When bitcoin (BTC) made its way into the mainstream media, it caused a stir in the financial world. The majority of individuals were unaware of what it was, while some jumped in headfirst to invest in the new digital money.
At the time, there was no such thing as a bitcoin exchange-traded fund (ETF). However, in recent years, the idea of a BTC ETF has been greatly circulating in the cryptocurrency market.
So, how much do you know about a bitcoin ETF? Let's find out!
Bitcoin's brief history
The history of the legendary bitcoin currency started in 2008, when a particular person or group of people under the pseudonym Satoshi Nakamoto published a paper about a new type of currency that was entirely digital and used cryptography to keep transactions safe. The idea was implemented in 2009, when Satoshi Nakamoto launched the first-ever bitcoin software.
In 2011, things started heating up, with more computers connected to the network and started bringing this decentralized cash system to life. Throughout 2012 and 2013, the world saw big companies like WordPress and some online retailers starting to accept bitcoin as payment. It greatly increased bitcoin’s popularity and turned some heads towards it, even though most had no clue how it worked.
In early 2014, the price of one bitcoin was around $800. In February, there was major speculation about a new possible Google service that would allow everyone to trade bitcoin through Gmail, which boosted the value even further into the mid-$1,000 level.
At the time, people outside the crypto community started looking at it more seriously, and, most importantly, banks embraced this new technology to develop their own blockchain-based solutions.
After going past $1,100 intraday high in late May, BTC crashed down to a little over a thousand a few days later due to MtGox issues. It was another milestone in bitcoin's history as it went mainstream for enough reasons to be listed here, but the currency did not die down. Instead, it has kept growing to what we know today. Bitcoin officially started being featured in the forex markets in mid-2010.
What is a bitcoin ETF?
ETFs are an often-debated topic in the world of finance, because they allow individuals to invest in funds without purchasing individual stocks. Instead, a fund tracks an index composed of multiple companies within a particular industry or group, such as technology companies or banking firms. Under normal circumstances, investing in an ETF allows you to cheaply access different industries without having to buy shares from each company directly.
A bitcoin ETF is an exchange-traded fund that tracks the price of the world's most popular digital currency. This allows investors to purchase bitcoin without having to go through the lengthy process of obtaining crypto.
So when it comes to bitcoin, you still hold the bitcoin, but it is being held by someone else through a contract that operates in the currency world. Bitcoin ETF would potentially bring more investors into the cryptocurrency market, thus, raising demand for the whole market of digital assets and fuel prices to increase even further.
How a BTC ETF works
The currency market has its rules and regulations that must be adhered to. That said, to trade a BTC ETF, you need to have money at your disposal and some experience or willingness to learn.
In the simplest of terms, an ETF is a fund that trades based on its net asset value (NAV). Digital security holds cryptocurrency and can be bought by retail investors, with BTC or dollars. It's imperative to understand how this arrangement works, though, because it helps explain why bitcoin may go mainstream in the future.
So to buy or trade-in a BTC ETF, you must have some investment capital in the real world. Let's not forget that many millionaires out there might want to invest in a BTC ETF just to diversify their portfolios. This will likely increase demand for bitcoin dramatically, which is apparently excellent news for all BTC owners.
The crypto market is very young in general, and it has a few years ahead before becoming mature enough for ETFs, so don't expect them to shoot up anytime soon. But when they do finally arrive on the scene, the impact could be dramatic, with trillions of dollars entering crypto markets in sudden waves. This means more people investing in bitcoin and, thus, driving up its value exponentially!
Putting money into ETFs usually reduces the risk for investors, because it is less volatile than buying typical stocks, indices, and bonds.
Why focus on a bitcoin ETF rather than on bitcoin itself
Owning bitcoin is commendable, but the future is really in trading them through a BTC ETF. And here is why:
- It allows an investor to diversify their trading portfolio.
Taking reference to the proverb that you shouldn't have all your eggs in one basket is what investors look into deeply. And that is one of the main reasons that a BTC ETF may be popular in the future, as an investor can own or rather hold various assets in their accounts.
- It offers better security
A BTC ETF is safer than the actual bitcoin that can suddenly dip. With trading, you have limits that you can opt out of when the price drops to a certain level. And that is one of the main reasons why institutional investors would prefer trading through ETFs more than actual bitcoin.
Risks related to a BTC ETF
Here are some of the risks that you are bound to face, when it comes to a BTC ETF:
- You need the knowledge to trade
When you get to trading, you need to understand information about graphs, indicators, and other jargon. You need to do your own research and actually know what is the impetus behind every hit of "Buy" or "Sell" button. Otherwise it may end fatal. There is less information with this kind of ETF since you don't actually own the asset itself.
- It does not increase your earnings
Since you don't buy bitcoin but shares that try to mimic them, whatever money you make will correspond with whatever price movement happens regarding real bitcoin. Whereas if you had bitcoin, then your earnings will change based on how much they go up and down in value.
It's like someone who has money in a savings account versus someone who has their money physically sitting inside their wallet, with one not really earning anything. In contrast, the other earns small interest rates every so often until they want it out of their wallet.
Regulation issues when it comes to a BTC ETF run and approval
As mentioned above, a BTC ETF requires some rules and regulations for you to trade. Here are some of them:
- You must have a trading account with a broker company
To even start trading BTC ETFs, you need a broker who will facilitate the buying and selling of your BTC ETFs. You'll need to open an account with a broker company.
- The price of your BTC ETF is affected by the current price of bitcoin
Since the ETF is going to be traded on a stock exchange or commodity exchange, it can affect the current price per BTC for any given day. There could be instances when you don't want this effect, but if this is what you need at a particular time, then so be it. Just remember that every trade has two sides, so if someone wants to buy an asset, someone else has to sell it.
- You must have an appetite for risk
You cannot probably trade anything related to cryptocurrencies without risk. BTC ETFs are no exception. This is the time to max up on your fund for this particular kind of investment.
ProShares' BITO ETF released on Oct. 19 became the first approved ETF linked to BTC and managed to hit $1 billion mark only two days after listing. This surge reflects the massive demand among the investors in the US market for financial instruments that allow trading of the bitcoin price, without the necessity of obtaining the digital currency itself.
It is worth saying that ProShares' BITO, as well as Valkyrie Investments' and VanEck's financial product that were approved on Oct. 22 and Oct. 26 respectively, use bitcoin futures and are exposed only to the asset's price action, not to bitcoin itself. There are some powerful indicators that the United States Securities and Exchange Commission (SEC) may approve physical BTC ETF, but investors should be prepared for some good bumps on the road to that moment.
So, if you are ready to take all these risks into account, including market volatility and hacking issues, among others, this may be the next big thing in the world of mainstream finance you have been waiting on for so long. Just remember that there are more opportunities out there.
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