A meeting between two of the investment world's most hotly debated topics seemed inevitable. For cryptocurrency enthusiasts and investors who plan to take advantage of the growing popularity of exchange-traded funds (ETFs), the potential of an ETF tracking bitcoin is the finest option. Despite these difficulties, the first bitcoin ETFs are on the verge of being launched.
Because bitcoin, the world's most valuable cryptocurrency, remains mainly uncontrolled. Due to this, the Securities and Exchange Commission (SEC) is wary of allowing a cryptocurrency ETF to be made available to the common folks and general public.
How does an ETF for Bitcoin work?
Bitcoin
First, let's go through what a bitcoin ETF is and how it works so that we may better understand its possible benefits and hazards. An exchange-traded fund known as an ETF is a type of investment that keeps track of the performance of a specific asset or set of assets. ETFs permit investors to diversify their portfolios without really owning the things they are investing in.
ETFs are a more convenient option for those who just care about short-term gains and losses. To make it simpler for investors to diversify their portfolios, many traditional ETFs focus on larger baskets of names that share a common theme, including a concentration on sustainability or equities from the video game sector and related firms.
One of the most popular and well-known digital currencies in the whole world is represented by a bitcoin ETF. Investors can buy into the ETF without going through the difficult process of trading bitcoin. As a result, investors in the ETF will not have to deal with the rigorous storage and security processes that are required of cryptocurrency investors.
What's the harm in investing in Bitcoin?
What's the point of having an accurate ETF if it only tracks the price of bitcoin? There is absolutely no reason not to invest in bitcoin straight away. Because of this, there are several causes. When it comes to keeping bitcoins and other cryptocurrencies, investors don't have to worry about the security processes that come with them. Additionally, investors will not have to deal with cryptocurrency exchanges because the ETF may be purchased and sold on stock exchanges and markets.
Focusing on an ETF rather than bitcoin itself has another important advantage. Because the ETF is an investment instrument, investors may be allowed to short sell ETF shares if they predict the price of bitcoin will fall. You can't accomplish this in the current cryptocurrency market.
If you think the underlying asset price will fall, you can short sell bitcoin ETF shares. You won't get this advantage if you buy bitcoin directly.
On the other hand, ETFs are far more widely understood in the investment community than cryptocurrencies, despite their growing popularity. Instead of having to study the ins and outs of something that appears to be complex, an investor interested in digital currencies may focus on trading something that they already understand.
Bitcoin ETF Approval obstacles
There are numerous obstacles
There have been stumbling blocks on the way to approving the creation of bitcoin ETFs by regulatory organizations. The SEC rejected the Winklevoss Bitcoin Trust, a bitcoin ETF proposed by Cameron and Tyler Winklevoss, who are best known for their role with Facebook, now Meta (FB), and for Gemini exchange.
An unregulated exchange system makes bitcoin vulnerable to fraud and manipulation. This was the rationale for the refusal of the application.
The Winklevoss brothers persevered in their endeavors and never gave up. Winklevoss IP LLC received a patent from the US Patent and Trademark Office on June 19, 2018, for exchange-traded products.
Cryptocurrency enthusiasts are not the only ones waiting to establish the first bitcoin exchange-traded fund (ETF) successfully. Cboe Global Markets (CBOE), the exchange that pioneered bitcoin futures, predicted that the Securities and Exchange Commission (SEC) would allow digital currency-related exchange-traded funds (ETFs). In parallel, Cboe acquired Bats, the exchange where the Winklevoss ETF would have been traded if it had been available.
It was announced earlier this year that VanEck and SolidX, a fintech company working on bitcoin-related activities, had joined forces to create the VanEck SolidX Bitcoin Trust ETF. According to ETF Trends, this ETF is targeted at institutional investors due to the fact that it will open with a share price of $200,000 on the first day of trading. XBTC is a cryptocurrency created to keep track of a group of bitcoin trading desks' indices. By widening the scope of the ETF's investment objectives, XBTC seeks to alleviate some of the SEC's concerns about bitcoin-linked exchange-traded funds (ETFs).
In an interview with CoinDesk, Jan van Eck, CEO of VanEck, stated that he believes in the value of cryptocurrencies. If a properly structured physical-backed bitcoin ETF is developed, it is possible to safeguard investors from the operational risks associated with obtaining and retaining bitcoin. This insurance component will be of assistance."
Bitcoin Strategy ETF of Pro Shares
The Pro Shares Bitcoin Strategy ETF, which began trading on October 19, 2021, is the first Bitcoin-related exchange-traded fund (ETF) to do so. With the BITO fund, which trades on the CME under the ticker BTCUSD, investors will be able to keep an eye on the current price of Bitcoin (BTCUSD) as it fluctuates (CME). Pro Shares' bitcoin ETF varies from a number of the other bitcoin ETFs that are being taken into consideration, as discussed above. While the fund's performance will not be directly correlated to the current bitcoin price, it will be correlated to the cryptocurrency's future price.
As a result, funds such as BITO, which invest in bitcoin futures contracts, may realize returns that differ significantly from the value of bitcoin at the time the contract is entered into force. In the case of funds that follow volatile assets such as bitcoin, contango, a phenomenon in which long-term futures contracts are more expensive than short-term futures contracts, can result in losses.
Final words
SEC and bitcoin price
It is expected from SEC to approve a bitcoin ETF. Many investors and financial managers are looking forward to the Pro Shares Bitcoin Strategy ETF approval, which many crypto enthusiasts believe is a move in the right way.
"Americans are shipping money to all kinds of exotic locations to invest in unregulated [cryptocurrency] instruments with absolutely zero recourse if they lose every cent, they've put at risk...regulation will begin to fix those difficulties and keep client funds 'onshore,'" according to an SEC source.
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