them to the exchange). This may mean buying a hardware wallet to protect purchased Bitcoin, or storing private keys in a secure manner. You’d also have to work out how to file taxes for sales of Bitcoin that resulted in capital gains.
With a Bitcoin ETF, investors need not worry about private keys, storage, or security. They own shares in the ETF just like their shares of stock, and can gain exposure to the cryptocurrency market without having to go through the hoops of purchasing and holding crypto.
And to put it plainly, that is an extremely appealing proposition for many regular folks—as well as sophisticated institutional investors.
That's why so many hedge funds and other investment firms have filed applications with the U.S. Securities and Exchange Commission (SEC) for Bitcoin ETFs—we count at least seven high-profile Bitcoin ETF applications as of April 2021, from the likes of Fidelity, VanEck, SkyBridge Capital, Bitwise, and others.
How does a Bitcoin ETF work?
A Bitcoin ETF is managed by a firm that buys and holds the actual Bitcoin; the price is pegged to the Bitcoin held in the fund. The firm lists the ETF on a traditional stock exchange, and you, the investor, trade the ETF just as you would any other stock. Bitcoin ETFs also offer new types of trading opportunities, including short-selling, where investors can bet against Bitcoin.
Key differences between a Bitcoin ETF and other ETFs
First, some ETFs, like those that track the S&P 500, represent equity shares, so you get a cut of the dividends that any company in the ETF pay to their shareholders. When Tesla pays a dividend and you have shares in an ETF that includes Tesla, you get a (smaller) dividend. Bitcoin is decentralized, so that won't happen with a Bitcoin ETF.
Second, just like with other ETFs, you have to pay fees to the company offering the ETF. But with a Bitcoin ETF, some portion of your fees would go to paying the custody and management fees for the purchase and storage of the Bitcoin that underlies the ETF.
What’s so special about a Bitcoin ETF?
A Bitcoin ETF in the U.S. is expected to bring a new level of mainstream trustworthiness and acceptance to Bitcoin investing. In 2020 and 2021, big publicly traded companies including Square and Tesla bought Bitcoin as an investment for their balance sheets, which spurred new adoption—but the cryptocurrency is still seen by many conservative investors as a risky bet or even a gimmick.
The aPproval of a Bitcoin ETF by the SEC would mean institutional investors can more easily speculate on the price of Bitcoin. It would functionally bring Bitcoin to Wall Street, with the Bitcoin ETF traded through the same places as Tesla stock, bonds, gold, oil, or any other traditional assets.
And it would likely be a huge boost to the price of Bitcoin.