What is a Bitcoin ETF and What are the Pros & Cons?

Mainstream finance has caught wind of Bitcoin ETFs, generating a lot of hype over these proposed new investment vehicles. Learn what an exchange traded fund is and how adding Bitcoin to the mix could bring major changes to the crypto market. Are Bitcoin ETFs a good investment or are they damaging to the Network? Do owners of ETF shares actually own Bitcoin? What are the pros and cons? Find out everything you need to know!

What is a Bitcoin ETF?

The prospect of Bitcoin ETFs is steadily gaining traction with many believing the first approved one is directly over the horizon. Why are so many people excited about these unusual investment vehicles? To gain an understanding about what is going on with Bitcoin BTFs, let’s first delve into the definitions of “ETF” and “Bitcoin”.

Definition of an ETF

An ETF stands for an Exchange Traded Fund, which is essentially a security that tracks a specific type of asset, such as gold, bonds or foreign currencies. Sometimes, the assets behind the fund are referred to as a ‘basket of assets’. The ETF can be traded on traditional exchanges, just like a stock.

The two main participants in an ETF are the custodian, who holds and manages the fund on behalf of investors, and the investors who can buy a share in the ETF and have the opportunity to earn some passive income.

ETFs that are managed effectively offer investors a way to diversify their risk and grow their investment portfolio.

what is a bitcoin etf

Definition of Bitcoin

Bitcoin is a cryptographically secure, peer to peer system of currency that requires no central authority. The management of the currency is carried out in a distributed manner (over thousands of servers across the globe) by all users of the network using blockchain technology. No 3rd parties, including governments, banks and regulators, are necessary for people to transact in Bitcoin.

The technology used by Bitcoin is open source and accessible to all. Users of Bitcoin benefit from a system of money that is borderless and free from centralized control. Additionally, they enjoy financial freedom, financial privacy and advanced security when using this decentralized digital currency.

bitcoin etf

What Happens When you Mix ETFs with Bitcoin?

An exchange traded fund that uses a large reserve of Bitcoin as its underlying asset is a Bitcoin ETF. This type of ETF, when and if it becomes legalized, can be traded like a stock. That would give institutional investors who don’t have the technological know-how to manage their own Bitcoin keys and wallets a way to invest in Bitcoin.

The custodial entity, or the fund manager, holds and owns the Bitcoin while the investors who purchase shares in the ETF may benefit from the increased value of the share they are holding.

Naturally, there are many positives and negatives to Bitcoin ETFs, so let’s break them down:

Pros of Bitcoin ETFs

  • Investors with little to no technological savvy would have a way to invest in cryptocurrency.
  • It’s easier to own a share in a Bitcoin ETF than to own Bitcoin outright. You don’t have to store and manage your keys and wallet, nor do you have to worry about self-tracking your cryptocurrency capital gains.
  • Investors may feel more confident investing in a Bitcoin ETF as opposed to Bitcoin itself. If ETFs become legal, they will be a fully regulated investment option.
  • Tax implications improve when trading in ETFs. When trading BTC as a user, each trade liquidises the asset, causing a taxable event. Fund managers can trade ETF shares on behalf of the shareholders, who do not endure this repeated liquidation.
  • Many cryptocurrency supporters feel that Bitcoin ETFs will bring much needed institutional investors to the cryptocurrency space, further legitimizing what some believe to be a ‘suspect’ industry.
  • It’s possible that Bitcoin ETFs will be the impetus to making global adoption of cryptocurrencies a reality.

Cons of Bitcoin ETFs

  • Some investors believe the commodities market, including commodity-based ETFs, is heavily manipulated already. As such, bringing ETFs to cryptocurrency could bring heavy manipulation to the Bitcoin Network.
  • Similar to when gold ETFs were first introduced, the introduction of a BTC ETF could cause a dramatic change in price as it becomes available to a much broader audience.
  • Liquidity may become a big risk with Bitcoin ETFs if the fund manager or custodian decides to sell short. The risk will primarily lie with the shareholders, who essentially have no ownership of the underlying asset.
  • Owning a share in Bitcoin is not the same as owning Bitcoin. You don’t enjoy the best parts of BTC, such as voting rights (such as in a fork), a higher level of security, peer to peer transactions and other key holder rights. Buy owning a Bitcoin ETF, shareholders are not Bitcoin owners.
  • Bitcoin ETFs effectively centralize what is by design a decentralized currency. Hundreds of millions worth of Bitcoin could potentially be in the control of one entity. No one fully understands what the repercussions of such an action would be.
  • People who own Bitcoin ETFs will not need to have any understanding of cryptocurrencies. This could appear to be detrimental to the industry’s progress.

There are many advantages and disadvantages to Bitcoin ETFs. But both critics and supporters agree that they are heading our way for better of for worse. Join us today to learn more and keep up to date with the latest in cryptocurrency news and developments.