What Is Bitcoin ETF?



What is an ETF?

An ETF (Exchange-Traded Fund) is an index fund traded on stock exchanges. An ETF is a type of security that acts as a certificate for a portfolio of stocks, bonds, commodities, or cryptocurrencies.

The price of this security follows an index based on certain base assets.

In the US ETFs are registered with the Securities and Exchange Commission (SEC). The SEC classifies ETFs as securities.


How are ETFs different from investment funds?

Unlike investment funds, ETFs can be traded just like stocks. Therefore, ETFs can be traded throughout the entire trading day and their price is driven by supply and demand, as well as by the market participants activity.

ETF shares are typically more liquid than those of the investment fund. The latter usually circulate within the fund’s country of registration. ETF can be traded on foreign trading platforms and are suitable for margin trading.

For an investment fund the net value of the base assets is calculated for each trading day. For ETFs it is not the case, since they are traded just like stocks. Also, the market value of base assets can be higher or lower than their net value.

The Net Asset Value (NAV) is the price of an investment fund or an ETF calculated per share. The sum per share is calculated by dividing the total value of the assets in the fund’s portfolio (minus the obligations) by the amount of such assets in circulation.


Why do crypto-enthusiasts care about ETFs?

An ETF is a relatively common instrument for the world of traditional finance. Such products get more popular each year.

To invest in Bitcoin-ETFs market participants don’t need to have a wallet, create an account on a digital exchange, or worry about keeping the assets safe. In addition, investors aren’t affected by trading platform breaches, scams, or phishing attacks. Therefore, such instruments can be interesting to traditional investors unwilling to get into technical details.

Bitcoin-ETFs are anticipated to attract large investments into the cryptocurrency market. It would contribute to an increase in market capitalization and mass adoption of new assets.

BlockTower investment fund co-founder Ari Paul believes that the inflow of institutional investors will be the primary driver behind the next mid-term rally of Bitcoin price. According to Paul, the main barrier preventing large investors from entering the industry is the lack of reliable solutions for storage of digital assets, aimed at the large market players.

IronWood CEO Michael Strutton believes that if SEC approves cryptocurrency-based ETFs, large investment companies and funds, such as Fidelity and Ameriprise Financial, will definitely get into the market.


Why is there an opposition to Bitcoin ETFs?

Many well-known cryptoindustry influencers are skeptical about ETFs.

Bitcoin evangelist Andreas Antonopoulos calls such funds “a terrible idea.” He points out that ETFs will make the cryptocurrency market more centralized and prone to aggressive manipulation by institutional investors.

Famous cryptographer Nick Szabo is criticizing Bitcoin ETFs as well. He thinks that such funds will make more harm than good:

“I for one am not lobbying for an ETF or for Wall Street-managed money in general. It might cause more problems than it’s worth. The recent sell-off by dumb money has or soon will deprecate many opinionated know-nothings in this space. We don’t need new ones to take their place.”

Ethereum creator Vitalik Buterin believes that the cryptoindustry needs practical and useful applications more than ETFs.


Which companies aim to launch Bitcoin ETFs?

VanEck, SolidX, and CBOE are the companies putting significant effort into launching ETFs. These companies are trying to persuade the SEC that the market is ready for such financial products.

VanEck is creating MVIS Bitcoin US OTC Spot Index based on the data about BTC price provided by cryptodealers Genesis Trading, Cumberland, and Circle Trade. The company is aiming to utilize this index in Bitcoin ETF.

CBOE is planning to launch six futures-based ETFs simultaneously.

Yet, by now, the SEC hasn’t approved the applications for Bitcoin ETFs.

Regulators find Bitcoin too susceptible to market manipulations.

At the end of August 2018, the SEC rejected applications for the launch of ProShares Bitcoin ETF and ProShares Short Bitcoin ETF. The regulator also rejected several applications from Direxion and GraniteShares. Not long before that, in July, the SEC rejected a Bitcoin ETF application from Winklevoss brothers.

BlackRock postponed ETF launch for an undefined term. The company representatives stated that they will not offer ETFs to their clients until the industry can be considered mature. Before that, an ETF application from Barry Silbert’s Grayscale Investments was also withdrawn.


What is an ETP?

An ETP (Exchange Traded Product) is an exchange-traded financial instrument. It reflects the dynamics of a certain base index that can be based on stocks, commodities, derivatives, and cryptocurrencies.

ETFs described above are a type of ETP. Among other types there are:

  • Closed-end funds, that are publicly traded investment companies listed on stock exchanges as a stock. Such funds attract the necessary capital only once via an IPO of a fixed amount of shares.
  • Exchange-traded derivative contracts are standardized derivatives, just like futures or options, traded on organized platforms.
  • Exchange Traded Notes (ETNs) are debt securities. ETNs include exchange-traded certificates and exchange-traded currencies/commodities (ETCs).

Amun Crypto Basket ETP is an example of an ETP. The base assets here is HODL5 , which is the ticker for the index based on several most liquid cryptocurrencies, weighted by market cap. Shortly after launch, this product became the leader by trading volume on SIX Swiss Exchange.


What is an ETN?

An ETN (Exchange Traded Note) is an unsecured debt obligation, the price of which is pegged to the price of a certain asset (a basket of shares, commodities futures, or cryptocurrencies).

One of the decisive factors in ETN value is the credit rating of the company that issues such instruments. The price of an ETN can go down along with the issuer’s credit rating, even if the base index remains unchanged.

ETNs are traded on stock exchanges, but unlike ETFs, the ETN issuer doesn’t need to buy and hold any assets to monitor the price of the index. The main risk of working with notes is related to the possibility of the issuer’s default.

Some ETNs follow a specific index with leverage. This means that the issuer is obliged to pay a multiple of a price for increases and decreases in the index.

Examples of ETNs concerning the cryptocurrency market are the exchange-traded notes for Bitcoin from a Swedish company XBT Provider. These ETN allow you to invest in a basket of 5 or 10 assets.

In August 2018, USD-pegged Bitcoin ETNs were listed on Nasdaq Stockholm. However, these instruments were subsequently suspended by the SEC.

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