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What is a Bitcoin ETF and How Does it Work?

Updated: Nov 11, 2022

Learn the pros and cons of Bitcoin ETF and ProShares Bitcoin Strategy ETF


Key Takeaways

  • Bitcoin ETF is a regulated investment fund that represents the leading cryptocurrency Bitcoin. It keeps track of all the price movements of Bitcoin.

  • It can be traded on traditional exchanges like NYSE and TSX. Investors can leverage Bitcoin’s prices without directly owning a Bitcoin with the help of Bitcoin ETF.

  • ProShares Bitcoin Strategy ETF was launched on October 19 and has gained around $1 billion in trading volume within the first day.

what is a Bitcoin ETF: advantages vs disadvantages

The first-ever Bitcoin exchange-traded fund (ETF) started trading on the New York Stock Exchange (NYSE) on October 19. The Securities and Exchange Commission (SEC) turned down the approval of the first Bitcoin ETF when the Winklevoss brothers filed the first application eight years back.

The SEC rejected several other Bitcoin ETFs in the past as it was hesitant to allow an ETF based on the volatile cryptocurrency market. However, the rough path of Bitcoin ETF approval ended by the recent approval and launch of ProShares Bitcoin strategy ETF.

What is a Bitcoin exchange-traded fund (ETF)?

Exchange-traded funds are regulated financial products that represent a wide range of assets such as gold, stocks, or bonds. An ETF involves two main participants who are the custodian and the investor. Custodian holds and manages the fund whereas investors can buy a share of the ETF to earn passive income. It is the best way to acquire profits from the price movements of an asset without actually owning the asset. ETFs allow investors to diversify their risk and grow the investment portfolio.

The Bitcoin ETF is a regulated financial product that represents the leading cryptocurrency Bitcoin. It keeps track of the price fluctuations of its underlying asset i.e., Bitcoin. Investors purchase their shares in the Bitcoin ETF to benefit from the increased value of their shares.

How does Bitcoin ETFs work?

Bitcoin ETFs allow investors to gain exposure to Bitcoin without actually purchasing it. It can be traded on the traditional exchanges like NYSE, TSX instead of the crypto exchanges like Binance and Coinbase. It works similar to stock trading and enables users to buy or sell the shares of Bitcoin ETF during trading hours. The price of one Bitcoin ETF follows the price of the largest cryptocurrency in the world. Investors can leverage the price fluctuations to make profits without directly buying the digital asset.

Bitcoin ETFs allow investors to gain exposure to Bitcoin without actually purchasing it.

Advantages of Bitcoin ETF

  • Avoid the risks of owning a Bitcoin directly. Investors who are not confident in cryptocurrency or have insufficient knowledge about the technical aspects of crypto, e.g. the private keys and public keys, can now invest in Bitcoin via ETFs.

  • It is relatively easier to buy a share of the ETF compared to purchasing the actual Bitcoin. No need to store in a digital wallet and manage keys.

  • As Bitcoin ETFs are regulated, it is legal and compliant to the laws

  • Bitcoin ETF believers feel this will bring huge institutional investments into the cryptocurrency space

  • ETFs hold more than one asset and keep investment portfolios diversified that minimizes risks

  • Eligibility to be traded on traditional exchanges means it is regulated by the SEC and eligible for tax efficiency.

Disadvantages of Bitcoin ETF

  • Bitcoin acts as a hedge against the traditional financial system. It provides benefits like voting rights, high-level security, and peer-to-peer transactions which will be lost when investors start using Bitcoin ETF instead of Bitcoin.

  • Many investors believe that the commodity market including commodity-based ETFs is heavily manipulated. In the same way, bringing NFTs into the crypto world could manipulate the industry.

  • Investors can trade Bitcoin with other cryptocurrencies such as Ether, Litecoin, Tether, etc. On the other hand, an ETF cannot be traded to own other coins as it is an investment fund.

  • Decentralization is one of the core principles of Bitcoin that will be eliminated with the usage of Bitcoin ETFs. To purchase, hold, and secure a Bitcoin ETF, investors need to depend on centralized entities.

  • As anyone can purchase the shares of a Bitcoin ETF with no knowledge of how cryptocurrencies work, they do not play any part in the progress of the crypto industry.

  • Though ETFs track the price movements of the underlying asset, there might be inaccuracies because they can have other holdings. In this case, investors cannot leverage the accurate price changes of Bitcoin.

Successful Launch of ProShares Bitcoin Strategy ETF

ProShares Bitcoin ETF has acquired the highest-ever first-day trading volume of $1 billion on NYSE. It was traded with a starting price of $40.88 and closed the day at $41.94 with a total increase of 4.8%. The first day itself accumulated more than $570 million of assets and has become the most successful launch of all time.

Two days after the launch, Bitcoin reached an all-time high value of $66,974. It's price has recovered from more than six months of decline, seems to be fueled by the successful launch of the Bitcoin ETF. Other futures-based Bitcoin ETFs may debut in the next few weeks in the US which can help investors to gain exposure to the cryptocurrency market.

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