What Is An ETF?
Recently, there has been a lot of buzz about trading ETFs in the cryptocurrency marketplace. Most of us might have heard of it but have never actually decided to understand what it entails or how it affects cryptocurrency trading and market capitalization.
The Exchange-trade funds (ETFs) are responsible for tracking bitcoin and allowing traders to leverage Bitcoin’s growth.
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ETFs are designed to track the value of Bitcoin, its trade volume, and other asset potentials. Just like NFTs, ETFs are a new trend in the crypto space that a lot of our well-known crypto-enthusiasts are looking forward to participating in. If you are a cryptocurrency enthusiast or trader and you’re looking forward to capitalizing on the growing exchange-traded funds, then we’re here to show you how!
Every trader that plans on venturing into the ETF market space should understand that while there have been testimonies, there have also been sacrifices and losses during its launch. It is only viable since Bitcoin is the largest cryptocurrency network globally due to its market capitalization being unregulated. The Securities and Exchange Commission (SEC) is still hesitant to release the Bitcoin-focused ETF to the market for public use.
What Exactly is an ETF?
An Exchange Traded Fund is an ETF and consists of cryptocurrencies. Most ETFs are designed to track a market index, specifically a stock token; however, a cryptocurrency ETF is designed to keep track of the price of one or more digital tokens on the blockchain. All these activities happen based on investor sales or purchases, and that increases and fluctuates the share price of ETFs daily.
How Does a Cryptocurrency ETF work?
There are several benefits that a cryptocurrency Exchange Trade fund presents to its investors. Some of these benefits include reduced ownership costs for crypto traders, and reduced outsourcing required to trade cryptocurrencies. Before we begin explaining how ETFs work, it is important for every trader to know that there are two kinds and that they are characterized by backing.
Physical Backing
An ETF is backed by an actual physical cryptocurrency- an investment firm managing the cryptocurrency token’s fund purchases other cryptocurrencies and the ownership is represented as a share. Whenever an investor purchases a share in an ETF, he or she indirectly owns the cryptocurrency purchased by the firm and so, owners gain more exposure to cryptocurrencies without the expense and risk of an ownership right.
Synthetic Variant
The synthetic variant specifically tracks cryptocurrency derivatives in the form of futures contracts and cryptocurrency exchange-traded products (ETPs). In the United States, the U.S. Securities and Exchange Commission (SEC) will track the prices of Bitcoin futures contracts that the Chicago Mercantile Exchange (CME) trades.
ProShares are the owners of the first Bitcoin Strategy ETF (BITO). The investment firm released it for trades in October 2021 and its purpose is to track Bitcoin futures prices. For the Bitcoin ETF to be efficient, the price of one share of its exchange-traded fund would change as Bitcoin increases or decreases in price. When BTC increases in value, its ETF follows suit and so on. However, unlike the actual cryptocurrency, the ETF will trade on an actual traditional market, just like stocks and bonds- it will be displayed on exchanges like the NYSE and TSX.
How Does the Bitcoin ETF Work?
As mentioned earlier, an exchange-traded fund is an investment that tracks the performance of a specified asset or investment. With ETFs, an investor can make different investments without having a direct ownership link with the assets. ETFs also provide a simpler alternative for enthusiasts to buy and sell their assets; hence, traders can indirectly purchase cryptocurrency stock tokens.
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Similarly, a Bitcoin ETF mimics the price of the original Bitcoin cryptocurrency and allows investors to purchase more Bitcoin through the ETF without going through the process of placing a market order or conducting a trade. Due to the indirect link that holders have with their investments, they won’t have to worry about complex storage procedures that the SEC requires from them.
Benefits of ETFs
Diversification
Normally, an ETF can hold more than one asset. Using the Bitcoin ETF as an example, we see that it could comprise Bitcoin, Facebook/Meta stocks, Apple stocks, Tesla stocks, and others. Having such a portfolio allows investors to mitigate risk and diversify their portfolios. Whenever a trader uses a regulated market exchange, a Bitcoin ETF would provide its investors with the opportunity to diversify their existing equity pools.
Convenience
Since you don’t have direct ownership- let’s say you have passive ownership of the ETFs that come with owning Bitcoin, you are free from risk. Investing in a Bitcoin ETF provides leverage to Bitcoin’s price without you knowing how Bitcoin works. In summary, a Bitcoin ETF simplifies the investment process and maximizes profit expectations.
Tax Efficiency
Since most cryptocurrencies, especially Bitcoin, are centralized and unregulated, most of the world’s pension funds and tax havens restrict their citizens from purchasing and owning bitcoin. However, with Bitcoin ETF trading, traditional exchanges are likely to be regulated by the SEC, making them eligible for tax efficiency.
