Demystifying Bitcoin ETFs – A Beginner’s Guide to Understanding the Hype

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Bitcoin enjoyed a keen price surge recently due to the buzz around the prospect of a Bitcoin ETF. In the space of a few days, it broke through the $30,000 mark after rallying by almost 25%.

Yet, it wasn’t to be. The filing was turned down, price dropped back below $30,000 and hopes of a sparked bull run were parked once again.

So, why the excitement? Just what is a Bitcoin ETF? And how likely are we to see one?

On the last question, most pundits believe it is highly likely before long. One application has already been refiled at the time of writing.

For the reasons outlined below, a Bitcoin ETF represents a major milestone in crypto adoption.

What happened

In June, BlackRock unexpectedly filed for its own Bitcoin ETF.

In recent years, the US SEC (Securities and Exchange Commission) had rejected proposals from all and sundry. But this particular filing caused ears to prick up.

Coming from BlackRock, the world’s largest asset manager – not to mention during an ongoing crypto winter, and in the wake of the SEC’s suit against Coinbase, BlackRock’s custodial partner for the ETF – speculation was naturally sparked that BlackRock “may know something.”

This immediately provoked a scramble among BlackRock’s fellow institutional players to file their own applications.

Why the rush? The first approved Bitcoin ETF is expected to come with a significant first-mover advantage, and nobody wants to be left out. And, yet, all filings were rejected.

The SEC told Nasdaq and CBOE – the exchanges that filed the paperwork for several of the asset managers, including BlackRock – that the applications weren’t sufficiently clear and comprehensive.

However, this is far from the end. The asset managers can update their applications and refile, and as of now, BlackRock and others have already done so.

This all shows just what a Bitcoin ETF will mean to its providers.

But why the excitement in the market? To understand the buzz, a quick explainer on ETFs.

What is an ETF

ETF stands for ‘exchange-traded fund.’ Unlike with crypto, ETFs are traded on traditional stock exchanges, just like any stock.

A Bitcoin ETF would therefore be something of a game changer, drawing the traditional finance world closer with its emerging decentralized alternative, providing exposure to the controversial digital asset class within a traditional context.

ETFs were launched in 1993 and became popular as a means for the normal retail investor to gain exposure to a basket of assets all at once.

For example, if you wanted to invest in 500 of the largest companies in the US in one go, you could buy shares in an S&P 500 ETF, which tracks the indexed value of the equities of those companies.

So, in the case of this ETF, the fund contains stocks from those 500 companies.

But ETFs can contain many other types of investments, including commodities, bonds or a mixture of investment types.

An ETF might own hundreds or thousands of stocks across various industries – or it could be isolated to one particular industry or sector.

Why make a Bitcoin ETF

The proposed Bitcoin ETF would comprise only Bitcoin and closely track its price. So, why buy an ETF share, rather than actual Bitcoin (BTC)?

For most retail investors accustomed to the traditional financial system, cryptocurrencies still appear a new and risky prospect.

There remain regulatory issues, for example, and the offputting bad press of centralized exchanges – not to mention the prospect of having to learn about such things as digital wallets and accept the responsibility of self-custody and filing for any capital gains tax.

A Bitcoin ETF provides a convenient solution, working in much the same way as any other ETF.

Investors would buy shares in the ETF through whatever brokerage they might already buy stocks, trading them just as they’d trade Amazon or Apple.

This is not just attractive to the retail investor but to institutional investors, too – the big boys.

How would a Bitcoin ETF work

A Bitcoin ETF would be managed by a firm that buys and holds the actual Bitcoin, the price pegged to the Bitcoin held in the fund.

Listed on a traditional stock exchange, a Bitcoin ETF would also offer other trading opportunities, such as short-selling, allowing investors to bet against Bitcoin.

Unlike with ETFs that track equity shares, there would of course be no dividends available.

But as with other ETFs – and not with trading Bitcoin on a crypto exchange – investors would be liable to pay fees to the company offering the ETF, to cover the custody and management fees for the purchase and storage of the Bitcoin underlying the ETF.

Why the excitement

A Bitcoin ETF is expected to bring a new level of mainstream trustworthiness and acceptance to Bitcoin investing, and by extension, a little more to crypto in general.

Crypto still remains outside of the fold to the majority of conservative investors, both a risky bet and a curious novelty.

The approval of a Bitcoin ETF by the SEC would represent a new seal of approval from the mainstream and more crucially enable institutional investors to more easily take a position.

In other words, Wall Street meets Bitcoin.

This would result in both a huge boost to Bitcoin’s price and credibility and a major step in its integration into traditional finance.

In examining the logic behind the SEC’s decision, the kind of oversight it is calling for and how the regulator has already allowed similar Bitcoin investment vehicles, pundits think the probability of approval for a Bitcoin ETF is now fairly high.

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Valeriya Minaeva is the founder of a native Web 3.0 communications firm VComms and a main contributor to DeFi protocol 1inch Network.

 

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