Bitcoin exchange-traded funds (ETFs) have been the talk of the investment town ever since the SEC gave a green signal for its trading. However, it is important to note that investing in ETFs comes with its risks. With a bunch of investors ready to trade their money, here is all one needs to know about Bitcoin ETFs.
Bitcoin VS Bitcoin ETFs: What is the difference?
The difference between a Bitcoin and a Bitcoin ETF is quite significant. To understand this, let’s break each term down.
A bitcoin simply put is a form of cryptocurrency in which a record of transactions is maintained, and new units of currency are generated by the computational solution of mathematical problems.
The “spot” market is where bitcoins that are sold for cash are said to trade. The SEC and CFTC do not control the Bitcoin spot market, with a few notable exceptions.
On the other hand, investment firms subject to SEC regulation are ETFs. Securities that need to be registered with the SEC are the shares that the ETF issues. ETFs, like mutual funds, have defined investment goals and employ qualified money managers to help them achieve them.
An investor’s money is pooled via a spot Bitcoin ETF to buy Bitcoin immediately. An investing company oversees a Bitcoin ETF, which is listed on a conventional stock exchange.
How will the ETF investment work?
Spot Bitcoin ETFs employ registered custodians to safely store bitcoins in a digital vault. This type of ETF aims to replicate the value of bitcoins on the cryptocurrency market. The ETF purchases bitcoins from other holders or through approved cryptocurrency exchanges to get started. Tokens are then kept in a digital wallet, which frequently uses multiple security layers.
After that, the ETF issues shares in proportion to the total amount of bitcoins it owns. The price of an ETF share should correspond to the current cryptocurrency market price, and shares can be traded by the general public. As a result, the ETF’s shares try to closely mirror the price of bitcoins, and it periodically adjusts its holdings by purchasing or disposing of tokens.
Authorized participants (APs) handle both the creation and redemption processes. Usually, big financial organizations issue or redeem ETF shares in response to market demand. The APs produce or redeem ETF shares in huge blocks if the ETF shares are trading at a premium or discount.
Avoiding the FOMO: things to consider before the buy
Before buying Bitcoin ETFs one must remember that the price, availability, and trading of these assets depends on a lot of things. Before purchasing ETFs, the biggest consideration one must make is crypto volatility. The price of cryptocurrency and ETFs is interlinked. This means that the slightest volatility in the price of digital assets can result in uncertainty in the ETFs as well.
Although purchasing spot Bitcoin ETFs can save the time and money it would take to exchange and secure bitcoins on your own, these ETFs do impose management fees or expense ratios to cover operating costs, which gradually reduces profits.
Additionally, Bitcoin is not regulated by a government body. How dangers like fraud, manipulation, and asset loss will be handled is still quite unclear. Until more thorough oversight and regulations are put in place, risks from under regulation will loom over the larger market.
