Bitcoin is establishing itself as a legitimate investment asset that everyone can invest in. Technically, not just anyone, as some organizations and individuals can only participate in a highly regulated manner. Many people think that a Bitcoin ETF can fulfill this purpose.
US regulators have yet to approve a Bitcoin ETF for the US market even though a Bitcoin ETF exists in Canada. Let’s see what an ETF is and what it means for Bitcoin.
The cryptocurrency and Bitcoin markets have come a long way. Not more than a decade ago, only a small community of enthusiasts used the technology, while two pizzas cost around 10,000 BTC.
After several years, many successful businesses built on top of this industry and countless crypto projects, the birth of DeFi, etc. Institutional adoption is also skyrocketing. MicroStrategy converted over $2 billion of their balance sheet into Bitcoin. Therefore, you can soon buy the latest Tesla with your BTC.
The question is what building blocks are still missing before Bitcoin can become a major asset in the global macroeconomic environment? One of these could be a regulated way for organizations and more traditional players to get exposed to it. According to some, the best way to do that might be through an ETF.
What is a Bitcoin ETF?
ETF is known as an exchange-traded fund. It means an investment fund that tracks the price of an underlying asset. ETFs exist across many industries with many different asset classes. For example, gold ETFs have been around for decades and they track the price of gold.
A Bitcoin ETF will work the same way – the price of the ETF will follow the price of Bitcoin.
ETFs are understood as regulated financial products. They trade on traditional markets like the NYSE or NASDAQ, not on a cryptocurrency exchange. However, this could change in the future as the border between the cryptocurrency industry and traditional finance continues to blur.
Is Bitcoin ETF Important?
Bitcoin is not the easiest asset to trade. For example, custody can cause some serious problems for a large organization. After all, Goldman Sachs won’t just plug a hardware wallet into a laptop and YOLO (transfer) $2 billion in Bitcoins into it. Large financial institutions do not operate in the same way as individual investors. They need financial pipelines and a complex regulatory framework to enter this space.
This is why ETFs can go a long way, bringing adoption and expanding the potential investor base. It can offer arbitrage to traditional market participants without having to worry about owning the coin.
In addition to Bitcoin, Bitcoin ETFs can also hold other assets. For example, a Bitcoin ETF can contain a basket of assets, like Bitcoin, Tesla shares, Ethereum, gold, etc. This can provide some diversification benefits for investors.
Bitcoin ETF Brief Overview
When people talk about Bitcoin ETFs, they are usually talking about ETFs in the US market. However, ETFs exist in many different markets For example, the first Bitcoin ETF was launched on the Canadian stock exchange. It is traded on the Toronto Stock Exchange under the ticker BTCC and is known as the Purpose Bitcoin ETF.
Even so, most eyes are on US regulators because it is the largest financial market in the world. A US Bitcoin ETF could strengthen Bitcoin as an investment asset.
There have been several attempts to launch a Bitcoin ETF in the United States. All of them have been rejected by the US Securities and Exchange Commission (SEC) as of March 2021.
Why does the SEC continue to deny applications? They often cite the volatility, unregulated nature of the Bitcoin market
and their clear liability for market manipulation is the reason for rejecting ETF applications. While this may be true to some extent, it may also be true of many other financial markets that already have ETFs.
Besides, much of the financial system needed for Bitcoin to become a legitimate macro-asset was built during the last bear market. It would have been extremely difficult if MicroStrategy wanted to buy billions of Bitcoins just a few years ago. Now, however, both the infrastructure and the liquidity are poised to make even such large investments.
This continued maturation of the Bitcoin market will likely turn the tide for regulators, eventually giving way to a US Bitcoin ETF. It’s hard to know when that will happen – but it might be sooner rather than later.
Is it good to invest in Bitcoin ETF?
To invest in Bitcoin, is a Bitcoin ETF the right financial instrument? If you are an individual who wants to protect your savings against the melting value of fiat, you are better off buying Bitcoin.
In short, Bitcoin is about the democratization of finance. Actually, Bitcoin is a lot of things for different people. But having direct management of your savings can be very effective. Besides, there are countless ways you can earn interest or borrow against your Bitcoin.
There are advantages to investing in a Bitcoin ETF as noted. So, if those look appealing to you, an ETF could be a good option as well.
The Bitcoin ETF allows investors in the traditional market to gain exposure to Bitcoin in a regulated manner. That could be a good way to bring more institutions to crypto as an asset class.
So when will US regulators accept Bitcoin ETF applications in the US? Hard to say, but the necessary building blocks seem to be falling into place.