Managing and holding cryptocurrencies can be a complex and challenging process. For those new to cryptocurrency, purchasing Bitcoin from a crypto exchange seems like an overwhelming and unclear process. The technical side of owning Bitcoin, such as crypto wallets, Bitcoin addresses, and private keys, can be confusing to beginners, which can discourage some investors from getting involved.
All of this has intensified the appeal of a Bitcoin ETF, or exchange-traded fund for last couple of years. Several major financial institutions in the U.S., including BlackRock, Fidelity, and Invesco, have applied to launch ETFs and have submitted their applications to the U.S. Securities and Exchange Commission (SEC). However, as of January 2024, the SEC has not yet approved a spot Bitcoin ETF.
Hence its time to Demistify All the buzz around Bitcoin ETF
What is a ETF?
An exchange-traded fund (ETF) is a publicly traded investment vehicle that tracks the performance of an underlying asset or index, rather than a single company, similar to a stockA popular investment vehicle for investors to gain exposure to the value of underlying assets is an ETF, such as those tracking gold or oil.ETFs trade on stock exchanges and their value changes with the asset price.
A Bitcoin ETF operates like any other ETF. Investors purchase shares in the ETF through a brokerage and trade them similarly to shares in Apple or Tesla.
Why do we need a BTC ETF?
Many regular retail investors still view Bitcoin and other cryptocurrencies as risky investments due to unclear regulations and the unfamiliarity of owning a Bitcoin wallet and trusting crypto exchanges. Acquiring Bitcoin requires a certain level of self-education and places the onus of security on the individual investor, who is responsible for safeguarding their private keys (unless entrusting them to the exchange). This may involve purchasing a hardware wallet or securely storing private keys. Additionally, investors must navigate the process of filing taxes for any capital gains resulting from the sale of Bitcoin.
Investing in Bitcoin through an ETF is a more convenient and secure way for investors to gain exposure to the cryptocurrency market. They don’t have to worry about the hassle of buying, storing, and securing Bitcoins as they own shares in the ETF that function like regular stocks. This proposition is appealing to both regular and institutional investors, as evidenced by the numerous hedge funds and investment firms applying for Bitcoin ETFs with the SEC. The Winklevoss brothers were the first to apply for a Bitcoin ETF in 2013, followed by other companies, but the SEC has yet to approve any of the applications in the ten years since the Winklevoss twins’ attempt.
How will a Bitcoin ETF Work?
A Bitcoin ETF is an investment fund managed by a firm that purchases and holds actual Bitcoin. The ETF’s price is tied to the value of the Bitcoin held in the fund. The firm lists the ETF on a traditional stock exchange, which allows you, as an investor, to trade the ETF just like any other stock. Bitcoin ETFs offer new opportunities for trading, such as short-selling, where investors can bet against Bitcoin.
But there are also some key differences between a Bitcoin ETF and other ETFs.
First, some ETFs track the S&P 500 and represent equity shares. This means that if you have shares in an ETF, the holder will receive a portion of any dividends paid out by the companies included in the ETF, like Tesla. However, since Bitcoin is a decentralized currency, this won’t happen with a Bitcoin ETF.
Second, like other ETFs, Bitcoin ETFs also require one to pay fees to the company that offers them. However, with a Bitcoin ETF, some of the fees will be used to pay for the custody and management fees associated with purchasing and storing the Bitcoin that supports the ETF.
What all has happened till date?
- July 2013: The Winklevoss Bitcoin Trust files the first Bitcoin ETF proposal.
- June 2018: The SEC rejects the Winklevoss’ second Bitcoin ETF proposal.
- October 2019: The SEC rejects Bitwise’s Bitcoin ETF proposal.
- February 2020: Wilshire Phoenix becomes the latest project to have its Bitcoin ETF project rejected by the SEC.
- September 2020: The world’s first Bitcoin ETF is listed on the Bermuda Stock Exchange.
- December 2020: VanEck files a proposal for a Bitcoin ETF, after pulling its previous proposals before formal rejection multiple times.
- February 2021: Canada’s first Bitcoin ETF launches, the Purpose Bitcoin ETF (BTCC). Two more would be approved in the same month: the Evolve Bitcoin ETF (EBIT) and the CI Galaxy Bitcoin ETF (BTCX).
- October 2021: Launch of the first U.S.-listed Bitcoin-linked ETF, the ProShares Bitcoin Strategy ETF (BITO). It does not hold Bitcoin itself on its balance sheet, but tracks the price of Bitcoin through related assets.
- June 2023: The SEC approves the 2x Bitcoin Strategy ETF (BITX) from Volatility Shares and the first leveraged Bitcoin futures ETF.
- August 2023: London-based Jacobi Asset Management launches Europe’s first Bitcoin ETF.
- August 2023: A U.S. judge orders that the SEC’s denial of Grayscale’s application to convert its Grayscale Bitcoin Trust (GBTC) into a spot Bitcoin ETF be reviewed.
- October 2023: Following the SEC’s failure to appeal, the U.S. Court of Appeals formally orders the SEC to review Grayscale’s application.
- December 2023: SEC chair Gary Gensler stated that the regulator was “taking a new look” at applications for a spot Bitcoin ETF, and reviewing “between eight and a dozen filings.”
If the SEC approves a Bitcoin ETF, institutional investors will be able to easily speculate on the price of Bitcoin. This would bring Bitcoin to Wall Street, and the Bitcoin ETF would be traded alongside other traditional assets such as Tesla stock, bonds, gold, and oil. The approval of such an ETF would likely result in a significant increase in the price of Bitcoin.
