It is only a matter of time before Bitcoin ETFs transition from acceptance to full recognition.
Original title: “Distributed Classroom: Do you know what a Bitcoin ETF is?” 》
Written by: Decrypt
Translation: Fenbushi Capital
Bitcoin’s market value is slightly less than 200 billion U.S. dollars and is by far the largest and most popular cryptocurrency. Trading Bitcoin is usually purchased directly from an exchange.
However, new players will be confused about the technical aspects of Bitcoin: wallets, Bitcoin addresses, and private keys. Moreover, the risk of losing the private key and the time required to learn cryptocurrency alone scared away some investors.
So, is there an easier way to invest in Bitcoin so that Bitcoin and stocks are no different? Have! It is called Bitcoin ETF , or “Exchange Tradeable Fund”.
What is a Bitcoin ETF?
ETF is an investment tool.
ETFs represent the value of underlying assets, such as Bitcoin, gold or oil.
ETFs are traded on traditional stock exchanges. When asset prices rise, their value will rise; when asset prices fall, their value will fall.
The first ETF was launched in 1993. ETFs, as a way for retail investors to invest in a basket of assets, quickly became popular. If you want to invest in Fortune 500 companies at the same time, you can buy S&P 500 ETF stocks. The operation of a Bitcoin ETF is roughly the same as that of a traditional ETF.
If you want to invest in Bitcoin, you can buy shares of Bitcoin ETF. This means that you can trade on a traditional stock exchange, buying and selling Bitcoin ETFs just like buying and selling Tesla or Apple stocks. Bitcoin ETF tracks the current price of Bitcoin, which means you don’t need to buy Bitcoin yourself and deposit it in a cryptocurrency wallet.
So, why don’t people buy Bitcoin themselves? For most mainstream investors and traders, the overall risks of Bitcoin and cryptocurrencies are still great. In addition to unclear regulations, owning Bitcoin also requires owning a wallet and making crypto asset transactions. For the inexperienced, these two areas are still unknown and daunting. In an ETF, private keys, storage, and overall security can be managed by trusted parties, and investors do not need to manage them themselves.
Who invented the term Bitcoin ETF?
Bitcoin ETF is just an ordinary ETF that uses Bitcoin as the base asset for tracking. Strictly speaking, no one has invented this concept. But in 2013, Winklevoss Bitcoin Trust Company submitted the first Bitcoin ETF application to the SEC, and the US Patent and Trademark Office granted Winklevoss a patent for “Exchange Traded Products”.
How does Bitcoin ETF work? The Bitcoin ETF will be managed by a company that buys and holds Bitcoin, and the price will be supported by the Bitcoin held in the fund. The company’s ETF will be listed on traditional stock exchanges, such as the New York Stock Exchange. You can trade this ETF like other stocks.
However, you need to pay attention to a few things: First, some ETFs represent stocks (such as the S&P 500 Index) , which means you can get a share of dividends: for example, dividends from Tesla and 499 other companies. Bitcoin is decentralized, so there is no such thing as dividends.
Second, like other ETFs, you must pay fees to companies that handle Bitcoin ETFs . Part of the fee is paid to the operator, and part of the fee is to pay for the bitcoin storage and management fees required to purchase the stored ETF.
A brief history of Bitcoin ETFs
July 2013-Winklevoss Bitcoin Trust Fund submitted its first Bitcoin ETF proposal.
June 2018-Winklevoss’ second Bitcoin ETF proposal was rejected by the SEC.
February 2020-The Wilshire Phoenix project is the latest Bitcoin ETF proposal rejected by the SEC.
September 2020-The world’s first Bitcoin ETF is listed on the Bermuda Stock Exchange.
Why use Bitcoin ETF?
ETFs are more inclined to buy bitcoins directly for the following reasons: you need to bear security risks while holding bitcoins. This means that you are responsible for keeping your private keys, which includes purchasing a hardware wallet and storing the private keys in a secure manner.
Buying Bitcoin yourself will also face the risks of exchanges, and many exchanges have been hacked at least once. In addition, you must also figure out how to pay taxes for buying and selling Bitcoin. The ETF’s approach is to delegate the responsibility for security and storage to others.
Bitcoin ETFs will also provide new types of trading opportunities. One of them is called “short selling”, which is actually a bet on Bitcoin. It works by borrowing the ETF and selling it at the current market price, and then repurchasing the ETF at a lower price, thereby closing the position.
What is special about Bitcoin ETFs
Because traditional investors generally understand ETFs, but do not understand cryptocurrencies. Many crypto advocates believe that Bitcoin ETFs can bring more funds to the crypto market. In Bitcoin price betting, it can build a safe bridge for mainstream investors and institutional investors.
There is a view that if it is easier to invest in Bitcoin ETFs, then more people may invest. Bitcoin is one of the best performing assets in a decade, and its volatility and potential risks are attractive to high-risk investors.
Bitcoin ETF is expected to reach a new level in mainstream credibility and acceptance. Although Bitcoin ETF proposals have been repeatedly rejected in the past few years, there are still people who continue to propose. The fundamental reason is that once the proposal is approved, it may open new doors for investment in the crypto sector.
In essence, the approval of the SEC means that institutional investors will be able to trade and invest at the price of Bitcoin. This also means that Bitcoin has joined other areas of the securities market and can easily trade with Tesla’s stocks, US bonds, gold, oil or any other traditional assets.
The reasons for the popularity of Bitcoin ETFs are similar to those of cannabis ETFs. Like the crypto industry, although the cannabis industry is viewed by traditional investors as extremely risky and uncertain, investors still hope to have the opportunity to profit from it.
Why does the SEC still block Bitcoin ETFs?
Although Bitcoin ETF sounds attractive, there are few Bitcoin ETFs in the world (not even in the United States). Since 2017, the SEC has repeatedly rejected Bitcoin ETF proposals. SEC Chairman Jay Clayton said that the main problem with the rejection of the proposal is that the price of Bitcoin is easily manipulated . Even if Bitcoin ETFs extract prices from the most rigorous exchanges, their prices may still be manipulated by exchanges with lower reputations and looser restrictions.
A year later, SEC Chairman Jay Clayton reiterated this point at a Coindesk meeting: “The prices that retail investors see are prices that can be relied on without manipulation, not prices that only fluctuate without manipulation.” Approval will be a big victory for Bitcoin in terms of being considered a legitimate investment.
How to invest in Bitcoin ETF?
As of October 2020, there are no Bitcoin ETFs available for trading in the United States. Since Bitcoin is still regarded as an extremely volatile market and highly vulnerable to fraud and price manipulation, it has not yet been approved by the SEC.
Is there an exchange for Bitcoin ETF? Have! Some jurisdictions remain open to Bitcoin ETFs. In September 2020, Bermuda approved an application for the Bitcoin ETF to be listed on the Bermuda Stock Exchange. The ETF will be managed jointly by Brazilian fund management company Hashdex and Nasdaq.
Currently, Bitcoin ETF has been listed on the Bermuda Stock Exchange. The Bermuda Stock Exchange (BSX) announced Friday that it has approved the Hashdex Nasdaq Crypto Index ETF trading plan. In addition, the Gibraltar Stock Exchange listed a Bitcoin-like ETF in September; this ETF called the Bitcoin Fund is also listed on the Toronto Stock Exchange.
Grayscale, a large American cryptocurrency investment company, provides a publicly traded product- Grayscale Investment Trust . Grayscale Investment Trust is a pool of funds privately invested by Grayscale Company customers. Because it represents the shares of gray investors, this is not a true Bitcoin ETF. The trading price of trust funds is usually very high; however, Bitcoin ETFs reflect the true price of Bitcoin. However, the effect of the two is the same: using grayscale, you can buy bitcoin stocks on behalf of investors and trade them on the stock exchange.
Future Bitcoin ETF
Although Bitcoin is still regarded by many as a high-risk investment, it is changing. Since its inception more than ten years ago, Bitcoin has been recognized and supported by more and more respected entrepreneurs, investors, politicians and regulators. In 2019, at Facebook’s congressional hearing for the upcoming Libra cryptocurrency project, many politicians generally spoke highly of Bitcoin and blockchain technology.
Grayscale’s CEO stated that Bitcoin is banned in the United States. No matter who enters the White House this fall, US regulators are unlikely to pursue Bitcoin. This is the conclusion of Barry Silbert, CEO of venture capital firm Digital Currency Group and its subsidiaries.
The crypto industry generally believes that it is only a matter of time before Bitcoin ETFs transition from acceptance to full acceptance . US SEC Chairman Jay Clayton is still open to Bitcoin ETFs, at least for the moment it is interested in the ETF token version. But until the market solves the problem of Bitcoin being manipulated, Bitcoin ETFs will not appear in the United States.
The Bitcoin ETF listed on the Bermuda Stock Exchange may serve as a trial run for listing on the SEC. Regardless of whether the listing is successful or not, this case is likely to be used in future disputes with the SEC. If the SEC liquidates a Bitcoin ETF, more Bitcoin ETFs may appear in the future. Once the door is opened, other jurisdictions may notice this phenomenon.
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