First Bitcoin ETF Could Be a Start of a New Financial Order
Bitcoin ETFs have been a hot topic over the last few weeks, which might have left you curious about what they actually are and the implications they carry. Could these ETFs be about to bring cryptocurrencies into the mainstream, or are they just another passing fad? We’ll let you make the final call, but here’s a breakdown of what you need to know.
Cryptocurrencies have long been the rebellious outsider cousins to more traditional financial products, but bitcoin ETFs could be the first sign of a new age where that will no longer be the case. If you’ve seen the business news headlines recently, you might have heard crypto ETFs have been launched on Wall Street after receiving approval from the Securities and Exchange Commission (SEC). And it’s a pretty big deal.
Although there have been similar products in other countries, this ETF is a first for the US, and bitcoin enthusiasts are understandably excited for what it could mean for the future of crypto. Whether you’re looking to get involved yourself or you’re just curious, we’ll clue you up on what bitcoin ETFs are, why you might want to use them, and a few predictions for the future of crypto ETFs.
Introducing Bitcoin ETFs
Before we get into bitcoin ETFs, let’s start by quickly clearing up what ETFs themselves are. ETF is an acronym for exchange-traded funds: a type of fund that’s traded like a stock.
Like mutual funds, ETFs track a range of assets, such as the S&P 500 or a selection of environmentally-friendly stocks. They can also hold other asset types, like precious metals or bonds. But unlike mutual funds, ETFs are traded in real-time—you can buy and liquidate them immediately during market hours (instead of just when the market is closed).
Can you see why they get their name now? They’re literally just funds traded on exchanges.
Bitcoin and Crypto ETFs
You’ve probably now built up an educated guess about what bitcoin ETFs might be—but hold on a minute. As logic dictates, they’re ETFs that follow the price of bitcoin, but that doesn’t necessarily mean they have direct holdings of the cryptocurrency. Due to concerns about the lack of security and regulations concerning bitcoin, ETFs have so far taken a more indirect approach.
The ETF that’s been getting all the attention is the ProShares Bitcoin Strategy ETF (BITO), which was launched on the New York Stock Exchange (NYSE) on 19 October. And here’s the kicker: BITO contains futures contracts of bitcoin instead of the coin itself.
Futures contracts allow investors to speculate on the future price of an asset, meaning you can track something without buying it directly. Regulators preferred this approach since the futures market is more regulated and doesn’t involve buying bitcoin directly.
However, this doesn’t necessarily mean that bitcoin and crypto ETFs will always follow this approach. Some believe that a physical ETF could emerge soon (more on this later), and it’s also possible to mimic bitcoin’s price in other ways, such as through crypto-adjacent industries or stocks of companies that hold a lot of bitcoin investments.
Why Use Bitcoin ETFs?
At this point, you might be wondering why anyone would want to buy bitcoin indirectly by purchasing a fund that bought into futures. Why not just cut out the middleman and buy some bitcoin yourself?
Well, because to a huge portion of the population, it seems like you have to be a technical whizz to even figure out how to invest in cryptocurrencies in the first place.
Buying bitcoin means creating an account on a cryptocurrency exchange, making the purchase, transferring your bitcoin from the exchange to a wallet for security, and keeping your private key safe. It’s a lot of hassle for the average person who just wants exposure to crypto, so bitcoin ETFs offer a more convenient solution.
This opens cryptocurrencies up to a much wider pool of people.
An ETF also offers some inherent advantages since it’s a different kind of investment product to direct crypto holdings. For instance, you can short sell shares of your ETF if you think the price will go down, which isn’t possible on your standard cryptocurrency exchange.
However, ETFs aren’t the right choice for everyone. Some have pointed out that trading a bitcoin ETF rather than buying bitcoin directly can result in extra costs since the middlemen behind the fund have to purchase futures contracts routinely and pass the costs onto individual investors.
Also, since BITO doesn’t follow the price of bitcoin directly but through futures contracts, there’s some speculation the fund could trade too high when the market is rising and too low when the market is falling.
Others worry these funds threaten the principles of decentralization.
The Future of Bitcoin and Crypto ETFs?
Now, let’s return to the bigger picture. There’s been plenty of talk about crypto ETFs being the Next Big Thing in the finance world, but are they really here to stay? That’s a tricky question to answer.
Regardless of the potential crypto ETFs have, it’s worth pointing out that the amount of hype surrounding them right now makes it a volatile and risky time to start a crypto investment strategy—especially if your crypto knowledge is limited.
But just because there’s a lot of hype at the moment, it doesn’t make bitcoin ETFs a fad. As discussed above, they’re a convenient solution for a much wider group of people to get involved in crypto, so it would make a lot of sense for them to stick around.
It seems that more bitcoin and crypto ETFs are likely to follow in BITO’s footsteps. Grayscale Investments, which currently holds the world’s biggest Bitcoin fund—Grayscale Bitcoin Fund—is now looking for regulatory approval to convert its fund into an ETF. And this is likely just the beginning. Who knows how many other funds will want to join the party?
The impact of these ETFs on the cryptocurrency market is already evident. Following the ProShares ETF’s launch, bitcoin’s price soared close to all-time highs, and bigger rises are likely. Optimists would say that cryptos are looking like an unstoppable force.
Investing with MyConstant
Bitcoin ETFs are an exciting development, but they’re not for everyone. If you feel comfortable with the process of buying bitcoin (or other cryptos) directly and storing them yourself, you might prefer to go about things the old-school way. That way, you can benefit from the effect ETFs are having on the crypto market without taking on the risks associated with them.
After buying your crypto on an exchange, one option is to transfer it to a third-party platform like MyConstant. You can deposit it in our multi-cryptocurrency wallet (where you’ll earn up to 4% for stablecoins), or take your crypto even further by lending it out and earning interest on crypto up to 7%.
Furthermore, you can get a crypto-backed loan against multi-coin collateral.
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