What is a Bitcoin ETF and Why is it Important?

Recently there has been a lot of discussion about Bitcoin exchange traded funds (ETFs). However, it is a novel idea, especially as it has to do with Bitcoin and the crypto space in general. Therefore, most people in the crypto space don’t know what it is about.

Bitcoin is increasingly becoming recognized as an investment asset. Every day, new institutions and individuals are drawn to the top cryptocurrency, making it more popular. Experts however believe that the growth could be better with a more secure way to invest in Bitcoin.

Perhaps many more institutions and individuals would be interested in Bitcoin if it wasn’t so volatile and there was so much uncertainty in the industry. Those used to mainstream investment in particular are more worried about this, and the solution to it is believed to be a Bitcoin ETF.

What is a Bitcoin ETF?

Generally speaking, an ETF is an investment fund that tracks the price of an underlying asset. For example, a gold ETF tracks the price of gold, meaning if you invest in the ETF, you gain when gold rises in price and lose when gold crashes. By investing in a gold ETF, you’re investing in gold, without actually holding gold.

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The same thing applies to Bitcoin. A Bitcoin ETF is an ETF that tracks the price of Bitcoin. Because ETFs trade on traditional markets such as the NASDAQ or New York Stock Exchange (NYSE) rather than on crypto exchanges, investors are far more likely to be comfortable investing in them than directly in Bitcoin.

Apart from being a kind of investment mainstream investors are comfortable with, a Bitcoin ETF is important because it takes so much weight off the investor. For example, a large institution investing in Bitcoin can have serious issues with Bitcoin custody. 

This is because large institutions like J.P Morgan and other large banks cannot operate as casually as individual Bitcoin investors. You could simply transfer funds from one wallet to another and nobody cares. For institutions, strict rules must be followed in handling finances and other activities, making it unrealistic for them to invest directly in Bitcoin.

Because of this, it is believed that an ETF will significantly increase confidence in Bitcoin, bringing big investors in with more ease. As more institutions invest in Bitcoin through ETFs, the price will eventually rise, making it a win for everyone. 

In addition, a Bitcoin ETF could come with investment assets such as other cryptocurrencies, some top stocks, and precious metals such as gold and silver. This gives way for diversification of assets.

Types of Bitcoin ETFs

Bitcoin ETFs can be of two types. The first is a Bitcoin futures ETF, and the second is a bitcoin spot ETF. Futures bitcoin ETFs track Bitcoin futures contracts as their underlying assets. The securities and exchange commission (SEC) has so far approved several futures Bitcoin ETFs.

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Bitcoin spot ETFs on the other hand actually track real Bitcoins held in wallets. This is the goal that the crypto community is after – to get the SEC to approve a Bitcoin spot ETF. This is the one that is likely to attract more institutions.

While no Bitcoin spot ETF has been approved in the U.S, many of them have been approved in many countries. Despite the existence of these Bitcoin spot ETFs, Bitcoin doesn’t seem to be affected. However, experts believe a Bitcoin spot ETF in the U.S. could make all the difference. 

The Journey so far

There have been many applications for a Bitcoin spot ETF. The SEC however has been reluctant and hasn’t approved any. There are currently a handful of applications still on the commission’s desk and the crypto community eagerly awaits the verdict on them.

It is more likely than ever that at least one application will be approved though, as the SEC is under much pressure from the Judiciary and legislature to treat the crypto industry fairly.

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